BUSINESS TAXATION

TXTN2

Business Taxation and Transfer Taxes

Tax 1 – Income Taxation
◦ Income
◦ Anything that flows into the wealth of a taxpayer other than a mere return of
capital or anything that increases the net worth of a taxpayer.
◦ Capital vs. Income vs. Property
I. ESTATE TAX
 CHAPTER OVERVIEW AND OBJECTIVES
• This chapter discusses only the basic rules of succession and provides an introduction to
estate tax.

 After this chapter, students are expected to understand:

• The concept of succession
• The types and elements of succession
• The nature of estate tax
• The types of decedents and their taxation rules
• The model of estate taxation
Succession
is a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are
transmitted through his death to another or others either by will or by operation
of law (Art. 774, Civil Code of the Philippines).
Will
an act whereby a person is permitted with the formalities prescribed by law,
to control to a certain degree the disposition of his estate, to take effect after his
death (Art. 783, CCP) from the moment of the death of the decedent, the rights
to the succession are transmitted, and the possession of the hereditary property
is deemed transmitted to the heir (Art. 777, CCP).
Types of Will:
1) Notarial or Ordinary or Attested Will – is one which is executed in accordance with the
formalities prescribed by Art. 804 to 808 of the New Civil Code. It is a will that is created
for the testator by a third party, usually his lawyer, follows proper form, signed and dated in
front of the required number of witnesses (3 or more witnesses) and acknowledged by the
presence of a notary public.
2) Holographic Will - is a written will which must be entirely written, dated and signed by the
hand of the testator himself, without the necessity of any witness. This kind of will does not
need formalities because many people can recognize his handwriting and it can be verified
by a penmanship expert.
3) Codicil - a supplement or addition to a will, made after the execution of a will and annexed
to be taken as a part thereof, by which any disposition made in the original will is explained,
added to or altered.
Nature of Succession
◦ Succession is a gratuitous transmission of property from a deceased person in
favor of his successors.
◦ Succession involves only the net properties of the decedent. The heirs will
inherit what remains of the decedent’s property after satisfying the decedent’s
indebtedness and obligations including estate tax. The heirs shall not inherit
the debt of the decedent.
Elements of Succession
1) Decedent
the person whose property is transmitted through succession, whether or not he left a will
(Art. 775, CCP).
2) Heir
the person called to the succession either by the provision of a will or by operation of law
(Art. 782, CCP).
3) Estate
refers to all the property, rights and obligations of a person which are not extinguished by
his death (Art. 776, CCP).
Types of Succession
1) Testamentary Succession
- succession which results from the designation of an heir, made in a will executed in the form
prescribed by law (Art. 779, CCP).
- While the decedent may dispose of his properties in a last will and testament, he must,
however, reserve some for certain persons who are called by law as compulsory or forced
heirs.
◦ Kinds of successors in a testamentary succession:
◦ Legatee, an heir to a particular personal property given by virtue of a will.
◦ Devisee, an heir to a particular real property given by virtue of a will.
Types of Succession
2) Legal or Intestate Succession-
- transmission of properties where there is no will, or if there is a will, the same
is void or lost its validity, or nobody succeeds in the will.
3) Mixed Succession-
- transmission of properties, which is effected partly by will and partly by
operation of law.
Who are the HEIRS?
In intestate succession, the heirs shall be the following in descending order of
priority:
1) Compulsory heirs
2) Relatives up to the fifth degree of consanguinity
3) Republic of the Philippines

The law identified certain persons which it designated as “compulsory heirs”. These
are the persons who will inherit the estate by default. Only be their absence shall the
estate be partitioned to other relatives.
Types of Compulsory Heirs
◦ Primary heirs: Legitimate children and their direct descendants
◦ Secondary heirs: Legitimate/illegitimate parents and ascendants
◦ Concurring heirs: The surviving spouse and illegitimate descendants
Definition of Terms
◦ Legitimate children are those born out of a legal marriage
◦ Direct descendants refer to children or, in their absence, grandchildren
◦ Legitimate parents refer to biological parents
◦ Illegitimate parents are adopting parents to an adopted child
◦ The surviving spouse is the widow or widower of the decedent
◦ Illegitimate descendants are illegitimate children
Summary of Rules
1) Concurring heirs and
a) Descendants, or in their default,
b) Ascendants
2) Relatives in the collateral line up to fifth (5th) degree
3) Republic of the Philippines
Illustration
Illustration 1
Mr. X died. He was survived by his wife and four children. Mr. X has two brothers and one surviving
parent.

Who are his compulsory heirs?

a) The four children
b) Mrs. X

The surviving parents (secondary heirs) of Mr. X will not inherit because there are descendants (children)
Illustration 2
Ms. Y died single and without a child. Ms. Y’s parents, three brothers, and two sisters were her surviving
relatives.

Who are her compulsory heirs?

a) Ms. Y’s parents

The collateral relatives (brothers and sisters) cannot inherit since there are compulsory heirs.
Illustration 3
Mr. Y died a bachelor. He had no child. His parents were all dead long before his death. He only has a brother
and a sister, a first cousin, and a second cousin.

Who are his heirs?

a) Brothers and sisters

Since there is no compulsory heir, the brother and sister in the collateral line shall inherit. Without them, the
first cousin shall inherit.

Assuming further that only the second cousin is living, the government shall inherit the estate. Succession in the
collateral line cannot extend to the second cousin because he/she is beyond the fifth degree of consanguinity.
Basic Intestate Partition Procedures
1. The decedent and the surviving spouse shall first share in their common properties.
The common properties net of expenses and obligations chargeable to the common
properties of the spouses is divided between the decedent and the surviving spouse.
2. Determination of the decedent’s net interest.
The decedent’s net interest comprising of the following is computed:
a) Exclusive property of the decedent
b) Share of the decedent in the net common properties
3. Partition of the decedent’s net interest to the heirs:
a) Surviving spouse
b) Legitimate children
c) Illegitimate children
The SS and each of the children have one share each. Each illegitimate child is entitled to a half share.
Illustration 1
Mr. Richie Rich, a widower, died leaving ₱45,000,000 estate for his two legitimate children, Tin and
Pam, and two illegitimate children, Harold and Trivon. The estate shall be partitioned as follows:

Heirs Share Partition Inheritance

Tin (Legitimate) 1.0 1/3 x ₱ 45,000,000 ₱ 15,000,000

Pam (Legitimate) 1.0 1/3 x ₱ 45,000,000 ₱ 15,000,000

Harold (Illegitimate) 0.5 0.5/3 x ₱ 45,000,000 ₱ 7,500,000

Trivon (Illegitimate) 0.5 0.5/3 x ₱ 45,000,000 ₱ 7,500,000

Total 3.0 ₱ 45,000,000

Illustration 2
Mr. Uy died leaving behind his widow, Mrs. Uy, his legitimate children, Max and Rey, and
illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. and Mrs. Uy had the following properties:

Exclusive properties of Mr. Uy ₱ 18,000,000

Exclusive properties of Mrs. Uy 16,000,000
Net common properties 36,000,000

The net estate of the decedent shall be computed as follows:

Exclusive properties of Mr. Uy ₱ 18,000,000
Share in the net common properties (₱36M/2) 18,000,000
Distributable estate ₱ 36,000,000
 The estate shall be partitioned as follows:
Heirs Share Partition Inheritance

Mrs. Uy (spouse) 1.0 1/ 4.5 x ₱ 36,000,000 ₱ 8,000,000

Max (legitimate) 1.0 1/ 4.5 x ₱ 36,000,000 8,000,000

Rey (legitimate) 1.0 1/ 4.5 x ₱ 36,000,000 8,000,000

Joan (illegitimate) 0.5 0.5/ 4.5 x ₱ 36,000,000 4,000,000

Sylvia (illegitimate) 0.5 0.5/ 4.5 x ₱ 36,000,000 4,000,000

Eunice (illegitimate) 0.5 0.5/ 4.5 x ₱ 36,000,000 4,000,000

Total 4.5 ₱ 36,000,000

The total properties of the surviving spouse after the
partition shall be:
Exclusive share of Mrs. Uy ₱16,000,000
Share in net common properties (₱36M/2) 18,000,000
Share in the distributable estate 8,000,000
Total properties ₱ 42,000,000
Heirs under Testamentary Disposition
In testamentary succession, the heirs shall be the following:
1. Compulsory heirs
2. Other persons specified by the decedent in his will
Legitime
◦ Is that part of the testator’s property which he cannot dispose of because the
law has reserved it for certain heirs who are, therefore, called compulsory
heirs. The excess properties of the decedent is called a “free portion”
◦ By means of a last will and testament, a testator can designate the free portion
of his estate for additional heirs irrespective of their relationship to him but he
cannot exclude or disinherit compulsory heirs without a valid basis under the
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. Administrator – a person appointed by the court to manage the distribution
of the estate of the decedent
ESTATE TAXATION
◦ Estate taxation pertains to the taxation of the gratuitous transfer of properties
of the decedent to the heirs upon the decedent’s death.
◦ Estate taxation is governed by the law in force at the time of the decedent’s
death. The estate tax accrues as of the decedent’s death and the accrual of the
tax is distinct from the obligation to pay the same. Upon the death of the
decedent, succession takes place and the right of the State to tax the privilege
to transmit the estate vests instantly upon death.
Classification of Decedents for Taxation
Purposes
1. Resident Citizen – taxable on properties located within or outside the
Philippines
2. Non-Resident Alien – taxable only on properties located in the Philippines,
except intangible personal property when the reciprocity rule applies.
THE ESTATE TAX MODEL
Gross estate ₱ xxx,xxx
Less: Deductions from gross estate xxx,xxx
Net taxable estate ₱ xxx,xxx
Gross Estate
◦ Pertains to the totality of the properties owned by the decedent at
the point of his death.
Deductions
◦ Generally pertain to reductions in the inheritance of the heirs such
as obligations of the decedent, and losses of property during
administration, but also include exemptions from the estate tax
under the law.
Net Taxable Estate
◦ The net properties of the decedent after all pertinent deductions allowable by
law that is subject to tax. The net taxable estate is not equivalent to the
hereditary estate before estate tax because of exclusions, exemption rules and
deduction criteria imposed by the law.