GUIDELINES ON ESTATE AND DONOR'S TAX Atty. Edwin R. Abella

Concept and Nature:Estate tax is a tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries. It is not a tax on property. Estate tax is held to be an excise tax imposed on the privilege of transmitting property upon the death of the owner. The estate tax is generated by death and accrues at the time of death. It is governed by the law in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

Properties Includable In Gross Estate or Gross Gift:1. Citizen or resident decedent or donor:1) Real or immovable property, wherever located.2) Personal property, tangible or intangible, wherever located.(PD1457,

6/11/78)

2. Non-resident alien:1) Real or immovable property located in the Philippines.2) Tangible personal property located in the Philippines.3) Intangible personal property with situs in the Philippines subject to the

rule of reciprocity exemption.

Properties Considered Situated in the Philippines:1) Franchise which must be exercised in the Philippines.x2) Shares, obligations or bonds issued by corporation or sociedad

anonima organized or constituted in the Philippines.3) Shares, obligations or bonds issued by a foreign corporation eighty-

five per centum of the business of, which is located in the Philippines.4) Shares, obligations or bonds issued by a foreign corporation if such

shares, obligations or bonds have acquired a business situs in the Philippines.

5) Shares or rights in any partnership, business or industry established in the Philippines.

Composition of the Gross Estate:1) Real and personal property, whether tangible or intangible or mixed.2) Decedent's interest in property.3) Proceeds of life insurance.4) Taxable transfers.5) Transfers for insufficient consideration.

Proceeds of Life Insurance:1) Includable in gross estate:

a. Revocable beneficiary.b. Appointed beneficiary is the estate, executor or administrator.

2) Not includable in gross estate:Received from the GSIS and SSS.

Taxable Transfers:1) Transfer in contemplation of death (3-year presumption repealed by

PD 1705, 8/1/80)2) Transfer with retention or reservation of certain rights.

3) Revocable transfer.4) Transfers of property under general power of appointment.

a. Existence of general power of appointment held by the decedent.b. Exercise of such power by the decedent by will or by deed

intended to take effect upon death.c. Passing of property by virtue of such death.

5) Transfers for insufficient consideration.a. Covers only the excess of the fair market value over the value of

the consideration.b. Transfer was made in contemplation of death, otherwise will be

subject to donors's tax.

Kinds of Property:1) By Nature:

a. Real or immovable property.b. Personal property, tangible or intangible.

2) By Ownership:a. Exclusive capital or paraphernal property.b. Conjugal or community property.

Valuation of Gross Estate or Gift:1) Valuation date - Time of death or gift.2) Basis of valuation:

a. Real properties (land)i. Prior to August 31, 1969 - Comm. Act 466ii. September 1, 1969 to August 13, 1974 -R.A. 611iii. August 14, 1974 to November 24, 1976 - PD 539iv. November 25, 1976 to December 31, 1985 - PD 1054v. January 1, 1986 - Present - PD 1994

b. Improvementsi. June 10, 1986 to February 4, 1988 - RAMO 3-86ii. February 5, 1988 to February 18, 1991 - RAMO 1-88iii. February 19, 1991 to 1994 - RAMO 2-91iv. 1994-FMV per TD (Latest TD)v. Shares of stocks, obligations or bonds - RAMO 1-82vi. Usufruct, annuities, use or habitation - Formula using

American Tropical Experience Table. Beginning January 1, 1998, the valuation shall take into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table.

vii. Foreign currency and cash in bank - Peso value at exchange rate at the time of death.

viii. Other personal properties - Fair market value at the time of death.

Personal Properties:1) Shares of stocks, bonds and securities.2) Interest in partnerships, business or industry.3) Cash on hand and in banks.4) Machineries, transportation equipments, farm implements, tools, farm

animals, etc.5) Antiques, jewelry, silverware, paintings, etchings, engravings,

books, statues, vases, oriental rugs, collection of stamps and coins.6) Household furnitures, fixtures, appliances and other personal effects.7) Usufruct, annuities, use or habitation.

8) Mortgage notes, participation certificates, judgements, obligations and action which have for their object movables or demandable sums.

9) Goodwill, patents, and trademarks.Exclusions and Exemption from the Gross Estate:

1) Exempted under Special Laws and Exemptions by Omission:a. GSIS proceeds/benefitsb. Accruals from SSSc. Proceeds of life insurance where the beneficiary is irrevocably

appointed.d. Proceeds of life insurance under a group insurance taken by

the employer (Not taken out by the decedent upon his own life)e. WAR damage payments.f. USVA -RA 136.g. Properties held in trust by decedent.h. Transfer by way of bonafide sales.i. Transfer of property to the National Government or to any of its

political subdivisions.j. Separate property of the surviving spouse.

2) Exempted under the Tax Code:a. Merger of usufruct in the owner of the naked title.b. Transmission or delivery of the inheritance or legacy by the

fiduciary heir or legatee to the fideicommissary.c. Transmission from the first heir, legatee or donee in favor

of another beneficiary in accordance with the desire of the predecessor.

d. All bequests, devises, legacies or transfers to social welfare,cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, provided that not more than 30% of which shall be used for administration purposes (PD 507, 1974)

Allowable Deductions:1) Expenses, losses, indebtedness and taxes:

a. Funeral expenses:i. CA 466 (July 1, 1939) - 5% of gross estateii. PD 69 (January 1, 1973) - 5% of gross estate but not

exceeding P50,000.00iii. RA 7499 (July 28, 1992)- 5% of gross estate but not

exceeding P100,000.00.iv. RA 8424 (January 1, 1998)- 5% of gross estate but not

exceeding P200,000.00b. Judicial expenses.c. Claims against the estate

i. Claims against insolvent personsii. Unpaid mortgages or indebtednessiii. Unpaid taxesiv. Lossesv. Transfer for public purposesvi. Vanishing deduction (Property previously taxed)

d. Share of the surviving spouse in the net conjugal properties of the net conjugal properties.

e. Family Home - Amount allowable is equivalent to the current or fair market value or zonal value of the decedent's family home, whichever is higher, but not exceeding P1,000,000.

i. Must not exceed the value included in the gross estate or P1,000,000, whichever is lower.

ii. The amount in excess of P1,000,000 shall be subject to estate tax.

iii. Must be the decedent's family home as certified to by the Barangay Captain in the locality.

iv. Only one (1) family home may be claimed.f. Standard Deduction of P1,000,000.g. Medical Expenses incurred within one year from death in an

amount not exceeding P500,000.00.h. Amount Received by heirs under RA No. 4917.i. Deductions allowable to a non-resident decedent who is not a

citizen of the Philippines:i. A proportion of the expenses, losses, indebtedness and

taxes:Formula:

Phil. Gross Estate ------------------------- X Expenses, losses, indebtedness & taxes World Gross estate

ii. Transfer for public purposesiii. Vanishing deductioniv. Share of surviving spouse - Depending on the property

relationship of the husband and wife in the country where they are national.

Vanishing DeductionRequisites:

1) Present decedent must have died within five (5) years from the date of death of prior decedent or date of gift.

2) The property with respect to which deduction is claimed must have formed part of the gross estate situated in the Philippines of the prior decedent or taxable gift of the donor.

3) The property must be identified as the same property received from the prior decedent or donor or the one received in exchange therefore.

4) The estate taxes on the gift must have been finally determined and paid.No vanishing deduction on the property was allowed to the prior estate.

PROCEDURE IN COMPUTING THE VANISHING DEDUCTION:1) Determine the initial value of the property previously taxed; Rule -

Value of "Property previously Taxed" in computing the estate tax or donor's tax of the prior transfer or that of the present decedent's estate, whichever is lower.

2) Deduct any mortgage or lien on the "Property Previously Taxed" paid by the present decedent prior to his death, where such mortgage or lien was a deduction from the gross estate of the prior decedent or gift of the donor. This is the "Initial Basis".

3) The "Initial Basis" in Step (b) shall be further reduced by the following ratio of the expenses, losses, indebtedness, taxes or transfer for public purposes:

Initial Basis------------------ X Expenses, losses, indebtedness taxes, transfer for public useGross estate

4) Compute the final basis of PPT:Initial Basis (Step (b) x x xLess: Limitation (Step (c ) x x xFinal Basis (Amount subject to vanishing deduction) x x x

5) Determine the year interval between the date of death of the prior and present decedent or date of gift and death of present decedent to find the applicable percentage deduction:

0 - 1 year - 100%1 - 2 " - 80%2 - 3 " - 60%3 - 4 " - 40%4 - 5 " - 20%5 over - 0%

The final basis (Step (d) multiplied by the percentage deduction (Step (e) will be the vanishing deduction allowable. HYPOTHETICAL EXAMPLE OF COMPUTATION OF VANISHING DEDUCTION:"A" a Filipino, married and resident of the Philippines died on July 31, 1998 leaving the following properties:

Conjugal properties -------------------------------------------------------------------------------- P7,000,000.00Conjugal family home------------------------------------------------------------------------------- 3,000,000.00Property valued for P4,000,000 was inherited from his father who died on June 30, 1997 together with a mortgage loan of P1,000,000 which was paid by "A" on April 30, 1998 ------------------------------------------------------------- 5,000,000.00Gross estate -------------------------------------------------------------------------------------- P15,000,000.00Less: Deductions: Expenses, losses, indebtedness, taxes & transfer for public use ------------------------------------------------------------------- P2,000,000.00 Share of surviving spouse: Conjugal properties -------------------------------------------------------------------------- P10,000,000.00 Less: Conjugal deduction ---------------------------------------------------------------------- 2,000,000.00 Net conjugal estate --------------------------------------------------------------------------- P 8,000,000.001/2 share of surviving spouse ------------------------------------------------------------------ P 4,000,000.00Family home

----------------------------------------------------------------------------------------- 1,000,000.00Vanishing deduction (80%) Inherited property ----------------------------------------------------------------------------- P 4,000,000.00 Less: Mortgage paid ----------------------------------------------------------------------------- 1,000,000.00 Initial basis [Step (b)]---------------------------------------------------------------------------- 3,000,000.00 Less:

3,000,000 x P2,000,000 -------------------------------------------------------------------- 400,000.00 15,000,000.00 Final basis [Step (d)] --------------------------------------------------------------------------- P 2,600,000.00 80% Vanishing deduction [Step (e)] ---------------------------------------------------------- 2,080,000.00Total deductions -------------------------------------------------------------------------------- P 9,080,000.00Net taxable estate -------------------------------------------------------------------------------- P 5,920,000.00Computation of estate tax: P5,000,000 ---------------------------------- P465,000.00 920,000 @ 15% ------------------------- 138,000.00

Total estate tax due ------------------------------- P 603,000.00

ESTATE TAX RATES: (R.A. 8424)

THE ESTATE TAX SHALL BE

PLUS OF EXCESS OVER

Exempt Below P200,000

0

0 5% P200,000P15,000 8% 500,000135,000 11% 2,000,000465,000 15% 5,000,000

1,215,000 20% 10,000,000

Tax Credit For Estate Taxes Paid To A Foreign Country:1) The estate tax due shall be credited with the amount of estate tax

imposed by a foreign country on property located in said foreign country and included in the decedent's gross estate in the Philippines.

2) Limitation on credit - The amount of credit for estate tax paid to a foreign country shall not exceed the proportion of the tax due in the Philippines which the decedent's net estate situated within such country bears to his entire net estate.

3) The total amount of credit shall not exceed the proportion of the tax here in the Philippines which the decedent's net estate situated outside the Philippines bears to his entire net estate.

Reciprocity Provision On Transfer Tax Imposition:1) The property involved is intangible personal property.2) The decedent or donor at the time of death or donation was a citizen

and resident of a foreign country.3) That the foreign country did not impose a transfer tax of any character

in respect of intangible personal property owned by a Filipino citizen not residing in said foreign country, or

4) The laws of the foreign country allow a similar exemption from transfer taxes or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

ADMINISTRATIVE PROVISIONS ON ESTATE TAXATIONA. Notice of Death: When required:

a) In all cases of transfer subject to tax; orb) Where, though exempt from tax, the value of the gross estate exceeds P20,000.00

Time of filing: c) Within two (2) months after the decedent's death, ord) Within two (2) months after the executor or administrator has qualified.

Who shall file notice of death: e) Executorf) Administratorg) Any of the legal heirs

B. Estate Tax Return: When required:

a) In all cases of transfer subject to tax; orb) Where, though exempt from tax, the gross value of the estate exceeds P200,000.00.c) Regardless of the gross value of the estate, where the said estate consists of registered or registerable property.

Persons required to file: a) Executorb) Administratorc) Anyone of the legal heirs

Time for filing: a) Commonwealth Act 466 - July 1, 1939 - December 31, 1972 Within six (6) months after decedent's death. Within twelve (12) months after decedent's death if proceedings

form settlement was filed in court within six (6) months after death.

b) Presidential Decree No. 69 - January 1, 1973 to December 31, 1985. Within nine (9) months after decedent's death. Within twenty-one (21) months after decedent's

death proceedings for settlement was filed in court within nine (9) months after death.

c) Presidential Decree No. 1994 - January 1, 1986 to July 27, 1992. Within ninety (90) days after decedent's deathd) Republic Act 7499 - July 28, 1992 to present: Within six (6) months after decedent's death

Extension to File Return: Not exceeding thirty (30) days in meritorious cases.

Place of Filing: a) Office of the Commissioner of Internal Revenueb) Office of the Revenue District Officer, Collection Officer or authorized treasurer of the Municipality in which the decedent was domiciled at the time of death.

C. Payment of Estate Tax: Time of payment:

a) Commonwealth act 466-July 1, 1939 to December 31, 1972: Estate and Inheritance taxes- Payable within nine (9) and Twelve

(12) months, respectively, after death. Estate and inheritance taxes - Payable within twenty one (21)

and twenty-four (24) months, respectively, if proceedings for settlement of estate was filed in court within six (6) months after death.

b) Presidential Decree No. 69 - January 1, 1973 to December 31, 1985: Estate tax is payable at the time the return is filed.

(Within nine (9) days or twenty-one (21) months, as the case may be)

c) Presidential Decree No. 1994 - January 1, 1986 to July 27, 1992: Estate tax is payable at the time the return is filed (Within ninety

(90) days after death)d) Republic Act 7499 - July 28, 1992 to present: Estate tax is payable at the time the return is filed (Within six (6)

months after death) Extension to pay estate tax

a) Two (2) years - Estate is settled extrajudicially.b) Five (5) years - Estate settled judicially.

Surcharges: a) Late filing of estate tax return - 25% of tax due per return July 1, 1939 to December 31, 1972 - Discretionary or maybe

waived ifa) The return is voluntarily filed without notice from the

Commissionerb) The failure to file the return on time was due to a

reasonable cause.

b) Late payment of tax:

July 1, 1939 to August 1, 1980 - 5% August 1, 1980 to December 31, 1985 (PD 1705)10% January 1, 1986 to present (PD 1994) 25%

Interests: a) July 1, 1939 to September 1, 1969 (CA 466) Tax per return 12% Deficiency tax 6%b) September 1, 1969 to December 31, 1972 (RA 6110, 8/4/69)----------------------12%c) January 1, 1973 to January 16, 1981 (PD 69, 11/24/72)----------------------14%d) January 16, 1981 to present (PD 1773, 1/16/81)------------------------------20%

Place of filing of return and payment of tax: a) Commissioner of Internal Revenue, orb) Regional Director, Revenue District Officer or Collection Officer of the city or municipality in which the decedent was domiciled at the time of his death.

Person liable to pay estate tax: a) Executor or administrator before distribution of estateb) Heir or beneficiary subsidiarily liable to the extent of his distributive share.

DONOR'S TAXDefinition and Concepts:Gift tax is an excise on the transfer by a living person to another of money or other property without consideration.Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.

What Constitutes A "Gift" For Gift Tax Purposes?1. Transfer of property without consideration.2. It also includes sales, exchanges and other dispositions of property for

a consideration to the extent that the value of the property transferred exceeds the value in money or money's worth of the consideration received therefor.

Concept of Consideration:1. Consideration must be measurable in money or money's worth. Mere

legal consideration is not sufficient.2. The consideration must flow to the donor, mere detriment to the donee

does not satisfy the purpose of the statute.Commissioner V. Wemyss (324 U.S. 303, 1945)

Marriage is not a consideration reducible to money value. If a person transfers a property to a trust in consideration of marriage, a gift is made because no money consideration flows to the transferor/donor. Donative intent on the part of the tranferor is not an essential element for the imposition of the gift tax to the transfer.

When Does The "Gift" Occur?A gift occurs when the donor surrenders CONTROL over the property. If the donor retains an unlimited power to revoke the gift, it is clear that no gift has occurred.ty referred to in Section 24(D) and Section 27(D)(5) of the NIRC).

Requisites of A Taxable Gift:1. Capacity of the donor2. Donative intent (Except gift under Section 93 NIRC)3. Acceptance by the donee, and 4. Delivery of the gift to the donee, actually or constructively.

Kinds of Donation:1. Inter-vivos2. Mortis causa3. Indirect donation (Except real property referred to in Section 24(D) and

Section 27(D)(5) of the NIRC).

Persons Subject to Donor's Tax:1. (Same as in estate tax)

Before September 1, 1969 - Only donation made by individual is subject to donor's tax.

2. On or after September 1, 1969 (RA 6110) Donation made by all person, whether natural or juridical, is subject to donor's tax.

Gross Gifts:1. Composition -(Same as in estate tax)2. Valuation - At the time the gift was made (Same as in estate tax)

Deductions from the Gross Gift:1. Dowries or gifts by parents to children on account of marriage, before

its celebration or within one (1) year thereafter to the extent ofP10,000.

2. Gifts to the National Government or any of its agencies.3. Gifts made in favor of an educational, and/or charitable, religious,

cultural or social welfare corporation, foundation, trust or philanthropic organization or research institution or organization.

4. Encumbrance on the property donated if assumed by the donee in the deed of donation.

5. Those specifically provided by the donor as a condition of the donation which will diminish the value of the property received by the donee.

6. Exempt donation under special laws.

Tax Payable by the Donor:1. On or before December 31, 1972:

a. Donor's and donee's gift taxes were imposed based on graduated rates.

b. Gifts made during previous year or years are collated to the present gift and the gift tax computed on the total gift.

2. January 1, 1973 to January 15, 1981 (PD 69)a. Donor's tax was imposed on graduated rates.b. Gifts made during the previous year or years are computed

separately.c. Donor's tax computed on the total gifts made during each

calendar year.d. Collation of gifts are made only on gifts made during the same

calendar year.3. January 16, 1981 to July 27, 1992 (PD 1773)

a. Tax payable by the donor in favor of relatives is computed based on the graduated rates.

b. Tax payable by the donor in favor of stranger is computed at 20% or based on graduated rates, whichever is higher.

c. Gifts made during the same calendar year are collated and the donor's tax computed on the total gifts during the calendar year.

4. July 28, 1992 to December 31, 1997 (RA 7499)a. Tax payable by the donor on gifts made in favor of relatives is

computed based on graduated rates.b. Tax payable by the donor on gifts made in favor of strangers is

computed at 10% of the net gifts.5. January 1, 1998 to present (RA 8424)

a. Tax payable by the donor on gifts made in favor of relatives is computed based on graduated rates.

b. Tax payable by the donor on gifts made in favor of strangers is computed at 30% of the net gifts.

6. Relatives for donor's tax purposes:a. Spouse, ancestor and lineal decedentb. Brother, sister (whether by whole or half blood)

c. Relatives by consanguinity in the collateral lines within the fourth degree of relationship.

Rates of Donor's Tax (RA 8424)Donations to Relatives (Graduated Table)

THE DONORS TAX SHALL BE

PLUS

OF EXCESS OVER

Exempt 0 00 2% P100,000

2,000 4% 200,00014,000 6% 500,00044,000 8% 1,000,000204,000 10

%3,000,000

404,000 12%

5,000,000

1,004,000 15%

10,000,000

Donations to Stranger - 30%

SAMPLE PROBLEM OF DONOR'S TAXMr. Joseph Ramos, single made the following donations:

1. January 15, 1999 - to his brother, Jun, P100,0002. March 10, 1999 - to Clara, his sister, P250,0003. Sept 8, 1999 - to his girlfriend, Loi, a brand new car worth P600,0004. Oct 25, 1999 - to his father, Carlos, a vacant lot

worth P1,000,000 w/ FMV of P800,000 and zonal value of P1,500,0005. Nov 12, 1999 - to Luis, his brother in law, P200,0006. Feb 14, 2000 - to his mother, Maria, P300,000

Answer:

Date Donation Amount Tax Due

a) 1/15/99 Cash 100,000 (brother) Exempt

b) 1/15/99 Cash 100,000 3/10/99 Cash 250,000 (sister) 350,000

Tax on: 200,000 ================2,000

150,000 x 4% ============6,000

8,000Less: Tax on previous

donation (donation a)============0000

8,000c) 9/8/99 Cash 600,000 (Stranger)

Tax Due: 600,000 x 30%========== 180,000

d) 10/25/99 Lot 1,500,000 (ZV) (father) 3/10/99 Cash 250,000 1/15/99 Cash 100,000 1,850,000

Tax on: 1,000,000 ==============44,000

850,000 x 8% ============68,000

112,000Less: Tax on previous

donation (donation a + b) 8,000104,000

e) 11/12/99 Cash 200,000 (Stranger)Tax Due: 200,000 x 30% ==========60,000

f) 2/14/2000 Cash 300,000 (brother-in-law) Tax On: 200,000 ================

2,000 100,000 x 4% =========== 4,000

6,000Note: Letter (f) was donated in year 2000 therefore; this is not included in the cumulative total for 1999's donations. ADMINISTRATIVE REQUIREMENTS ON DONOR'S TAXA. Donor's Tax Return:

1. Requirements (State the following information/data):a. Each gift made during the calendar yearb. Deductions claimed and allowablec. Previous net gifts during the same calendar yeard. Name of donee and addresse. Other pertinent information

2. Time of filing:a. Before December 31, 1972:

On or before March 1 following the close of the calendar year.

b. January 1, 1973 to December 31, 1997 Within thirty (30) days after each donation. Extension not exceeding thirty (30) days maybe granted.

c. January 1, 1998 to present Within thirty (30) days after each donation- No Extension

3. Place of filing of donor's tax returna. Commissioner of Internal Revenueb. Revenue District Officer, Collection Officer or duly authorized

Treasurer of the municipality where the donor was domiciled at the time of donation.

B. Payment of Donor's Tax:

1. Donor's tax should be paid at the time the return is filed or within thirty (30) days after the date of gift.

2. Extension to pay tax may be granted not exceeding six (6) months. Effective January 1, 1998 (RA 8424), no extension for

the payment of the donor's tax shall be granted.C. Surcharges:(Same as estate tax)D. Interest:(Same as estate tax)

Properties Includable In Gross Estate or Gross Gift:1. Citizen or resident decedent or donor:Properties Considered Situated in the Philippines:Composition of the Gross Estate:Proceeds of Life Insurance:Taxable Transfers:Vanishing DeductionTax Credit For Estate Taxes Paid To A Foreign Country:Reciprocity Provision On Transfer Tax Imposition:Definition and Concepts:What Constitutes A "Gift" For Gift Tax Purposes?Concept of Consideration:When Does The "Gift" Occur?

Requisites of A Taxable Gift:Kinds of Donation:Persons Subject to Donor's Tax:Gross Gifts:Deductions from the Gross Gift:Tax Payable by the Donor:Rates of Donor's Tax (RA 8424)Donations to Relatives (Graduated Table)Donations to Stranger - 30%