Business Transfer Tax

CHAPTER 11 Transfer Taxation

Transfers transmission of property

natural/juridical person created by law

Types of transfers:
1. Bilateral transfer
transfer for consideration
onerous transaction/exchange
subject to income taxation for realized gain
Ex. Sale exchange for money
Barter exchange for another property
2. Unilateral transfer
transfer without consideration
gratuitous transactions or transfer
Types of Unilateral Transfer
1. Donation (donation inter-vivos) gratuitous
transfer from living donor
2. Succession (donation mortis causa)
gratuitous transfer from deceased person upon
death to his heirs
3. Complex transfer
transfer for less than full and adequate
consideration
sales made lower FMV of property
Tax rules on transfer for adequate consideration

Pure exchanges, subject to income tax only

Transfer
for
less
than
adequate
&
full
consideration

Transfer element (gratuity) subject to transfer

tax either mortis causa or inter-vivos

Exchange element (indirect donation) subject to

income tax
Ex.
FMV
40k
10k transfer
Selling Price 30k
element
Cost/tax basis25k
Types of transfer taxes
exchange
1. Donors tax imposed donation 5k
inter-vivos
2. Estate tax imposed donation mortis causa
Rationale of transfer taxation
1. Tax evasion/minimization theory a way to
defeat income taxation with the intention/ illegal
2. Tax recoupment theory natural decreasing of
income taxation
3. Benefit received theory most dominant
rationalization of transfer taxation
4. State partnership theory govt is taking fair
share by taxing the transfer of wealth to other
person
5. Wealth redistribution theory transfer tax is
redistributed to benefit society
6. Ability theory transfer property is ability to pay
tax
Nature of Transfer Taxes
1. Privilege tax
2. Ad valorem tax
3. Progressive tax
4. National tax
5. Direct tax
6. Fiscal tax
Classification of Transfer Taxpayers
1. Resident/Citizen

Resident Citizen
Resident Alien
Non-resident citizen
2. Non-resident alien
*corporation/partnership fixed place of business in
Philippines is resident, if not fixed is non-resident
*citizen of corp. /partnership determined by
incorporation test
GENERAL RULE IN TRANSFER TAXATION
1. Resident/Citizen subject to tax on all transfer
of properties, global transfer of properties
2. Non-resident alien (NRA) taxable only on
properties located in the Philippines at the date
of transfer
SITUS OF PROPERTIES location of the property
The ff. properties considered located in Philippines
1. Franchise exercisable in Philippines
2. Shares, obligations, or bonds issued by any
corp. or sociedad anonima or constituted in
the Phil,
3. Shares, obligations or bonds by any foreign
corp, 85% of the business is located in Phil.
4. If such shares, obligations or bonds issued
by any foreign corp., acquired business
situs in Philippines.
5. Shares or rights in any business or industry
established in Philippines
6. Any personal property, tangible/intangible
located in Phil,.
Reciprocity rule on non-resident aliens
*intangible personal properties of NRA or Filipino nonresident are exempt from Philippine transfer tax
Examples of intangible properties:
1. Financial assets
2. Accounting
a. Cash
intangible assets
b. Receivables or
a. Patent
credit
b. Franchise
c. Investment in
c. Leasehold right
d. Copyright
bonds
d. Shares of stock in a e. trademark
corp.
e. Interest in
partnership
TIMING VALUING OF TRANSFERS
1. Donation inter-vivos valued at date of completion
or perfection of donation; ACCEPTANCE OF DONEE
2. Donation mortis causa valued at date of death
Motive of donation is the determining factor
Example of motives (inter-vivos)
1. reward services rendered
2. relieve the donor of the burden of management
of the property
3. save on income tax
4. see children financially dependent
5. see children enjoy property while still alive
6. settle family disputes
Example of motives (mostis causa)
1. take effect at the death of donor
2. last will and testament
3. retention of certain rights until death
4. revocable transfer
5. conditional transfer
*Estate tax is higher tax rates than donors tax

Non-Taxable Transfer
1. Void Transfer prohibited by law; invalid transfer

property not owned

donation between spouses

refusal of done

oral donation
2. Quasi-transfer transfer that not involve transfer of
ownership

right to usufruct over the property to the owners

naked title

transfer of property to real owner

transfer from first heir to second, predecessor

3. Incomplete transfer transfer or deliver but
ownership is not, it will transfer upon happening
future events/conditions
Types of Incomplete transfer
1. Conditional transfer
2. Revocable transfer
3. Transfer in contemplation of death
4. Transfer with reservation of title until death
How to incomplete transfer are completed?
1. Conditional transfer inter-vivos
a. Fulfillment of condition by transferee
b. Waiver of the same by the transferor
2. Revocable transfer to inter-vivos
a. Waiver by transferor exercising his right of
revocation
b. Lapse of his reserved right to revoke
3. Reservation of title of property until death are
completed
COMPLEX INCOMPLETE TRANSFER
*incomplete transfer made for less full and adequate
consideration
VALUATION Rules: Complex Incomplete Transfer
1. Donation inter-vivos = FV @ date of completion
of transfer less consideration
2. Donation mortis causa = FV @ date of death less
consideration
Test of Taxability of Incomplete Complex Transfer
The ff. must be established to before ICT is taxable:
1. Incomplete transfer is paid for less than full and
adequate consideration at the date of deliver
2. Property must not be decrease in value less than the
consideration paid at the completion of transfer
CHAPTER 12 Succession and Estate Tax
Succession mode of acquisition of property, rights, and
obligation of a person to the extent of the value of
inheritance are transfer through his death
*Inheritance includes all property, rights and obligation
of a person which are not extinguished by death
Decedent deceased or dead person
Types of SUCCESSION
1. Testamentary Succession made in a will
o last and will and testament
written document
o testate a person who died with a
will
2. Intestate Succession without will or with
invalid one
3. Mixed Succession partly with written will and
partly by operation of law
Will act whereby person is permitted to control to a
certain degree of the disposition of this estate, to
take effect after his death
expression of the decedents desire

Types of will
1. Holographic will written, dated and signed by
testator
2. Notarial will notarized, signed by decedent
and witnesses
3. Codicil supplement or addition to a will, made
after execution of a will ; need to be executed to
be valid
Note: Every will must be acknowledge before notary
public by testator and witnesses
Nature of succession
Succession is gratuitous transfer from deceased
person in favor of his successor; donation mortis causa
involves net properties of decedent; heirs
will inherit remaining of decedent after satisfying
decedents indebtedness and obligation incl. estate
tax
Note: Heir shall not inherit the debt of decedent
Elements of Succession
1. Decedent person who transfer properties
through his succession, whether or not with will;
if left will, he is called : testator
2. Estate transfer of right, obligation and
properties not extinguished by his death; also
called: inheritance of the decedent
3. Heirs person called to the succession either by
will or operation of law
Who are the heirs?
Compulsory heir certain person who is identified by
law
Types of Compulsory Heirs
1. Primary Heirs legitimate children and direct
descendants
2. Secondary Heirs legitimate/illegitimate
parents/ascendants
3. Concurring Heirs surviving spouses and
illegitimate descendants
Definition of terms
1. Legitimate children born out of legal marriage
2. Direct descendants children or grandchildren
3. Legitimate parents biological parents
4. Illegitimate parents adopting parents
5. Surviving spouse widow/widower of descendants
6. Illegitimate descendants illegitimate children
Note: under family revised code, adoptive parents can
now qualify as secondary heirs sharing 50:50 with
biological parents

*in absence of compulsory heirs, ff. shall inherit in

order of priority:
1. Collateral relatives up to 5th degree of consanguinity
2. Philippine govt
*priority is given to collateral relative in closest degree
Summary of Rules:
1. Concurring heirs
a. Descendants
b. Ascendants
2. Relatives in the collateral line up to 5th degree
3. Republic of the Philippines
Note: second cousins are on 6th degree, cannot inherit
Legitime part of testators property which he cannot
dispose of because the law has reserve it for certain
heirs, called compulsory heirs
Disinheritance and Repudiation

Decedent can disinherit an heir on certain grounds

Heirs may repudiate their share in inheritance of

decedent

Other persons in succession

1. Legatee person whom gifts of personal
property is given by a will
2. Devisee person whom gifts of real property is
given by a will
3. Executors person named by decedent who
shall carry out the provision of will
4. Administrators person appointed nu court to
manage distribution of estate of decedent
Estate Taxation pertain to the taxation of gratuitous
transfer of properties of decedent to the heir upon his
death; governed by law
NATURE OF ESTATE TAX:
1. EXCISE TAX estate tax is not tax on property
but privilege tax to transfer property through
death
2. REVENUE/GENERAL TAX estate tax is
intended as revenue or fiscal measure
3. AD VALOREM TAX estate tax is depend upon
the value of estate
4. NATIONAL TAX estate tax is imposed by govt
5. PROGRESSIVE TAX estate tax is tax based on
progressive rates
Classifications of Decedents for taxation Purposes
1. Resident or Citizen Decedents
2. Non-Resident Decedents
ESTATE TAX MODEL
Gross Estate
XXX
Less: Deductions from gross estate
XXX
Net Taxable estate
XXX
GROSS ESTATE pertains to the totality of the
properties owned by decedent at point of his death
Two concepts under gross estate:
a. Exclusion gross estate not included from
estate taxation
b. Inclusion gross estate included as part of
taxable gross estate
Deduction (exp. of death, obligation of decedent, losses
of property which also exemption from estate tax)
Net Taxable estate net properties of the decedent
after deductions allowable by law; subject to estate tax

Chapter 13-A Estate Tax-Gross Estate

Gross Estate consist of all tangible and intangible, real
or personal properties of the decedent where situated at
point of death
*NRA decedent, gross estate includes only properties in
the Philippines, except intangible personal property
when reciprocity rule applies
Residen
NRA w/o
NRA w/
t/
reciprocit
reciproci
Citizen
y
ty
Property
In
Out
In
Out
In
Out
Location

Real properties
x
x
Personal
properties

-Tangible
x
x

-Intangible
x
x
x
Procedure in Establishing Gross Estate
1. Inventory count of existing properties at point of
death
2. Adjustments for exempt transfer & taxable
transfers
Adjustments to the Inventory
1. Exempt transfers
a. Not owned by decedent
b. Properties owned but excluded by estate tax
2. Taxable transfers (inclusion gross estate)
-added to the inventory list of decedent
properties

GROSS ESTATE FORMULA:

Inventory of properties at the point of death

xxx,xxx
Less: Exempt Transfers
Properties not owned

xxx,xxx
Properties owned but excluded by law
xxx,xxx
xxx,xxx
Inventory of taxable present properties
xxx,xxx
Add: Taxable Transfers
xxx,xxx
GROSS ESTATE

xxx,xxx
Exempt Transfers
1. Transfer of properties not owned by decedent
a. Merger of usufruct in the owner of the naked
title
b. Transfer or delivery of inheritance or legacy in
fiduciary heir or legatee to fideicommissary
c. Transfer from first heir ,legatee or donee in favor
of another beneficiary, in accordance with the
desire of predecessor
d. Proceeds of irrevocable life insurance policy
payable to beneficiary other than estate,
executor or administrator
Beneficiary
Designati
Estate, administrator, or
Other
on of
executor
parties
beneficiar
y
Revocable
Include
Include

Irrevocable

Include

Exclude

e.
f.
g.

Properties held in trust by decedent

Separate properties of surviving spouse
Transfer by bona fide sales (because its onerous
transactions)
2. Transfer legal exclusion
a. Proceeds of group insurance
b. Proceeds of GSIS policy or benefits from GSIS
c. Accruals from SSS
d. US Veterans Administration (USVA) benefits
e. War damage payments
f. All bequest devises, legacies or transfers to
social welfare, cultural and charitable institution;
provided that not more than 30% of said shall be
used for administration purposes
g. Acquisitions and or transfers expressly declared
as non-taxable by law
Taxable Transfers mortis causa transfer and intervivos tranfer
Types of Taxable Transfer
1. Transfer in contemplation of death
*donation made during his lifetime, motivated by
thought of his death
2. Revocable transfer, including conditional
transfer

Revocable transfer transfer of possession over

property but not the ownership; included in
gross estate]

Revocable transfer rules : ownership transfer

only when the transferor waives the right to revoke
the transfer

If transferor dies without waiving his right of

revocation: he owns the property at point of his
death; included in his gross estate
3. Property passing under general power of
appointment
*general power of appointment by the decedent shall be
included in gross estate of decedent; general power
enables the holder of such property to do with the
property anything as if the property was his own
COMPOSITION OF GROSS ESTATE
1. Properties, movable or immovable, tangible or
intangible
2. Decedents interest on properties
3. Proceeds of life insurance
a. designated as revocable to any heir
b. regardless of designation, if the beneficiary is
estate, administrator or executor
4. Taxable Transfer
VALUATION OF GROSS ESTATE
Properties subject to estate must be appraised at FV @
point of death
Fair value refers to the amount at which 2 willing
buyers and sellers could transact an exchange
Valuation rules:
1. FV of property at time of death , included in gross
estate
2. FV rules set by law or revenue regulation
3. In default of such FV rules, reference under GAAP
is applied
4. Encumbrances on the property or decrease in
value after death shall be ignored
Fair Value Rules on the ff. assets:
1. Real properties

a.

Value at CIR (zonal value), if no zonal value it

shall be based on FMV appears at latest tax
declaration
b. Value fixed by Provincial/City Assessor
(Assessed value)
2. Shares of stock
a. Preferred share at par value
b. Unlisted common or ordinary share at Book
Value
c. Listed in the stock exchanges or PSE, FMV
closest at date of death or trading price at
date nearest to the date of death, if none is
available on the date of death.
3. Usufruct and annuities
*included in gross estate
*Annuity at present value
*Usufruct right to income over property
4. Other properties
a. Used properties: brand new(purchase price),
FV at second hand
b. Pawned jewelry properties ( loan-to-value
ratio)
c. Loan receivables fair value at fixed amount
in the contract
5. Taxable
Transfer
transfer
without
consideration are included in gross estate at fair
value at date of death less consideration paid at
the date of transfer.
Chapter 13-B Married Decedents
Gross Estate of Married Decedents
1. Decedents exclusive properties
2. Common properties of spouses
Exclusiv Conjugal/Com Total
e
mon
GROSS
xxx,xxx
xxx,xxx
xxx,x
ESTATE
xx
Less:
Deductions
Common types of property regimes:
1. Absolute separation of property (ASP) all
properties of spouses are separate properties, except
those properties which they may acquire jointly
2. Conjugal partnership of gains (CPG) all
properties that accrues fruit of their individual or joint
labor or fruits of their properties during marriage will
be common properties of spouses
3. Absolute community of property (ACP) all
present properties owned by spouses at date of
celebration of marriage shall be common properties
including future fruit of separate or joint industry or
fruits of their common properties
Applicable property regime in default of an
agreement
*in absence of an agreement or regime agreed by
spouses is void.

Basic Rules in the Determination of Property

Interest

1. Presumption in the inventory taking of the

estate
Under ASP, properties are presumed separate
of either spouses unless proven to be joint
properties
Under CPG and ACP, properties of spouses are
presumed common unless proven exclusive
properties
2. The sale or exchange of properties do not
alter their classification
*properties acquired using separate properties
are still separate properties vice versa, common
properties are still common properties.
3. Accruals in value or gains on sale of
properties
*increase in value or gains on the sale properties
are fruits subject to rules of the property regime
agreed upon spouses
CONJUGAL PARTNERSHIP OF GAINS (CPG)
common properties begin to accrue only from the date
of marriage describe as Prospective
Ex. of fruits during marriage
1. Salaries, profits or gains of labor or industry of
either spouses
2. Income of properties acquired during marriage
3. Income of separate properties of either husband
or wife
Exception to prospectivity: acquisitions by gratuitous
such as donation and inheritance unless designate to
both spouses

ABSOLUTE COMMUNITY OF PROPERTIES (ACP)

union of the present property of the spouses including
fruits of labor and industries of the spouses during
marriage
Special feature of ACP
1. Retrospective feature properties brought into
the marriage will be common properties
2. Prospective feature spouses may acquire
during the marriage shall be common
Exclusive properties
1. Properties by gratuitous title during marriage
2. Fruits of separate properties of spouses
3. Properties for exclusive personal use, except
jewelry
4. Properties brought into marriage by either
spouse with a descendants by a prior marriage
Exceptions to prospectivity feature of ACP:
a. Properties by gratuitous title
b. Fruits of separate properties during marriage
*fruits follow principal fruit of common property is a
common property
Acquisition of Exempt Properties either common or
separate properties shall be excluded in computation of
the gross estate
Exempt properties of NRA Decedents exempt
foreign properties of married NRA decedent must be
excluded in gross estate
Paraphernal property brides property