Transfer Taxes

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On-Line
Bar Reviewer on Taxation
Reynaldo G. Geronimo
Partner
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Transfer Taxes
(Estate and Donor’s Taxes)
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Advisory
• No part of this work may be reproduced, stored in
a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise except as
permitted by Atty. Reynaldo G. Geronimo.
• While the author has used best efforts in
preparing this work, he makes no representations
or warranties with respect to the accuracy or
completeness of the contents herein and
specifically disclaims any implied warranties of
merchantability or fitness for a particular purpose.
• Any copy of this work not bearing the signature of
the author on the label comes from an illegal
source.
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What is meant by “transfer taxes”?
The term “transfer taxes” refers to the
estate tax and the donor’s tax imposed by
the National Internal Revenue Code on
gratuitous transfer of property on account
of the death of the decedent (in which
case the tax is called the “estate tax”) or
upon the making of a gift that is effective
during the lifetime of the transferor (in
which case the tax is called the “donor’s
tax”).
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What are the purposes
of the transfer taxes?
• Like any other tax, the primary purpose of
the transfer taxes is to raise revenue to
defray the expenses of government
• The specific secondary purpose of the
transfer taxes is in compliance of the
requirement that the rule of taxation be
equitable and to aid in the evolution of a
progressive system of taxation, as
mandated by the Constitution.
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Estate Tax
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What is the nature
of the estate tax?
The estate tax is an excise tax or a
tax on the privilege of transmitting
property upon death thereby shifting
the economic benefits and enjoyment
of property from the decedent to
those who by law or by the
decedent’s wishes may be entitled to
it, effective upon his death.
7
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What theories are propounded to justify
the imposition of the estate tax?
• Benefit-Received theory- The State protected
the accumulation of the decedents’ wealth for
which the State must be compensated;
• Privilege theory- Succession is not a natural
right but instead a privilege and therefore can be
subjected to taxes.
• State Partnership theory-State was a hidden
partner in the production of the decedent’s
wealth;
• Ability to Pay- Those who had more in life should
be made to give in law.
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How is the estate tax computed?
The estate tax is computed by
applying the progressive estate tax
rate schedule to the net estate which,
in turn, is arrived at by subtracting the
allowable deductions from the value
of the gross estate of the decedent.
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What law governs the imposition of
the estate tax? The law as of date
of death, or, as of date of payment?
The statute in force at the time death of
decedent governs the taxation of the
estate. The estate tax accrues as of the
date of death when succession takes
place and when the right to tax instantly
vests on the State.
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What is the situs that enables a
state to impose the estate tax?
• Citizenship and residence of aliens allow a
state to impose the estate tax on
properties wherever situated.
• The estates of non-resident aliens are thus
not subject to the estate tax, except those
that are located in the Philippines, subject
to the rule on reciprocity.
11
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What is the rule of reciprocity to the extent
that it affects the estate taxation of
intangible personal property?
If the country of citizenship or residence of an
alien does not impose an estate tax (or donor’s
tax) at the time of the transfer of intangible
personal property or allows an exemption to
properties owned by Filipinos, the said
intangible personal property shall, on the basis
of that reciprocity, not also be subject to the
estate tax.
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What are included in the gross estate of a
decedent who is Phil citizen or resident alien?
1. All the property of the decedent, wherever
situated, to the extent of his interest therein at
the time of his death;
2. Property transferred during his lifetime but in
contemplation of death;
3. Property transferred with the intention of the
transfer taking effect in possession or
enjoyment at or after death of the decedent, or
where decedent retained the right to possess
or enjoy the property or designate the person
to so possess or enjoy it.
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4. Property transferred subject to the right to
revoke on the part of decedent;
5. Proceeds of life insurance to the extent
received by the estate or, irrespective of the
beneficiary, where the decedent had the
right to revoke the designation of the
beneficiary;
6. Prior interests transferred, like items 3,4,
and 5, prior to effectivity of tax code;
7. Property transferred for insufficient
consideration
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How are the properties comprising
the gross estate valued?
• Real property – at fair market value as determined
by Commissioner or zonal value, whichever is
higher
• Shares of stock- if listed, arithmetic mean between
highest and lowest quotation on date of death, or
date nearest to said date; if unlisted, book value; if
unlisted preferred, par value;
• Usufructuary rights, etc- per annuity tables
approved by Sec. of Finance upon
recommendation of the Commissioner.
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What may be deducted from the
gross estate of a citizen or resident
decedent to get the net estate?
1. Actual funeral expenses in an amount
equal to 5% of gross estate but not more
than P200,000;
2. J udicial expenses of estate settlement;
3. Claims against the estate- duly notarized
debt instrument and contracted within 3
years prior to death of decedent, with
statement showing how the proceeds
were disposed of. 16
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4. Claims of the decedent against insolvent
persons, provided claim is included in the
gross estate;
5. Unpaid mortgages where the property,
undiminished by mortgages, is included
in the gross estate;
6. Casualty losses if not deducted in the
income tax return and incurred not later
than payment of estate tax;
7. Diminishing deduction of property
previously taxed
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8. Bequests, legacies, devisees, and other
transfers to Gov’t or political
subdivisions, exclusively for public
purposes;
• Fair Market Value of the Family Home to
the extent of not more than P1,000,000;
• Standard deduction of P1,000,000;
• Medical expenses paid within 1 year
from date of death
• Amounts received by heirs under a
qualified private retirement plan (RA
4917) if included in the gross estate
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How is the estate taxation of non-residents
different from that of citizens/residents?
• Non-residents are taxed only on properties
situated in the Philippines;
• Non-residents are allowed only (a)
expenses, losses, indebtedness and
taxes; (b) diminishing deduction; (c)
transfers for public use; and (d) share in
the conjugal property.
• To avoid unfair double taxation, taxes paid
abroad are deductible, subject to certain
conditions,
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What transfers, occurring at time of
death, are not subject to estate tax?
1. Merger of usufruct in the owner of the naked
title;
2. Transmission or delivery of inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary;
3. Transmission from the 1
st
heir, legatee or
donee, in favor of another beneficiary,
according to wishes of predecessor;
4. Charitable transfers no part of which benefits
an individual and no more than 30% of which
is used for administrative purposes.
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How is the estate tax paid?
1. Notice of death- filed within 2 months from
date of death, if estate is over P20,000;
2. Estate tax return- filed within 6 months from
decedent’s death if (a) transfer is subject to
tax; (b) gross value is over P200,000 even
if exempt; (c) regardless of value, estate
consists of registered or registrable
properties; (d) with CPA certification if over
P2 million gross value.;
3. Tax paid when return is filed. Extensions
may be granted: 2 years if extrajudicially
settled; 5 years if judicially settled
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Donor’s Tax
(or Gift Tax)
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Who are liable for the donor’s tax?
Any person, resident or nonresident,
who transfers property, by way of a
donation inter vivos, or makes a gift, in
trust or otherwise, directly or indirectly,
regardless of whether property is real or
personal, tangible or intangible.
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What is meant by a “donation inter
vivos” or “gift” for purposes of the
donor’s tax?
For donor’s tax purposes, a “gift” or a
“donation” includes both a transfer without
compensation or consideration with donative
intent (called a “direct” gift) or transfer, even
without donative intent, for less than
adequate or full consideration (called an
“indirect” or “deemed” gift).
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What is the purpose of the donor’s tax
• The donor’s tax, like any other tax, was
primarily intended to raise revenue.
• The donor’s tax is secondarily intended to
minimize the effect of the avoidance of the
estate tax by those who transfer property
prior to the taxpayer’s death as well as of
the avoidance of the income tax by those
who, by such transfers, also split their
income tax base. 25
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What are the rates of the donor’s tax for
donations inter vivos made by residents?
• If the donee is a stranger, the tax rate is
30% of the net gifts made during the
calendar year;
• If the donee is NOT a stranger, the tax
rate is according to a progressive
schedule, from 2% after the first P100,000
to 15% over P10,000,000 on the net gifts
made during the calendar year.
26
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Illustrate the computation of the donor’s
tax on gifts made to strangers.
Assume X makes a gift to stranger A on J une
1, 2008 with the value of P100,000; a second
gift to stranger B on December 31, 2008 and
a third gift to stranger C on J anuary 15,
2009.
The tax on the gift on J une 1, 2008 is
P30,000; on the gift on Dec 31, 2008 also
P30,000; and on the gift on J anuary 15,2009
also P30,000 for a total of P90,000.
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Under the same facts, except the donees are not
strangers, how is the tax computed?
The tax on the J une 1, 2008 gift is zero; to
compute the tax for the December 31, 2008, the
J une 1 gift is added to the December 31 gift for
a total of P200,000 which according to the
schedule rates is taxed at 0% on the first
P100,000 and 2% on the following P100,000.
The tax is therefore P2,000. For the third
donation, the two previous donations are not
added to the third because the latter is given in
another year. Tax is again 0%.
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What gifts made by residents are
exempt from the donor’s tax?
1. Dowries or gifts proper nuptias and
before the celebration of marriage by
parents to each of their children-
P10,000;
2. Gifts made to National Gov’t, any of its
agencies not conducted for profit,
political subdivisions;
3. Gifts to educational and/or charitable
institutions, not more than 30% of which
are used for administration
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Are contributions, in cash or in kind,
made to any political candidate,
political party or coalition of parties for
election campaign purposes subject to
donor’s tax?
No. The law says that such contributions
“shall be governed by the Election Code, as
amended.” The Election Code does not
make such contribution subject to tax.
Moreover, such contributions are in effect
exercises of one’s basic political rights which
cannot be subjected to tax. 30
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When is the donor’s tax paid?
The donor’s tax is paid at the
time the donor’s tax return is
filed which is within thirty (30)
days after the date each gift is
made.
31
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Compare the donor’s tax with the estate tax.
As to: Donor’s Tax Estate Tax
Trigger Donation Succession
Basis of
computation
For non-
strangers,
cummulative &
annual;
Only once
Time for
payment
30 days from
date of each gift
6 months from
date of death,
subject to
extensions
Rates (for
non-strangers)
From 0% to 15% From 0% to
20%
32
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Thank You
and
Good Luck
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