Introduction of Transfer Tax

Transfer
Transfers refer to any transmission of property from one person to another.

Types of Transfer
1. Bilateral transfers involve transmission of property for a consideration. They are referred to as
onerous transactions or exchanges.

2. Unilateral transfers involve the transmission of property by a person without a consideration.

They are commonly referred to as gratuitous transactions or dimply, transfers.

3. Complex transfers are transfers for less than full and adequate consideration. These are sales
made at prices which are significantly lower than the fair value of the property sold.

Types of Transfer Taxes

1. Donor's tax - imposed on donation inter-vivos.

2. Estate tax - imposed on donation mortis-causa.

Succession
It is a mode of transmission of the ownership, rights, interests and obligation over property by
reason of death of the owner in favor of certain persons designated by the owner himself or by
operation of law.

Elements of succession
1. Decedent - the person who dies and whose properties, rights and obligations are transmitted. If
he left a will, he is called the testator.

2. Estate - the properties, rights and obligations which are the subject matter of the succession. It is
sometimes called the inheritance.

3. Successors - the persons to whom the properties, rights and obligations of the decedent will pass.
They are the heirs or beneficiaries.

Kinds of succession
1. Testate or voluntary - a succession carried out according to the wishes of the testator expressed
in the form prescribed by law.

2. Intestate, involuntary, or legal - a succession with an invalid will or without a will, thus giving rise
to a succession by operation by law.

Other persons in Succession

1. Legatee - a person whom gifts of personal property is given by virtue of a will.
2. Devisee - a person whom gifts of real property is given by virtue of a will.
3. Executors - a person named by the decedent who shall carry out the provisions of the will.
4. Administrators - a person appointed by the court to manage the distribution of the estate of the
decedent.
Estate tax
It is a tax on the privilege of the decedent to transmit his estate at death to his lawful heirs of
beneficiaries.

Gross Estate
Gross estate pertains to the totality of the properties owned by the decedent at the point of his
death.

Composition of Gross Estate

1. In the case of a citizen or resident alien decedent:
a. Real property within and outside the Philippines.
b. Tangible personal property within and outside the Philippines.
c. Intangible personal property within and outside the Philippines.

2. In the case of non-resident alien decedent:

a. Real property within the Philippines.
b. Tangible personal property within the Philippines.
c. Intangible personal property within the Philippines, unless there is Reciprocity in which case it is
not taxable.

Rule of Reciprocity
This rule applies to transmission of intangibles of non-resident alien decedent. There is reciprocity if
the foreign county of which the decedent was a citizen and resident at the time of his death:
1. Did not impose a transfer tax; or

2. Allowed similar exemption from tax in respect of intangible personal property owned by citizens
of the Philippines not residing in that foreign country.

When there is reciprocity, the transmission of intangibles located in the Philippines of a non-resident
alien decedent is not subject to tax. When there is no reciprocity, the transmission of intangibles
located in the Philippines of a non-resident alien decedent is subject to tax.

Properties considered as located in the Philippines

1. Franchise which must be exercised in the Philippines.

2. Shares, obligations, or bonds issued by any corporation or Sociedad anonima organized or

constituted in the Philippines in accordance with its laws.

3. Share, obligations, or bonds issued by any foreign corporation 85% of the business of which is
located in the Philippines.

4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or
bonds have acquired business situs in the Philippines.

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

6. Any personal property, whether tangible or intangible, located in the Philippines.

Sample Problem
P1
A citizen of the Philippines (PH), single, died a resident of the United State (US), leaving the following
properties:
Real property in the US - 2,000,000
Personal property in the PH - 1,600,000
Family home in the US - 1,400,000
The gross estate subject to Philippine estate tax is:

P2
A citizen of Japan, residing in Tokyo, with properties in the Japan and the Philippines, had the
following data on properties and rights at the time of his death and their values.
Real estate, Japan - 1,000,000
Real estate, PH - 2,000,000
Share of stock of Domestic Corporation - 200,000
Share of stock of a Japanese corporation - 300,000
Share of stock of a Chinese corporation, doing business in PH only - 100,000
Philippine Peso deposit in BPI - 500,000
Receivable under life insurance with an insurance company doing business in Japan - 250,000
The gross estate that should be reported in the Philippines is:

Taxable transfers (with insufficient consideration or without consideration)

1. Transfers in contemplation of death.
2. Revocable transfers.
3. Properties passing under a general power of appointment.
4. Transfer with retention of certain rights.

Exempt transfers
1. The merger of usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fidelcommissary.
3. The transmission from the first heir, legatee or done in favor of another beneficiary, in accordance
with the desire of the predecessor.
4. All bequests, devices, legacies or transfer to social welfare, cultural and charitable institutions, no
part of net income of which insures to the benefit of any individual: Provided, however, that not
more than 30% of the said bequests, devices, legacies or transfers shall be used by such institutions
for administrative purposes.

Properties Excluded from gross estate of citizen or resident alien decedent

1. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate,
executor or administrator.
2. Proceeds of GSIS policy.
3. Separate property of the surviving spouse.
4. Benefits received from GSIS.
5. Benefits received from SSS.

Valuation of the estate

1. Usufruct - to determine the value of the right or usufruct, use or habitation, as well as that of
annuity, there shall be taken into account the probable life of the beneficiary in accordance with the
latest Basic Standard Mortality Table.
2. Properties - the estate shall be appraised at its fair market value as of the time of death. However,
the appraised value of real property as of the time of death shall be whichever is higher of:
a. The fair market value as determined by Commissioner, or
b. The fair market value as shown in the schedule of values fixed by the Provincial or City Assessors.
Fair market value - is the price at which property would change hands between a willing seller and a
willing buyer, neither of whom is under compulsion to sell or to buy.

Sample Problem
1. A revocable transfer with a consideration received:
Consideration received - 200,000
FMV of property at the time of transfer - 300,000
FMV of property at the time of death - 250,000
Value to include in the gross estate is:

2. Real property with a cost of P300,000 and a fair market value at the time of death P1,000,000, but
subject to a mortgage of PP200,000 shall be in the gross estate at:

3. A citizen and resident of the Philippines died leaving the following properties and rights:
Cash in Banks - 1,000,000
Real property in the PH:
Assessed value - 100,000
Zonal value - 500,000
Real property abroad, FMV - 450,000
Car in PH, mortgage of P200,000 - 400,000
Receivables:
From a friend from whom there is no possibility of recovery - 20,000
From a sister whose ratio of assets to liabilities is 1:3 - 15,000
Insurance contracts:
Receivable under life insurance, father as revocable beneficiary - 250,000
Receivable under life insurance, mother as irrevocable beneficiary - 200,000
Receivable under accident insurance, happened one year ago - 50,000
Receivable under property insurance, for damaged cause to his car - 12,000
Revocable transfers:
To sister (FMV at the time of transfer P40,000 and consideration P10,000) - 50,000
To father (FMV at the time of transfer P30,000 and consideration P30,000) - 60,000
To mother (FMV at the time of transfer P40,000 and consideration P50,000) - 70,000
The gross estate is:
True or False
1. Unilateral transfers are subject to transfer tax.

2. Bilateral transfers include sales and barters.

3. Donation inter-vivos are subject to donor's tax.

4. The transferor in donation inter-vivos is a donor.

5. The transferee in a succession is referred to as an heir.

6. Succession is a mode of acquisition of property similar to barter.

7. A decedent with last will and testament is said to be intestate.

8. The succession by operation of law is called testate succession.

9. The will may be prepared after the death of the decedent.

10. A person who prepared a will is referred to as the administrator.

11. The gross estate of resident alien includes real properties wherever situated.

12. The gross estate of a non-resident citizen includes real properties wherever situated.

13. The gross estate of a non-resident alien includes tangible personal properties located in the
Philippines.

14. Income earned by the estate are not subject to estate tax.

15. Income earned before death are included in gross estate.

16. The gross estate of a non-resident alien would be included all properties regardless of location.

17. The gross estate of a non-resident citizen of the Philippines would include only properties
located in Philippines.

18. The gross estate of a resident, not citizen of the Philippines, would include all properties
regardless of location except there is a rule of reciprocity.

19. The gross estate of a non-resident, not citizen of the Philippines, would not include intangible
properties located in the Philippines.

20. Estate is a tax on the privilege of the decedent to transmit his estate at death to his lawful heirs
or beneficiaries.
Exclusive and common properties of spouses

Absolute Community of Property

Exclusive Property
1. Property acquired before the marriage by either spouse who has legitimate descendants by a
former marriage, and the fruits of such property.
2. Property acquire during the marriage by gratuitous title by either of the spouse and the fruits
thereof (unless it is expressly provided by the donor or testator that they shall form part of the
community property).
3. Property for personal and exclusive use of either spouse, except jewelry.
4. Fruits or income of exclusive property.

Community (Common) Property

All other properties owned by the spouses:
1. At the time of marriage; or
2. Acquired thereafter.

For marriages on or after August 3, 1988, the property relationship between husband and wife, in
the absence of a written agreement between them, is the system of absolute community.

Conjugal Partnership of Gains

Exclusive Property
1. That which one already owns before his or her marriage, except the fruits of such property.
2. Property acquire during the marriage by gratuitous title by either of the spouse and the fruits
thereof (unless it is expressly provided by the donor or testator that they shall form part of the
community property), except the fruits of such property.
3. Property acquired using exclusive property (Substitution)

Conjugal (Common) Property

All other properties are presumed conjugal, example:
1. Salary received, and
2. Fruits or income from exclusive property.

For marriage before August 3, 1988, the property relationship between husband and wife, in the
absence of a written agreement between them, is the system of conjugal partnership of gains.

Sample Problems:
P1
Mr. X, a married decedent under the conjugal partnership of gain, receive the following properties
by gratuitous title:
Before marriage During marriage
Residential lot - gift to Mr. X 2,000,000
Commercial lot - gift to Mrs. X 5,000,000
Income of residential lot 400,000 800,000
Income of commercial lot 1,400,000
Income from own labor - Mr. X 200,000 800,000
Income from own labor - Mrs. X 300,000 800,000

a. How much is the common properties of Mr. and Mrs. x?

b. How much is the exclusive properties of Mr. X?
c. How much is the exclusive properties of Mrs. X?
P2
Mr. X, a married decedent who got married on August 3, 1988, receive the following properties by
gratuitous title:
Before marriage During marriage
Residential lot - gift to Mr. X 2,000,000
Commercial lot - gift to Mrs. X 5,000,000
Income of residential lot 400,000 800,000
Income of commercial lot 1,400,000
Income from own labor - Mr. 200,000 800,000
Income from own labor - Mrs. X 300,000 800,000

a. How much is the common properties of Mr. and Mrs. X?

b. How much is the exclusive properties of Mr. X?
c. How much is the exclusive properties of Mrs. X?

P3
Mr. and Mrs. Cruz, got married August 3, 1988, had the following personal properties:
Acquired before marriage:
Tuxedo of Mr. Cruz-3,000
Wrist watch of Mr. Cruz - 2,000
Car - 800,000
Gown of Mrs. Cruz - 40,000
Acquired during marriage:
Earring and necklace of Mrs. Cruz - 150,000
Cellphones - 50,000
Louis Vuitton bag Mrs. Cruz - 150,000
Dress, shoes and underwear of Mr. Cruz - 60,000
Dress, shoes and underwear of Mrs. Cruz - 80,000

a. How much is the common properties of Mr. and Mrs. Cruz?

b. How much is the exclusive properties of Mr. Cruz?
c. How much is the exclusive properties of Mrs. Cruz?

P4
During her marriage, Mrs. Aguilar received a gold bracelet worth P400,000 as inheritance from her
grandparents. Using her salaries, Mrs. Aguilar bought P100,000 worth of shoes and dress and a
P200,000 diamond ring for her own use. On the other hand, Mr. Aguilar bought Rolex watch worth
P30,000 from the income of a property which was donated to him during the marriage. Using his
salary, Mr. Aguilar also bought shoes and dress worth P70,000 and a platinum necklace worth
P250,000 for his exclusive personal use.

a. How much is the common properties of Mr. and Mrs. Aguilar?

b. How much is the exclusive properties of Mr. Aguilar?
c. How much is the exclusive properties of Mrs. Aguilar?