Transfer Taxes

On-LineBar Reviewer on Taxation

Reynaldo G. GeronimoPartner

1

ChanRobles Internet Bar Review : ChanRobles Professional Review, Inc.

www.chanroblesbar.com : www.chanroblesbar.com.ph

Transfer Taxes(Estate and Donor’s Taxes)

2



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.

3



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”).

4



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.

5



Estate Tax

6



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



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.

8



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.

9



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.

10



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



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. 12



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. 13



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

14



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.

15



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. Judicial 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



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

17



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

18



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, 19



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 1st 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. 20



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 21



Donor’s Tax(or Gift Tax)

22



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.

23



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).

24



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



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



Illustrate the computation of the donor’s tax on gifts made to strangers.

Assume X makes a gift to stranger A on June 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 January 15, 2009.The tax on the gift on June 1, 2008 is P30,000; on the gift on Dec 31, 2008 also P30,000; and on the gift on January 15,2009 also P30,000 for a total of P90,000.

27



Under the same facts, except the donees are not strangers, how is the tax computed?

The tax on the June 1, 2008 gift is zero; to compute the tax for the December 31, 2008, the June 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%.

28



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

29



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



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



Compare the donor’s tax with the estate tax.As to: Donor’s Tax Estate Tax

Trigger Donation SuccessionBasis 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



Thank Youand

Good Luck

33



Documents

Transfer Taxes