TRANSFER TAXES ESTATE & TRUSTS ESTATE – ESTATE – refers refers to the mass of properties left by decedent or testator to his heirs or beneficiaries.
The trust is revocable if the power to revest the title to the property of the trust is vested: 1. in the grantor or in conjunction with other person who does not have the substantial adverse interest in the disposition of the property 2. in any person who does not have substantial adverse interest in the disposition of the property.
TRUST – TRUST – is is the right to the property, real or personal, exercised by one person for the benefit of another parties.
In irrevocable trust, you cannot transfer or revest the title of the property.
Parties to a Trust: a. Trustor or grantor - one who created the trust b. Trustee or fiduciary fiduciary – – one one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the fiduciary is also the nbeneficiary. nbeneficiary. c. Beneficiary
“No substantial interest in the disposition of the property” – he – he must not be the beneficiary.
If the properties properties of the estate is is not invested in a business, so ten heirs are just co-owners of the property, that is not taxable because co-ownership as a rule is not taxable.
Estate may be the subject to tax, tax, if it is under under your administration. administration. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement.
If the heirs heirs decide to continue the business, such that the administrator may manage the same, that will become an unregistered taxable partnership.
If the estate is under extra-judicial settlement, settlement, it is is not subject to tax tax because that will not earn income considering that the heirs agreed to settle the estate extra-judicially.
Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. So, they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust.
When we speak speak of judicial settlement, this may include include estate or intestate proceedings.
Estate and trust are entitled entitled to personal exemptions exemptions P20,000.
Trust may be subject to tax if the trust is irrevocable. irrevocable .
Non-taxable trust are: 1. Revocable Trust. The income here will be taxed in so far as the recipient of the same is concerned. 2. Employee’s Trust. If an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable.
SPECIAL DEDUCTIONS DEDUCTIONS (this can be availed of only by estate and trust): 1. In the case of intestate, the executor, or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. 2. In the case of a trust, the income may be distributed to the beneficiaries during that year may also be deducted. The trustee or fiduciary may distribute the income or accumulate the income. The trustee has the discretion whether to distribute the
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income to the beneficiaries during the taxable year or to accumulate the same and distribute such income after the lapse of certain period of time or year. In the event that income of the trust is distributed to the beneficiary, this particular amount may also be claimed as deductions. Questions: If there are two (2) trust created by one trustor or grantor, how do we tax the income of that trust? Answer: Under the law, the taxable income of these two (2) trust must be consolidated. That trust should be taxed as if they constitute one trust. Situation: Grantor X created 2 trust. One is A trust created and the other is B trust. There is only one beneficiary named Y. Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income is P30,000. We will tax these 2 trust separately but through consolidation. In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to trust A and B. So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax, the tax due should be apportioned. TRANSFER TAXES Taxes may be imposed on onerous transmission of properties or on the gratuitous transmission of properties. Transfer taxes that are imposed on the onerous transmission of properties: 1. VAT (value-added tax) 2. Percentage Tax (excluded this 1998 Bar) 3. Excise Tax (also excluded)
2. MARRIED DECEDENT - his estate includes his exclusive properties and his shares in the conjugal properties BUT NOT the exclusive properties of the surviving spouse PROPERTY OWNERSHIP bet. SPOUSES - NCC – NCC – before before Aug. 3, 1988 > CPG - EXCLUSIVE PROPERTY under N.C.C. 1. brought into the marriage as his/her own 2. acquired during the marriage by LUCRATIVE TITLE 3. acquired by RIGHT of REDEMPTION REDEMPTION or EXCHANGE with other exclusive properties 4. purchased with exclusive money - CPG under N.C.C. 1. acquired by ONEROUS TITLE - common fund 2. acquired by INDUSTRY/WORK, INDUSTRY/WORK, SALARY or either 3. FRUITS< RENTS or INTERESTS [conjugal/exclusive] 4. all properties not determined to be exclusive shall be presumed to be conjugal FAMILY CODE CODE - after Aug. 3, 1988 - ACP - EXCLUSIVE PROPERTY under the F.C. 1. gift, donation, contribution exclusively given to one of the spouses only - gift and fruits/income considered exclusive 2. INHERITANCE given exclusively to one spouse - gift or fruits/income considered exclusive 3. acquired of personal and exclusive use - except JEWELRY 4. exclusively owned before marriage including fruits /income IF spouse has children from the former marriage 5. purchased from exclusive fund.
CONTENTS OF THE BACK PAGES DIVISION OF GROSS ESTATE: 1. INDIVIDUAL WHO DIED SINGLE - G. E. includes all that he owns at the time of death
EXEMPTIONS FROM ESTATE TAX - special laws 1. Benefits received [GSIS, SSS] 2. proceeds of GSIS life insurance
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3. Benefits received – U. S. Veterans 4. REPARATIONS – WW II Veterans 5. RETIREMENT BENEFITS - if included in gross estate 6. proceeds of group insurance DECEDENT’S INTEREST assets that are still owned by decedent at the time of death to the extent of his equity or interest in any property whether as exclusive owner, conjugal owner, or common owner. COMPOSITION OF GROSS ESTATE [DI, T-GPA, RT, T-IC, P-LI, T-CD] 1. DECEDENT’S INTEREST 2. TRANSFER by VIRTUE OF GENERAL POWER OF APPOINTMENT 3. REVOCABLE TRANSFER 4. TRANSFER for INSUFFICIENT CONSIDERATION 5. PROCEEDS from LIFE INSURANCE 6. TRANSFER in CONTEMPLATION of DEATH FUNERAL EXPENSES INCLUDE: 1. expenses for interment 2. mourning clothing [widow, children] 3. expenses for wake before burial 4. charges for rites and ceremonies incident to interment 5. cost of burial plot 6. tombstone or monument 7. obituary or death notices JUDICIAL EXPENSES 1. accountants fee 2. appraisers fee 3. administrator’s fee 4. attorney’s fee 5. docket fee 6. stenographers’ fee 7. other expenses of court hearings
CLAIMS AGAINST THE ESTATE - obligations of the decedent contracted in good faith while still alive but remains unpaid at the time of death UNPAID MORTGAGES OR INDEBTEDNESS RULES: (claimed as deductions) 1. the said mortgage/indebtedness must have been contracted during the decedent’s lifetime in good faith for an adequate and full consideration in money or moneys worth 2. the value of the decedents interest in the property mortgaged is included in the value of the gross estate must be undiminished by said mortgage/indebtedness 3. must not include: A. any income tax upon income received after the death of decedent B. property taxes not accrued before his death C. any estate tax LOSSES – fire, storm, shipwreck or other casualty, robbery, theft, embezzlement RULES: 1. must not be compensated by insurance 2. must have been incurred during the settlement of the estate BUT NOT LATER than the last day for the payment of the estate tax (6 mos.) 3. not claimed as deduction in an income tax return of the taxable estate TAXES which are not DEDUCTIBLE 1. income tax or income received after death 2. property taxes not accrued before death 3. estate tax COMPUTATION of VANISHING DEDUCTION FORMULA: INITIAL BASIS GROSS ESTATE X E. L. I. T. and transfers for public purposes SHARE OF SURVIVING SPOUSE RULES:
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1. the gross conjugal estate shall be diminished by expenses and charges EXCEPT those chargeable to the exclusive properties 2. the NET amount shall be divided into two (2) 3. ½ goes to the surviving spouse and deducted from the estate of the decedent ALLOWABLE DEDUCTIONS - NON-RESIDENT DECEDENT [ELIT-TVS] 1. ELIT (expenses, losses, indebtedness, taxes) FORMULA: PHIL. GROSS ESTATE WORLD GROSS ESTATE x ELIT 2. transfer for public purposes 3. vanishing deductions 4. share of the surviving spouse NOTICE OF DEATH - if value exceeds Php20,000 - FILE notice with BIR within two mos. Of decedent’s death or within two mos. After election of qualified executor or administrator ESTATE TAX RETURN if gross value of estate exceeds P200,000 or if gross estate consists of registered property, FILE in duplicate and under OATH if value of gross estate exceeds P2,000,000, return must be supported by a certificate of C.P.A. TIME FOR FILING RETURN within 6 mos. From decedent’s death EXTENSION: not exceed 30 days PAYMENT OF ESTATE TAX upon filing of the estate tax return and before delivery to any beneficiary of his distribution’s share of the estate EXTENSION: not to exceed 5 years If extra-judicially settled, 2 years It must file bond – not to exceed double the value to be paid
SURCHARGE - 25% for late filing, for late payment - 50% for filing of false or fraudulent return INTEREST – 20% per annum PARTIES TO A DONATION 1. DONOR – gratuitously disposes 2. DONEE – receives and accepts KINDS OF DONATION 1. PERSONAL PROPERTY – may be orally or in writing EXCEPT: exceeds P5,000 – donation and acceptance must be in writing 2. REAL PROPERTY – PUBLIC DOCUMENT ACCEPTANCE - same deed of donation or separate instrument; done during the lifetime of the donor RULE: HUSBAND AND WIFE G.R.: Every donation between Husband and Wife during the marriage is VOID EXCEPTION: 1. donation mortis causa 2. moderate gifts - family affair *** gifts coming from the conjugal property made by both spouses are taxable, ½ to each spouse RULE on INADEQUATE CONSIDERATION * if the property transferred is real property classified as capital asset, the transfer is subject to capital gains tax of 6% and not to donor’s tax * where the consideration is fictitious, the entire value of the property transfer shall be subject to donor’s tax * the amount by which the value of the property exceed the amount of consideration shall be deemed a gift for purposes of the donor’s tax VALUATION OF GROSS GIFTS - FMV at time of donation 1. Real Property
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- BIR zonal value or FMV fixed by city/provincial assessor whichever is higher 2. Shares of Stock A. If listed – average value at the date of donation B. If not listed – book value at the date of donation 3. Personal Properties – FMV at the time of donation * FMV = pawn value x 3
EXEMPTIONS/ALLOWABLE DEDUCTIONS 1. DOWRIES RULES: st A. Exempt up to 1 P10,000; B. Legitimate recognized or legally adopted children; C. Made before marriage or within one year thereof. 2. GIFTS TO NATIONAL GOV’T. or POL. SUB. - not conducted for profit 3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs. - not more than 30% used for administrative purposes - may be a school or non-stock entity DEDUCTIONS ALLOWABLE 1. ENCUMBRANCES or donated property, if assumed by the donee 2. DIMINUTION of the donated property as specified by the DONOR RULE (non-resident donor) 1. Same allowable deductions as resident donors except that the same must be connected with donated property situated in the Phils. 2. NO deductions for “dowries” RULE if Donee is a Stranger 1. TAX PAYABLE – 30% of net gift STRANGER – one who is not a brother, sister (whole or half-blood), spouse, ancestor, lineal descendant or relative by CONSANGUINITY in the COLLATERAL th LINE within the 4 degree. RULE ON POLITICAL CONTRIBUTIONS - considered TAXABLE GIFTS
- donee in this case is deemed to receive a financial advantage gratuitously ADMINISTRATIVE PROVISIONS - donor’s tax return must be filed under oath and in duplicate - filed within 30 days from date of donation EXTENSION: not exceeding 30 days - WHEN PAID - time the return is filed EXTENSION: not exceeding 6 mos. PROVIDED – BOND- double the amount of TAX TAX CREDIT for donors tax paid to a foreign country - donor was a Filipino citizen or resident alien at the time of foreign donation - donor’s taxes of any character or description are imposed and paid by the authority of a foreign country LIMITATIONS: 1. The amount of credit in respect to the tax paid to any country shall NOT EXCEED the same proportions of the tax against which such credit was taken 2. The total amount of credit shall not exceed the same portion of the tax against which such credit is taken Transfer taxes imposed on gratuitous transmission of properties are: 1. Estate tax 2. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of a decedent or testator DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This transmission of properties occurs during the lifetime of the donor and the donee. ESTATE TAX NATURE OF ESTATE TAX – It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself.
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PURPOSES OF ESTATE TAX – to avoid the undue accumulation or concentration of wealth 1. The primary purpose is to raise revenue in order to support the government; 2. To supplement income tax; 3. To reduce successive inequalities in wealth, meaning, to achieve social equality.
► If the personal intangible properties of a NRD does not belong to the abovementioned enumeration, they may not form part of his gross income or we may also apply the doctrine of mobilia sequntur personam. ► M o b i l i a s e q u n t u m p e r s o n a m , according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which provides tax situs.
KINDS OF ESTATE TAXPAYER: 1. Resident estate taxpayer – includes citizen of the Phils., resident alien who died in the Phils., and such alien, at the time of his death, is a resident of the Phils; 2. Non-resident estate taxpayer – is limited to non-resident alien individual.
Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated.
Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils.
Real and personal tangible properties of NRD are taxable only if they acquire tax situs in the Phils.
Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from real estate tax? Answer: YES, by applying the rule on reciprocity. RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on tax on the properties of the citizens of the Phils. who died in that foreign country. The phrase “does not impose” and “allows exemption” are different from each other. When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover a ll properties but only certain properties.
Personal intangible properties that are deemed to have acquired Phil. situs are: [F, SOB (DC, FC-85%, FC-SP), SR – P]
Case:
1. Franchise which is exercised in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corporation or socieda d
Country of Morocco has no international personality. If it grants exemptions to the intangible personal properties if Filipino citizens who died in that country, will you apply also that rule on reciprocity?
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3. Shares of stock, obligation or bonds issued by foreign corp., 85% of the business of which is conducted in the Phils 4. Shares, obligations or bonds acquire business suits in the Phils. > Such shares, obligations or bonds acquire business situs in the Phils. of they are used by foreign corp. in furtherance of its trade or business. 5. Shares or rights in any partnership, business or in any partnership, business or industry, established in the Phils.
Held: YES. It does not matter whether the country has international personality or not. What is important is it allows or grants exemption from estate tax. “Sec. 85, Gross Esta te – The value (FMV) of the gross estate of the decedent shall be determined by including the value, at the time of his death, of all property, real or personal, tangible or intangible, wherever situated: Provided, however, That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.”
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The composition of the gross estate may include: 1. Decedent’s Interest. (includes yields, fruits and interest) The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest. In the case of parcel of land, it may produce income in the form of harvest which harvest may form part of the gross estate. In the case of apartment, the rental of such apartment should also be included, not only the value of the property. Dividends - Partnership profits Rights of usufruct 2. Transfer by virtue of general power of appointment It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. In general power of appointment, the power is exercisable or in favor of the estate, executor, administrator or a creditor of the estate. If the power is exercisable other than these (estate, administrator, administrator or creditor of the estate), that may be considered as special power of appointment.
3. Revocable Transfer – Any transfer made by the decedent during his lifetime where the decedent has re served the right to ALTER, AMEND, TERMINATE, or REVOKE. such transfer; it is sufficient that the decedent had the power to REVOKE, though he did not exercise such power. Irrevocable transfers should be excluded from gross estate. Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the decedent. 4. Transfers for Insufficient Consideration The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given. Example: If the property has a FMV of P100,000 and the consideration given is only P50,000, the difference of P50,000 represents insufficient consideration. 5. Proceeds of Life Insurance Policy
Proceeds of life insurance policy may be included if: a. the beneficiary designated is the estate executor, administrator or heirs of the decedent – whether revocable or not revocable rd b. the beneficiary designated is a 3 person who is revocably designated as beneficiary Proceeds of life insurance policy is excluded from the gross estate in the following cases: rd a. 3 person is irrevocably designated as beneficiary b. proceeds of group insurance policy – taken out by the co. for its employees c. proceeds of accident insurance policy except accident insurance policy as characteristic d. proceeds of GSIS Life Insurance Policy (govt. employees) e. proceeds of life insurance payable to the heirs of deceased U. S. and Phil. Army Note: As regards the estate executor, administrator or heirs as beneficiary, it is immaterial whether the designation is irrevocable or revocable. -
6. Transfer in Contemplation of Death If such transfer was induced by the thought of death principally, REGARDLESS of whether the death is impending forthcoming or not TRANSFER may be done before, at the time of or even after the decedent’s death 3-YEAR PRESUMPTION [deleted by P.D. 1705. Aug. 1, 1986) ST
[MU-NT, F, T-1 -B, B-SCC] EXCEPTINS/EXCLUSIONS from GROSS ESTATE 1) merger of USUFRUCT in the MAKED TITLE 2) FIDEICOMISSARY st 3) transmission from 1 heir to another beneficiary - will of the testator 4) BEQUEST, DEVISEES, LEGACIES or TRANSFER - SOCIAL WELFARE, CULTURAL and CHARITABLE institutions - no part of net income inures to any individual - not more than 30% for admin. purposes
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DEDUCTIONS FROM GROSS ESTATE DEDUCTIONS FROM GROSS ESTATE THAT MAY BE: 1. Conjugal deductions [FH, JE, FE, ME, CAE, L, U(M/I),T, SD, SP, C-IP] 2. Absolute deductions 3. Exclusive deductions [VD, T-PU, UM, E-EP] (share of SS) ST OTHERS: [M-U, F, T-1 -B, G-CI] I. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. Family home 2. Judicial of funeral expenses 3. Casualty losses 4. Indebtedness/unpaid claim against the estate 5. Accrued taxes (before the death of the decedent) 6. Standard Deduction 7. Separation pay given to the heirs of the decedent on account of death
► In the case of funeral expenses, the amount deductible is the actual funeral expenses on the amount which is not more than 5% of the gross estate whichever is lower, but in no case to exceed P200,000. ► There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection with the preservation, administration or settlement of the estate, it may be claimed as deductions. Judicial expenses also include extra judicial expenses. 3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other casualty losses. ► These losses must be sustained not later than six (6) months after the death of the decedent. ► not compensated by insurance
Discussion: 1. Family home – (even unmarried person may have a family home) subject to the following conditions: a. there must be only one (1) family home; b. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home in that particular locality; c. the amount that is deductible or the FMV of the family home should not be more than P1M; excess shall be subject to tax d. the FMV must be included in the gross estate of the decedent.
4. Indebtedness which partake of the nature of the unpaid claims against the estate. ► These must be supported by notarized documents. These obligations must be incurred within three (3) years prior to death of the decedent. ► Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the decedent. In order to be deductible, this claim must be included in the gross estate.
If the FMV of the family home is P5M, this should be included in the gross estate of the decedent. But when you claim deductions, you can only claim up to P1M.
► deduction from the gross estate shall be the collectible portion
2. Expenses which may be in the nature of judicial expenses or funeral expenses.
5. Taxes which must accrue before the death of the decedent.
► Medical expenses are also deductible subject to the following conditions: a. the amount deductible, is limited only to P500,000; b. it must be incurred within one (1) year before the death of the decedent; c. this must be substantiated by receipts
6. Standard deduction ► The amount is P1M. So, this may only be applied if the gross estate of the decedent is more than P1M.
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7. Separation pay given to the heirs of the decedent on account of death. ► The procedure is to include the amount in the gross estate and then claim this thereafter deductions. II. EXCLUSIVE DEDUCTIONS ► These are deductions against exclusive properties. These may include: (VP-CE) 1. Vanishing deductions – whether inherited or acquired by Donation 2. Transfer for public use 3. Other charges against the exclusive property 4. Encumbrance on exclusive property Discussion: 1. VANISHING DEDUCTION [5, IP, I-GE, PD, PT, N-P-VD] is an allowable deduction against the exclusive property of the decedent may be claimed as deduction under the following conditions: a. Death of a decedent which must take place within FIVE YEARS from the death of the prior incident or before gift was given. Situation: A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive property. This property had already been taxed because that forms part of the gross estate of A. Again, this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which may reduce his estate tax. The condition set by law is that B must have died within the 5-year period. If B died 6 years after the death of A, B can no longer claim such vanishing deductions.
b. Identity of Property – located in the Phils. So, there must be evidence to that effect that this is the same property which forms part of the gross estate of A. c.
Inclusion of the tax property in the gross estate of the prior decedent.
d. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been paid by prior estate. e.
No previous vanishing deductions.
Question: So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it was acquired through inheritance. Can C claim vanishing deductions? Answer: NO, because this had already been claimed by B. You can only claim vanishing deduction once. It is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. Can we apply this vanishing deduction? YES. Here, B must have died within the 5-year period from the date of donation. Acquisition and transmission exempt from estate tax are: a. The merger of usufruct in the owner of the naked title
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b. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee of the fideicommisssary. c. Transmission of the property from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor. d. 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 and not more than 30% of said bequests, devises, legacies or transfers be used by such institutions for administrative purposes. So, transfers to non-stock, non-profit educational institution is not exempt from estate tax because this is not included from the enumeration BUT exempt from donor’s tax. 2. Transfer For Public Use The donee must be the government or any political subdivision. It must be used exclusively for public use. The transfer must be done orally but testamentary disposition and must be at its present value. 3. Other Charges Against The Exclusive Property So, if the property has been mortgaged with a bank, we consider that as unpaid mortgage. 4. Encumbrance On Exclusive Property VALUATION OF THE GROSS ESTATE: valuation as of the time of death 1. Real Property The FMV equivalent to the value as determined by the BIR or zonal value OR that of the value as determined by the provincial or city assessor whichever is higher. 2. Personal Property a. Tangible Personal Property if not being sold; pawn value x 3; The FMV is equivalent to the selling price of the property. (Brand new items) b. Intangible Property – includes interest, shares of stock It must be the FMV of the interest or shares of stock.
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If the intangible personal property is account receivable, it should be Principal PLUS interest unpaid upon the death of the decedent except if worthless) If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate. American tropical experience table IF LISTED – mean or ave. value between the highest and lowest stock quotation IF NOT LISTED – BOOK value
DONOR’S TAX DONOR’S TAX – is an excise tax because what is being tax here is the right or privilege to transmit or dispose of property gratuitously in favor of another. Tax imposed on the privilege of transmitting property by and living person to another by way of donation Prevents avoidance of estate tax PURPOSE OF DONOR’S TAX: 1. The primary purpose is to raise revenue; 2. To supplement income tax and estate tax. donation – the act of liberality whereby a person disposes gratuitously of a THING or a RIGHT in favor of another who accepts it. DONATIONS SUBJECT TO DONOR’S TAX trust or not real or personal tangible or intangible 1. Indirect donation – Example: Cancellation of indebtedness 2. Direct donation Donor’s tax applies to both natural and juridical persons The law says, “donor’s tax apply whether the transfer is in trust or otherwise”. So, property held in trust may be the subject of donation. But, this contemplates of a transfer where the dominion, the right over such property, use, enjoyment of the same other rights, must all
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be transferred to the donee so that it will constitute as taxable donation. Read Section 104.
CHARACTERISTICS OF VALID DONATION: [F, A, C, I, D] 1. It must be given during the lifetime of the donor. 2. It must be irrevocable. 3. It must comply with the formalities of donation. 4. Acceptance of the donee. REQUISITES OF VALID DONATION 1. It must comply with the formalities of donation. If the amount of personal property is P5,000 or less, the donation may be made orally. If the amount of personal property is more than P5,000 the acceptance shall be in writing. Donation of real property must be made in a public instrument irrespective of the amount 2. Acceptance by the donee of the donation. Acceptance must be made during the lifetime of the donor. If the amount of personal property is P5,000 or less, acceptance may be made orally. If the amount of personal property is more than P5,000, the acceptance shall be in writing. In the case of donation of real property, acceptance must be made in the same deed of donation or in a separate public instrument. 3. Capacity of the donor and the donee: a. Those made between persons who were guilty of adultery or concubinage at the time of the donation. b. Those made between persons found guilty of the same criminal offense, in consideration thereof; c. Those made to a public officer or his wife, descendants and ascendants by reason of his office. Incapacitated donees are: [P, R-P, G, D, NPL]
a. The priest who heard the confession of the donor during his illness, or the minister of the gospel who extended spiritual aid to him during the same period. th b. The relatives of such priest or minister of the gospel within the 4 degree, the church, order, chapter, community, organization or institution to which such priest or minister belongs. c. A guardian with respect to donation made by a ward in his favor before the final accounts of the guardianship have been approved, even if donor should die after the approval thereof; nevertheless, any donation made by ward in favor of the guardian when the latter is his ascendant, brother and sister, or spouse, shall be valid. d. Any physician, surgeon, nurse, health officers or druggist who took care of the donor during his last illness. e. Individuals, association & corporations not permitted by the law to receive donations. *The following are also incapable of receiving donations by reason of unworthiness: [P (AC, ID, AV), C-AL, A-6 yrs., H-KVD, A or C, F-D, F] a. Parents who have abandoned their children or induced their daughters to lead a corrupt or immoral life, or attempted against their virtue. b. Any person who has been convicted of an attempt against the life of the donor, his or her spouse, descendants or ascendants. c. Any person who has accused the donor of a crime for which the law prescribes imprisonment for 6 years or more, if the accusation has been found groundless. d. Any heir full of age who, having knowledge of the violent death of the donor, should fail to report it to an officer of the law within a month unless the authorities have already taken action, this prohibition shall not apply to cases wherein, according to law, there is no obligation to make an accusation. e. Any person convicted of adultery or concubinage with the spouse of the donor. f. Any person who by fraud, violation, intimidation, or undue influence should cause the donor to make a donation or to change one already made.
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g. Any person who by the same means prevents another from making a donation, or from revoking one already made, or who supplants, conceals, or alters the latter’s donation. h. Any person who falsifies or forges a supposed donation of the decedent.
Personal Intangible properties that are deemed situated or acquire situs in the Phils. are: GROSS GIFTS [F, SOB (DC, FC-85%, FC-SP), SR, P] 1. Franchise which is exercised in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corp. or socieda d anonim a.
Under Art. 87 of the F.C., husband and wife are prohibited from making donation to each other. 4. Intention to donate the property of the donee (or DONATIVE INTENT). Exception: Transfer of insufficient consideration in the case of a contract of sale. Example: If the FMV of the property is P100,000 and P50,000 was the consideration given. The difference of P50,000 is considered a donation.
3. Shares of stock, obligations or bonds issued by foreign corporation, 85% of the business of which is conducted in the Phils. 4. Shares, obligations, bonds issued by a foreign corp. which acquires business situs in the Phils. Such shares, obligations or bonds acquires business situs in the Phils. if they are used by such foreign corp. in furtherance 5. Shares or rights in any partnership, business or industry established in the Phils.
* The amount received by a disinherited heir is subject to donor’s tax because he has no right to such property and the same was gratuitously given, so there is no donative intent.
6. Real, Intangible and Intangible Personal property or Mixed Even if the personal intangible properties of the NRD acquired tax situs in the Phils. it may still be exempt from donor’s tax by applying the rule on reciprocity.
5. Delivery of the property.
Rule on Reciprocity – If the foreign country of that NRD does not impose, or allows exemption on the donor’s tax on the properties of citizens of the Phils. who died in that foreign country.
Note: If there is no valid donation, the recipient is subject to income tax because of the provision “from whatever source derived.”
Sec. 104 is applicable to both estate tax and donor’s tax. Classification of donor subject to donor’s tax: 1. Resident donor (RD) - this includes citizen of the Phils. or a resident alien. 2. Non-resident alien (NRD) – he must be a non-resident alien. RD – Real properties, personal tangible properties, and personal intangible properties of resident donor are subject to donor’s tax wherever situated. NRD – Real properties and personal tangible properties of a non-resident donor are subject to donor’s tax only if they are located in the Phils… Personal intangible properties of NRD are subject to donor’s tax only if they acquire tax situs in the Phils…
TARIFF AND CUSTOMS CODE CUSTOMS LAW – does not refer only to the provisions of Tariff and Customs Code. It also includes other laws and regulations subject to enforcement by the Bureau of Customs. Other laws subject to enforcement by the Bureau of Customs: 1. NIRC – Sec. 107. Importation of goods or articles subject to VAT. The VAT must be paid before these goods are released from Customs Custody.
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2. NIRC – Sec. 131. Importation of Articles subject to excise taxes. The payment of excise tax must be made before the goods are released from Customs custody. 3. Regulations that may be issued by the CB, the implementation of such regulation is vested in the Bureau of Customs. Customs duties – are duties which are charged upon commodities on their being imported in or exported out of a country. Tariff – means a book of rates; a table or catalogue drawn usually in alphabetical order containing the names of several states that hold commerce together. Offices charged with enforcement or administration of Customs laws 1. Tariff Commission (TC) 2. Bureau of Customs (BOC) Powers of TC: (TRACER) The power of the TC are investigatory in nature: They investigate the following matters: 1. Matters relative to Tariff relations between the Philippines and the foreign countries. So, that includes commercial treaties. 2. Relation between the rate on raw materials and finished products. 3. Matters relative to the Arrangement of schedules of values 4. Matters pertinent to the Classification of articles 5. It shall also investigate the Effects of foreign competition. 6. It shall investigate the operation of the Tariff Laws and submit Report regarding the same. After investigation, TC shall submit its report to the Bureau Commissioners or to Secretary of Finance. POWERS OF THE BOC: (PERAS) 1. BOC has the power to Prevent and suppress smuggling and other frauds upon BOC. Consistent with this power, the BOC has:
a. Power to control and supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries. b. Police power to exercise over Harbor, Airport, River and Port. c. The right of pursuit against vessel subject to seizure even if it is seized beyond the maritime zone. This is called the extra-territorial jurisdiction of the BOC. Sometimes, we call this right of pursuit. The BOC may exercise this power when: c.1. the vessel was subject to seizure or forfeiture c.2. there was violation of the Customs law committed within the Phils. As regards smuggled goods imported not in accordance with the provisions of the Customs law, it may be pursued by the BOC even if it is transported through air, land or water. Consistent with this power, the BOC may enter in a building, house, structure, enclosure and warehouse. No search warrant is required. As long as they reasonably believed that the place store smuggled goods, seizure or search may be made. But it must be shown that the place must not constitute a dwelling place or unit. This is also because if it is a dwelling place that is covered by the Constitutional provision where warrant must be secured. Situation: Suppose the watchman or security guard and his family live in that place or building where smuggled goods are stored can there be seized without search warrant? Can we consider that a dwelling place? Answer: No, that will make the building a dwelling place. Even if it is outside of its district such that it came from Zamboanga and was unloaded at Cebu, the collector of Cebu may still seize the goods. What is only required is that it came from a port of entry within the Phils. 2. Enforcement of the Tariff and Customs Law including other laws and regulation affecting the administration of Tariff laws. 3. Recommend to the Sec. of Finance needed rules and regulations necessary for the effective enforcement of the provisions of the TCC.
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4. Assessment and collection of lawful revenues from imported articles. Also, assessment and collection of fines, penalties, fees and other charges accruing under the provisions of the TCC. 5. It has the exclusive and original jurisdiction over Seizure and forfeiture cases. Meaning, to the exclusion of regular courts. Articles subject to Customs duties: Articles means wares, merchandise, goods and anything which may be made subject of importation or exportation. Articles include Philippine money. So, if the Philippine money is transmitted or taken out of the Phils. without authority from the Central Bank, that may be the subject matter of seizure. Articles subject to Customs duties: 1. Dutiable articles – are articles subject to Custom duties 2. Prohibited articles: a. Absolutely prohibited articles: (SWING) 1. those prohibited by Special Laws 2. Weapons of War 3. Insidious, obscene or immoral articles 4. Narcotic or prohibited drugs 5. Gambling devices b. Qualifiedly prohibited – meaning subject to restrictions or limitations. IF these limitations are not complied with. They will be prohibited. 3. Duty free imported articles – these are articles not subject to custom duties. These are: (MASARAP) a. Medals, badges used as trophies or awards b. Animals and plants for experimental purposes c. Sample articles d. Aquatic resources e. Repair materials f. Articles necessary for the take-off and landing of an airplane or for safe navigation of vessels g. Articles for Public exposition. Included here are historical books and personal household effects
Customs duties may be classified as: 1. Regular or ordinary custom duties – these are the ad valorem tax and specific tax. For purposes of determining the ad valorem tax, the basis must be the home consumption value. Home consumption value is the price stated in the commercial, trade or sales invoice. If there is a reasonable doubt as to this value, recourse may be had to the commercial and revenue attachė report, the BOC s hould refer to the available information that may help the BOC determine the applicable ad valorem tax. Case: NCR-Japan has a subsidiary in the Phils. which is NCR-Phil. Ten adding machines were imported from NCR-Japan and they used, for purposes for determining ad valorem, the home consumption value, the price stated in the sales invoice. Instead, we should refer to the commercial revenue attaché report to determine the basis of that ad valorem tax. 2. Special custom duties: (DCMD) a. Dumping duties b. Countervailing duties Note: The purpose of dumping and countervailing duties is to protect our local products against unfair foreign competition c. Marking duties – the purpose of this is to prevent possible public deception. d. Discriminatory duties – duties which are imposed for the purpose of protecting our national interest Dumping duty – duty levied on imported goods where it appears that a specific kind or class of foreign article being imported into or sold is likely to be sold in the Phils. at a price less than its fair value.
Imposed on specific kind or class of foreign article which is being imported into, or sold or is likely to be sold for exportation to or in the Phils. at a price less than its fair value, the importation or sale of which is likely to injure an industry imposing like goods in the Philippines.
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The duty is equal to the difference between the actual purchase price and the fair value of the articles in question in the country or exportation as determined by the Sec. of Finance.
These are special duties imposed on imported articles. This may be imposed subject to the ff. requisites: 1. There must be a deliberate and continuous sale of imported article in the Philippines as price lower than the prices in the exporting country. 2. This must prejudice or cause or likely to cause injury to our local industry.
As regards dumping duties, the extent of the special duty is the amount that represents under-pricing. As regards countervailing duties, the extent is the excise inland tax or the amount of advantage enjoyed by that imported article. Marking duty – duty on ad valorem basis imposed for improperly marked articles. The requirement that foreign importation must be marked in any official language of the Phils., the name of the country of origin of the article.
Situation: There are articles of foreign origin the prevailing price of which in the US is equivalent to P100. These articles are sold or dumped in the Phils. at lower than the prevailing price in the US because they are saleable in the U.S. So, this will prejudice our local industries. In order to protect our local product or to discourage people from buying this imported product, we should be impose special duties in addition to the regular duties. Dumping duties should be imposed. Countervailing duty – duty equal to the asc ertained or estimated amount of the subdsidy or bounty or subvention granted by the foreign country on the production, manufacture, or exportation into the Phils. of any article likely to injure an industry in the Phils. or retard or considerably retard the establishment of such industry.
Imposed on articles, upon the production, manufacture or export of which any bounty or subsidy is directly or indirectly, granted in the country of origin and/exportation. No need to show proof that the imports cause injuries to domestic industries producing the same products. The duty is equal to the ascertained or estimated amount of the bounty or subsidy given.
Situation: Sometimes imported products enjoys certain subsidy from their government. So, they have an advantage. Our local products for example, does not enjoy similar subsidy. We should counter that advantage by imposing countervailing duties. The purpose there is to protect our local products against unfair competition. This represents the inland excise tax on locally manufactured articles of the same kind to off-set this advantage.
The purpose is to prevent deception of consumers. The articles must be properly marked, otherwise a special duty of 5% of the value shall be imposed.
Retaliatory or Discriminatory duty – duty imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such manner as to place it at a disadvantage compared with the commerce of any foreign country.
The amount may be increased in an amount not exceeding 100% ad valorem when the President finds the public interest may be served thereby.
This may be imposed by the President of the Philippines when our goods are discriminated against.
As regards dumping, countervailing and marking duties, it is the Sec of Finance, upon recommendation of the Tariff Commission, who may impose these duties.
Question: What is the extent of the flexible power of the President of the Phils. under the TCC? Answer: That includes the power to impose discriminatory duties. The President upon recommendation of the Tariff Commission may increase the tariff rates by not more than 5x or meaning 500x of the tariff rates. He may also decrease the tariff rates by not less than 50%.
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He can only exercise these powers in the interest of the national economy, national security and general welfare of the people. 2. Other duties: a. Storage fee – this is charged on the goods or articles stored in a warehouse under the control and supervision of the BOC. Articles owned by the government are exempt from storage fee is these articles are stored in a government warehouse. b. *Wharfage dues – Even if there is no wharf where the goods may be unloaded, wharfage dues may still be imposed because it is not a duty or charge on the use of the wharf. Even if the goods are unloaded in a private wharf or seashore, wharfage dues still be imposed because this is a duty imposed on the cargoes or articles which are unloaded. These are taxes. These are not really custom duties. The significance of this is that when tax exemption is granted from all forms of taxes, this may be included. If the exemption is only from custom duties, wharfage dues is not included. c.
Arrastre charges – this is a duty imposed on goods or articles for handling, receiving or custody of such articles.
d.
Tonnage fees – this is based on weight or tonnage of vessel.
e.
Harbor fees
f.
Berthing fees – this is imposed on the vessel for mooring berthing at a particular pier or port.
(a) (b)
Partial – means the value cannot be promptly ascertained. Final - meaning custom duties had been ascertained or finally determined.
If these duties are not paid by the taxpayer, the government or the BOC has the power to impose the following administrative sanctions: (1) (2) (3)
Surcharges may be imposed under certain situations Fines may be imposed under certain situations Seizure or forfeiture
Forfeiture is the penalty , seizure is the remedy. Situations where goods may be seized or forfeited by the government: (a) Articles, vessels, aircraft may be the subject matter of seizure if they are unlawfully used in the importation of foods into the Philippines or exportation of goods form the Phils. Case:
Berthing fees may only be imposed if the vessel is wharfed or berthed at national port. So, if it is wharfed at privately owned port, that is not subject to berthing fees. Steps in the imposition of custom duties: 1. Declaration of goods or articles 2. Assessment by an appraiser. Determine the value applying the schedule of values stated in the tariff rates and that is subject to the approval of the Collector of Customs. 3. Liquidation which may be:
Jose had a vessel, M/V Maria Victoria. It was unlawfully used for the importation of cargo. When this was seized by the government, Jose raised the defense of good faith. Held: (1) It is an action directed against the articles and in fact, the caption of the case is Republic of the Phils. vs. M/V Maria Victoria. It is a proceeding in rem, so good faith is not a defense. (2) Even if the vessel did not carry the contraband, that may be the subject matter of seizure if the vessel facilities the importation of that contraband. It is not also required that the vessel must come from the foreign country.
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Case: Cruz was caught carrying a bulk of foreign currencies. These were seized by the government because she had no license issued by the CB to carr y said sum of foreign currency.
extra-judicial
(2) Judicial Held: Cruz must prove that she had a license otherwise seizure was proper. The burden of proof lies on the importer. (b) Excessive sea stores. Sea stores are the provisions of the vessel necessary for administration and maintenance. (c) Excessive sea stores for aircraft. Sea stores must be in the place where it should be displayed. If these are kept in the cabin of the crew, these may be the subject matter of seizure because these are considered excessive.
(b) Seizure
(b) Abandonement (c) Protest
(a) Filing of civil action (b) Filing of criminal action if there is fraud and it must be serious
(a) Appeal to CTA, CA, SC (b) Filing of criminal action against erring Customs officials
ENFORCEMENT OF TAX LIEN Requisites: (1) (2)
(d) Unlawful transfer of cargoes from one vessel to another before reaching the point of destination.
Articles must neither be prohibited nor irregular The articles must be in the possession of the BOC If the articles are prohibited or irregular, the remedy is seizure Abandonment may be express or implied.
(e)
Unmanifested articles
Cases cognizable by the BOC
(f)
Prohibited articles
(1) (2)
(g)
Devices, receptacles
(h)
Envelopes, boxes, trunks
(i)
Beast
(j)
Thing of value or money which is intended to influence BIR officers.
Seizure cases on the part of the government and Protest case on the part of the importer
Seizure cases: The issue here pertain to the validity of the importation because you may raise the defense that these are not prohibited importation. Protest: The issue here is the validity of the assessment or collection, or the validity of the classification of articles where c ustoms duties are imposed.
Tax Remedies under the Tariff and Customs Code:
PROCEDURE IN PROTEST
Remedies
Government
Importer
(1) Administrative or
(a) Enforcement of tax lien
(a) Tax refund
Remedy
Where to file
(1) File a protest
Collector of Customs
[Issues which may be raised] (a) Validity if the assessment or
Prescriptive Period 15 days from the payment of
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collection (b) Validity of classification of articles (2) If protest is denied, Appeal collector’s ruling
Customs Commissioner (CC)
(3) If CC affirm collector’s ruling, Appeal (4) If CTA affirm collector’s ruling, Appeal (5) If CA affirm CTA, Appeal
Questions of fact or Question of law
CTA
Question of fact or Question of law
CA
Question of fact or Question of law
SC
Question of law
Customs duties
Within 15 days from receipt of the Collector’s ruling Within 30 days from receipt of the decision of the CC. Within 15 days from receipt of CTA decision Within 15 days from receipt of CA decision
☺ Estate may be the subject to tax if it is under administration. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement. ☺ If the estate is under extra-judicial settlement, it is not subject to tax because that will not earn income considering that the heirs agreed to settle the estate extra judicially. ☺ When we speak of judicial settlement, this may include estate or intestate proceedings. ☺ Trust may be subject to tax if the trust is irrevocable. Non-taxable trust are: 1. Revocable Trust. The income here will be taxed insofar as the recipient of the same is concerned. 2. Employee’s Trust. So, if an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable.
TRANSFER TAXES ESTATES & TRUSTS ESTATE – refers to the mass of properties left by decedent or testator to his heirs or beneficiaries. TRUST – is the right to the property, real or personal, exercised by one person for the benefit of another parties. Parties to a Trust: a. Trustor or grantor - one who created the trust. b. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the fiduciary is also the beneficiary. c. Beneficiary
The trust is revocable if the power to revest the title to the property of the trust is vested: 1. In the grantor or in conjunction with other person who does not have substantial adverse interest in the disposition of the property. 2. In any person who does not have substantial adverse interest in the disposition of the property. ☺ In irrevocable trust, you cannot transfer or revest the title of the property. ☺ “No substantial interest in the disposition of the property” – he must not be the beneficiary. ☺ If the properties of the estate is not vested in a business, so the heirs are just coowners of the property, that is not taxable because co-ownership as a rule is not taxable. ☺ If the heirs decide to continue the business, such that the administrator may manage the same, that will become an unregistered taxable partnership.
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TRANSFER TAXES ☺ Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. S, they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust. ☺ Estate and trust are entitled to personal exemptions to P20,000. SPECIAL DEDUCTIONS (this can be valid of only by estate and trust): 3. In the case of estate, the executor or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. 4. In the case of trust, the income may be distributed to the beneficiaries during that year also be deducted. The trustee or beneficiary may distribute the income or accumulate the income. The trustee has the discretion whether to distribute such income after the lapse of certain period of time or year. In the event that income of the trust is distributed to the beneficiary, this particular amount may also be claimed as deductions. ☺ Question: If these are two (2) trust created by one trustor or grantor, how do we tax the income of that trust? ☺ Answer: Under the law, the taxable income of these two (2) trust may be consolidated. That trust should be taxed as if they constitute one trust. ☺ Situation: Grantor X created 2 trust. One is A and the other is B. There is only one beneficiary named Y. Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income is P30,000. We will tax these 2 trust separately but through c onsolidation. In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to trust A and B. So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax, the tax due should be apportioned.
Taxes may be imposed on the onerous transmission of properties or on the gratuitous transmissions of properties. Transfer taxes that are imposed on the onerous transmission of properties: 1. VAT (value-added tax) (excluded this 2000 Bar) 2. Percentage Tax (also excluded) 3. Excise Tax (also excluded) Transfer taxes imposed on gratuitous transmission of properties are: 1. Estate Tax 2. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of the decedent or testator. DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This transmission of properties occurs during the lifetime of the donor and the donee. ESTATE TAX NATURE OF ESTATE TAX It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself. PURPOSES OF ESTATE TAX: 1. The primary purpose is to raise revenue in order to support the government; 2. To supplement income tax; 3. To reduce excessive inequalities in wealth; meaning, to achieve social equality. KINDS OF ESTATE TAXPAYER: 1. Resident estate taxpayer – includes citizen of the Phils., resident alien who died in the Phils., and such alien, at the time of his death, is a resident of the Phils.; 2. Non-resident estate taxpayer – is limited to non-resident alien individual.
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→ Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated. → Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils. → Personal intangible properties of NRD are taxable only if they acquire tax situs in the Phils.
RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on estate tax on the properties of citizens of the Phils. who died in that foreign country.
→ Personal intangible properties that are deemed situated or deemed to have acquired Phil. situs are: 1. Franchise which is exercise in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corporation or socieda d
When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover a ll properties but only certain properties.
anonima
Country of Morocco has no international personality or not. What is important is it allows or grants exemption from estate tax.
3. Shares of stock, obligations or bonds issued by foreign corp. 85% of the business of which is conducted in the Phils. 4. Shares, obligations, bonds issued by a foreign corp. which acquired business situs in the Phils. Such shares, obligations or bonds or in any partnership, business or industry established in the Phils. if they are used by such foreign corp. in furtherance of its trade or business. 5. Shares or rights in any partnership, business or in an y partnership, business or industry established in the Phils.
The phrase “does not impose” and “allows exemtion” are different from each other.
Case:
“Sec. 85. Gross Esta te . – The value of the gross estate of the decedent shall be determined by including the value, at the time of his death, of all property, real or personal, tangible or intangible, wherever situated. Provided, however, That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.” The composition of the gross estate may include:
→ If the personal intangible properties of a NRD does not belong to the above mentioned enumeration, they may not from part of his income or we may also apply the doctrine of mobilia sequntur personam. → Mobilia sequntu r pe rsonam , according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which provides tax situs. Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from estate tax? Answer: YES, by applying the rule on reciprocity.
1. Decedent’s Interest. The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest. In the case of parcel of land, it may produce income in the form of harvest which harvest may form part of the gross estate. In the case of apartment, the rental on such apartment should also be included, not only the value of the property. 2. Transfer by virtue of general power of appointment It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. The general power of appointment, the power is exercisable or in favor of the estate, executor, administrator or a creditor of the estate. If the power is exercisable other than these (estate, administrator or
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creditor of the estate), that may be considered as special power of appointment. 3. Revocable Transfer Irrevocable transfer should be excluded from gross estate. Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the decedent. 4. Transfer for Insufficient Consideration The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given. Example: If the property has a FMV of P100,000 and the consideration given is only P50,000, the difference of P50,000 represents that insufficient consideration. 5. Proceeds of Life insurance policy. Proceeds of life insurance policy may be included if: rd a. 3 person is irrevocably designated is the estate executor, administrator or heirs of the decedent rd b. the beneficiary designated is a 3 person who is revocably designated as beneficiary Proceeds of life insurance policy is excluded from the gross estate in the following cases: 1. 3 person is irrevocably designated as beneficiary 2. proceeds of group insurance policy 1. proceeds of accident insurance policy except if accident insurance policy has a characteristic 2. Proceeds of GSIS Life Insurance Policy -
rd
-
Note: As regards the estate executor, administrator or heirs as beneficiary, it is immaterial whether the designation is irrevocable or revocable.
DEDUCTIONS FROM GROSS ESTATE:
DEDUCTIONS FROM THE GROSS ESTATE MAY BE: 1. Conjugal deductions 2. Absolute deductions 3. Exclusive deductions I. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. Family home 2. Judicial or funeral expenses 3. Casualty losses 4. Indebtedness/unpaid claim against the estate 5. Accrued taxes (before the death of the decedent) 6. Standard Deduction 7. Separation pay given to the heirs of decedent on account of death. Discussion: 1. Family home, subject to the following conditions: a. there must be only one (1) family home; b. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home, in that particular locality; c. the amount that is deductible or the FMV of the family home should not be more than P1M; d. the FMV of the family home is P5M, this should be included in the gross estate of the decedent. But when you claim deductions, you can only claim up to P1M. 2. Expenses which may be in the nature of judicial expenses or funeral expenses.
In the case of funeral expenses, the amount deductible is the actual funeral expenses or the amount deductible is limited only to P500,000;
There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection with the preservation, administration or settlement of the estate, it may be claimed as deductions, judicial expenses also include extra-judicial expenses.
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3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other casualty losses. These losses must be sustained not later than six (6) months after the death of the decedent.
-
May be claimed as deduction under the following conditions:
6. Standard Deduction The amount is P1M. So, this may only be applied if the gross estate and the decedent is more than P1M.
a. Death of the decedent which must take place within FIVE (5) YEARS from the death of the prior incident. Situation: A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. One of the properties of A which forms part of his gross estate had alread y been taxed. This property will be transmitted to B by way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive property. This property had already been taxed because that forms part of the gross estate of A. again, this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which may reduce his estate tax. The condition set by law is that B must have died within the five-year period. If B died 6 years after the death of A, B can no longer claim such vanishing deductions.
7. Separation pay is given to the heirs of the decedent on account of death. The procedure is to include the amount in the gross estate and then claim this thereafter as deductions.
b. Identity of Property So, there must be evidence to the effect that this is the same property which forms part of he gross estate of A.
4. Indebtedness which partake of the nature of unpaid claims against the estate. There must be supported by notarized document. These obligations must be incurred within three (3) years prior to the death of the decedent. Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the decedent. In order to be deductible, this claim must be included in the gross estate. 5. Taxes which must accrue before the death of the decedent.
II. EXCLUSIVE DEDUCTIONS These are deductions against exclusive properties. These may include: (VP-CE) 1. * Vanishing deduction 2. Transfer for public use 3. Other charges against exclusive property 4. Encumbrance on exclusive property Discussion: 1. * VANISHING DEDUCTION is an allowable deduction against the exclusive property of the decedent.
c. Inclusion of the property in the gross estate of the prior decedent. d. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been paid by prior estate. e. No previous vanishing deductions. Question: So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it was acquired through inheritance. Can C claim vanishing deduction?
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Answer: NO, because this had already been claimed by B. You can only claim vanishing deduction at once. If it is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. Can we apply this vanishing deduction?
2. Personal Property a. Tangible Personal Property – The FMV is equivalent to the selling price of the property. b. Intangible Personal Property – includes interest, shares of stock. it must be the FMV of the interest or shares of stock If the intangible personal property is account receivable, it should be Principal PLLUS interest unpaid upon the death of the decedent. If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate.
YES. Here, B must have died within 5-year period from the date of donation. TAX REMEDIES Acquisitions and transmissions exempt from estate tax are: 1. The merger of usufruct in the owner of the naked title 2. Transmission or delivery if the inheritance or legacy by the fiduciary heir or legatee to the fideeeicommissary. 3. Transmissions of the property from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor. 4. 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 and not more than 30% of said bequests, devises, legacies or transfers shall be used by such institutions for administrative purposes.
2. Transfer for Public Use The donee must be the government or any political subdivision. It must be used exclusively for public use. -
3. Other Charges Against the Exclusive Property - So, if the property has been mortaged with a bank, we consider that as unpaid mortgage.
According to the SC, government and taxpayers must stand on reasonably equal terms. Basically, the remedies that may be availed of by the Government or the taxpayer may be grouped into: a. Administrative remedies b. Judicial remedies If the tax law is silent on administrative remedies, the government may still avail of the usual administrative remedies such as Distraint of personal property, or Levy on real property. But that may be resorted to by the government in the collection of taxes are: a. Distraint of personal property b. Enforcement of tax lien c. Levy on real property. Distrain and levy can only be done if notice is given.
If the tax law is silent on administrative remedies, the taxpayer may still avail of the usual administrative remedies of protest and refund for purposes of convenience and expediency.
If the tax law is explicit on administrative remedies, the taxpayer must observe the principle of exhaustion of administrative remedies. Under the Tax Code, if an assessment is made by the BIR, the remedy of the taxpayer is to protest first the assessment. It is the
4. Encumbrance on Exclusive Property VALUATION OF THE GROSS ESTATE: 1. Real Property → The FMV equivalent to the value as determined by the BIR or zonal value and that of the value as determined by the provincial or city assessor whichever is higher.
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decision of the BIR on that disputed assessment that is being appealed to the CTA.
In claiming for tax refund, the taxpayer have to file first a written claim for refund with the BIR Commissioner.
Exception to the Principle of Exhaustion of Administrative Remedies: a. if it involves judicial questions b. if it involves disregards of due process c. if it involves an illegal act.
Judicial Remedies: IF the tax law is silent on judicial remedies, the government can still avail of the usual judicial remedy. Example: filing an action for collection with the court. If the tax is silent on judicial remedies, the taxpayer may file a special civil action for declaratory relief. But this does not apply as far as the NLRC or the TCC is concerned because these particular tax laws are explicit on this judicial remedies. If the tax law is explicit on judicial remedies, the government should observe the provisions of the law. Example: The filing of an action for collection with the Court must be approved by the BIR Commissioner.
6. There is that remedy of constructive distraint of personal property. Levy of real property 1. The subject property is real property 2. What is issued is in the nature of an authenticated certificate describing the property and stating the name of the taxpayer as well as the amount due 3. Requires not only posting but also publication of the notice of sale in a newspaper of general circulation in 3 consecutive weeks. 4. If the bid is not equal to the tax liability of there is no bidder, the BIR may forfeit such real property levied by the government. 5. There is right of redemption within 1 year from the date of sale plus 15% interest. 6. There is no such remedy as constructive levy of property. Constructive Distraint can only be resorted to under the following situation: Code: C.A.R.L.) 1. When a taxpayer cancels or hides his property 2. If he performs any act which will obstruct the collection efforts of the BIR 3. If he is retiring from business subject to tax 4. When he is about to leave the Philippines Enforcement of the tax lien: If the taxpayer failed despite receipt of notice to pay the BIR, a lien is created against the properties of the taxpayer.
It is the discretion of the BIR to avail itself of remedies which may result in the expeditious collection of taxes.
Distinction between the Distraint and Levy Distraint of personal property 1. The subject matter is personal property, stocks and securities, bank accounts, debts and credits. 2. In the event that the taxpayer failed to pay the tax, the BIR will issue warrant of distraint. 3. The only requirement is posting of notice of sale in 2 public or conspicuous places 4. If the bid is not equal to the amount of tax liability, the BIR may purchase the property distrained for and in behalf of the government. 5. There is no right of redmption
Case: Which is preferred, the claim of the government arising from tax lien or the claim of the workers predicated on the judgment rendered by the NLRC? Held: The claim of the government arising from tax lien is superior to the claim of a private litigant predicated on a judgment. Exception: The claim of the laborers may be superior under Art. 110 of the Labor Code when the employer was declared bankrupt of judicial liquidation.
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*In observing the provisions of the tax code in regard to distraint or levy, the BIR cannot apply or invoke the presumption of regularity in administrative proceedings. So, if the procedure had been questioned by the taxpayer, it is not for the taxpayer to prove that the procedures under the NLRC in regard to distraint on levy had been complied with.
Revenue taxes are self-assessing taxes.
Requisites of Assessment: 1. Written notice stating that the amount is due as tax. 2. Written notice must contain a demand for the payment of such tax.
Assessment is not a condition sine qua non for purposes of collecting taxes. This is so because demand is not required. The rule under Art. 1169 of the NCC that demand is required before a person may incur in delay cannot be applied. Taxpayer incurred in delay if he fails to pay the tax on date fixed by Tax Code.
Assessments, made by the BIR Commissioner are presumed correct. The presumption does not violate the due process under the Constitution because the presumption is merely disputable.
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Assessment is made when it is mailed, released or sent. Example: If it was received by the taxpayer in a particular date (Dec. 5, 1997), you should count the prescriptive period for making an assessment from the date it was mailed, released or sent by the BIR and not from the receipt of the notice of assessment by the taxpayer. The assessment may be subject to revision by the BIR. If revised, the prescriptive period will commence to run from the safe when such revised assessment is mailed, released or sent. So, it is not from the date the original assessment is mailed etc. but from the date the revised assessment has been mailed. The making of assessment is prescriptible.
Normally, the BIR may require the taxpayer to submit reports, documents, books of accounts and other report to establish his tax liability. In the absence of these reports, documents, etc., the BIR may determine the tax liability by using other methods. *The BIR can determine the tax liability of the taxpayer on the basis of that so-called best evidence obtainable in the absence of said reports etc. In one case, agents of the BIR used the books of account seized as a result of raid by means of search warrant.
NET WORTH OR INVENTORY METHOD (also called Net Investigatory Method)
This is another method that may be employed by the BIR in determining the tax liability of the taxpayer. This is an expansion of that accounting principle, assets less liabilities equals net worth.
The rule is, the BIR may collect taxes with or without prior assessment.
PRESCRIPTIVE PERIOD FOR MAKING AN ASSESSMENT & COLLECTION With prior assessment I. Return filed is not false or fraudulent a. Return was file but there exist a deficiency b. Return was filed but no payment has been made II. Failure/Falsify/Fraudulent a. Intentional failure to file a return
3 years from the date of actual filing. If it was filed earlier than the date fixed by the Tax Code.
Without prior assessment 3 years from the date of actual filing or from the last day fixed by law for filing such return.
COLLECTION: Within 3 years from the date of assessment 10 years from the discovery of such
Taxes may be collected even without prior
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b. False return c. Fraudulent return
omission of failure, falsity or fraud COLLECTION: 3 years from the date of assessment.
assessment and prescriptive period is 10 years from the discovery of failure or omission, falsity or fraud.
Notes: The rule is if prior assessment has been made, the BIR can avail of the administrative and judicial remedy. But if without prior assessment, the BIR can only avail of the judicial remedies. Return must be the one prescribed by the BIR. SO, if you file your Books of Accounts in lieu of that return, that does not constitute return. PRINCIPLES GOVERNING THE FILING OF AN ACTION FOR COLLECTION BY THE BIR Collection is proper under the following situations: a. BIR assessment is considered final and executory, if no protest or dispute has been made by the taxpayer. IF protested by the taxpayer but he did not appeal, the BIR decision on such protest, the effect is that the BIR decision shall be considered final and executory. b. IF he appeal the decision of the BIR of the Commissioner to the CTA but he did not appeal the decision of the CTA to CA, the decision of the CTA shall be final and executory. c. If he appeal to the CA but the CA decision affirming that decision of the BIR was not appealed to the SC, CA decision shall be final and executory. d. If appealed to SC but SC affirm the decision of the CA, SC decision is final and executory.
If the decision of the BIR is final and executory, the assessment made cannot be questioned. The issue of prescription can no longer be raised except if the BIR submitted the particular issue for the resolution of the Court, that is considered as waiver on the part of the BIR and such issue of prescription may be subject to resolution. There is no provision in the TAX Code that prohibits the BIR from filing an action for collection even if the resolution on the motion for reconsideration on the assessment made is still pending.
When the case is pending before the CTA, collection may also be made by filing of an answer to the petition for review with the CTA. This is tantamount to a filing of collection of tax. This will also stop the running of the prescriptive period for collection of taxes. Collection of taxes is prescriptible.
GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE PERIOD IN THE COLLECTION OF TAXES: (Code: N.A.P.O.C.A.R.) 1. No property could be allocated; 2. Agreement between the BIR and the taxpayer to the effect that the prescriptive period shall be suspended pending the negotiation; 3. If the BIR is Prohibited from a distraint or levy of real property; 4. If the taxpayer is Out of the Philippines; 5. If the address of the taxpayer Cannot be located; 6. The filing of an Answer to the petition for review executed by a taxpayer with the CTA; 7. When a Request for reinvestigation has been granted by the BIR. PRINCIPLES IN CRIMINAL ACTION 1. The filing of an action requires the approval of the BIR Commissioner. Also, the filing of civil action requires the approval of the BIR Commissioner. BUT this is not jurisdictional. This is merely a formal defect which can be cured. 2. The purpose of filing cr iminal action is to impose statutory penalties. 3. The payment of tax liability does not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the Tax Code. This is so because the civil liability arises from the failure of the taxpayer to pay and this does not arise from felonious act. 4. The acquittal of the taxpayer from criminal liability does not carry with it the extinguishments of civil liability. 5. The penalty of subsidiary imprisonment applies only to the failure of the taxpayer to pay the penalties. But, the Tax Law is silent on the failure of the taxpayer to pay his deficiency or delinquency tax. DEFICIENCY VS. DELINQUENCY
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In deficiency, the taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax due and the tax paid. In delinquency, the taxpayer did not file a return.
FALSE RETURN vs. FRAUDULENT RETURN In the case of false return, this is a deviation from the truth. It may be the result of mistake, error, or negligence of the taxpayer. It is not always intentional because it may be the result of an honest opinion of the CPA. In fraudulent return, there is always the intent to defraud the government to evade taxes. It is always intentional and deliberate.
Criminal action may be suspended if the taxpayer is absent from the Philippines.
FIVE (5) years – the prescriptive period for filing a criminal action for violations of the provision of the Tax Code.
In the case of refusal to pay the tax, the 5-year prescriptive period will commence to run from the date final notice or demand has been served upon the taxpayer.
As regards violation of the Tax Code, if the violation is known the 5year prescriptive period shall commence to run from the date of the discovery of the violation and the institution of judicial proceedings for investigation and punishment. The law uses the conjunction “and”. So, it will commen ce to run only from the time the BIR referred the case to the Fiscal’s Office or City Prosecutor. In effect, it is always in the control of the BIR.
If you RECEIVED AN ASSESSMENT by the BIR, the remedies are: a. File a request for reconsideration of the assessment or this is a claim for reevaluation of the assessment based on the existing records. b. File a request for investigation of the assessment --- it is also a claim for a reevaluation of the assessment on the basis of newly discovered evidence, or additional evidence that the taxpayer intends to present in the reinvestigation. WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner ISSUES which may be raised >>>>> Question of law or fact or both questions of law and fact WHEN >>>>>>>>>>>>>>>>>>>>>>> Within 30 days from receipt of such assessment IF the request for investigation or reconsideration has been denied by the BIR: 1. File a motion for reconsideration of the decision with the BIR; OR 2. Appeal the decision with the CTA. *** Motion for reconsideration must raise new grounds, meaning grounds which have not been raised in that request for reconsideration or reinvestigation. Otherwise, it is just a pro-forma motion, it will not suspend the period within which to appeal the BIR decision to the CTA which is 30 days from receipt of the BIR decision. ISSUES that may be raised on appeal with the CTA >>> Questions of Law or fact OR both If CTA affirms the decision of the BIR: Appeal the CTA decision to CA. ISSUES >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Questions of law WHEN >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Within 15 days from receipt of the CA decision
REMEDIES OF THE TAXPAYER The taxpayer may, instead of filing a protest, file a written claim for refund. BEFORE PAYMENT, the taxpayer may dispute or protest the assessment. He ma also invoke the power of the BIR Commissioner to compromise tax liability.
REQUISITES FOR FILING REFUND:
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1. This must be filed within the two (2) year period from the date of payment; 2. The fact of withholding must be proven; 3. This must be included in the income tax return of the taxpayer; 4. It must be shown that the payment or the amount stated in the return was received by the government. WHERE TO FILE REFUND: ISSUES:
--- BIR --- Questions of law or fact OR --- both OR --- the taxes are illegally or erroneously collected
ILLEGALLY COLLECTED TAX vs. ERRONEOUSLY COLLECTED TAX: Illegally collected tax means it violates certain provision of the law. It may not be authorized by a peculiar Tax Law or statute. Erroneously collected tax means there may be a law passed but there was a mistake in the collection. WHEN TO FILE: Within 2 years from the date of payment > Payment must be proven in contemplation of Tax Law, there is payment when the tax liability is fully paid. So, if it is payable in installment, there can only be payment when the final installment has been paid.
