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Business and Other Transfer Taxes

Class: F3/E3
Room: BRIC
Days: Monday
Time: 1:00 – 4:00 p.m.
Business and Other Transfer Taxes

Class: A4/MM3
Room: 304T
Days: Tuesday
Time: 8:00 – 11:00 a.m.
Teaching-Learning Strategies

• Lecture and Class Discussions


• Actual Demonstrations and Computations
• Problem Solving and Case Analysis
Course Requirements
• Attendance and Attitude
• Class Participation
• Quizzes/Long Tests
• Assignments/Discussions
• Major Exams (Prelim, Midterm, Final)
Attendance
• Tardiness:
– Arrives 1 minute after scheduled start of class
– 3 tardiness = 1 absence
• Absences:
– Beyond 15 minutes late is considered absent.
– Maximum # of absences = 8
– Beyond 8 absences = failure due to absences
(FDA)
Grading System
• Class Participation 20%
• Quizzes/Long Tests 20%
• Assignments/Discussions 20%
• Major Exams (Prelim, Midterm, Final) 40%

 Final Grade = Prelim + Midterm + Final


3
Where We Stand
• Everyone starts with a perfect grade
• How you maintain that mark until the end of
the semester is entirely within your control
– Attendance and Attitude
– Class Participation
– Quizzes/Long Tests
– Assignments/Discussions
– Major Exams (Prelim, Midterm, Final)
First Assignment
for submission
• ¼ size index card
• FAMILY NAME, First Name (NICKNAME) –
upper left
• Course & Year – upper middle
• 1x1 or 2x2 - ID picture – upper right
• Contact# (1st row)
• Email address (2nd row)
Lecture Topics
Week 1: Basic Concepts and Principles of Taxation
– Introduction
– Definition, Nature & Basis of Taxation
– State Power
– Objectives of Taxation
– Limitations on the Power of Taxation
– Basic Principles of a Sound Tax System
– Essential Characteristics of a Tax
– Tax distinguished from a license fee
– Classification of Taxes
What is Taxation?
• Inherent power of a sovereign state
(government) to impose a charge or financial
burden on persons, properties or rights to
– Raise revenues for its use and support
– Enable it to discharge its appropriate functions
• Dictated by the needs of the government -
exact any amount, except when
– There are prescribed limitations
– There is abuse of power
• Power is shared by the three branches of
government
1. Legislative: enacts the laws that impose the tax
2. Executive: promulgates the regulations that
implement the law
3. Judicial: sees to it that
• the laws do not violate inherent and constitutional
limitations on the power of taxation, and
• the implementation is according to the letter and spirit
of the law
• Inherent limitations:
– Must be levied for a public purpose
– Cannot be delegated
– Government instrumentalities through which the
government exercise sovereign powers are
exempt from tax
– Limited to the territorial jurisdiction of the taxing
state
– Cannot apply to the property of foreign
governments (international comity)
• Constitutional limitations:
– No law impairing the obligations of contracts shall
be passed
– No person shall be imprisoned for debt or non-
payment of a poll tax
– The rule on taxation shall be uniform and
equitable
– Charitable and religious institutions and non-profit
cemeteries and all kinds of lands, buildings and
improvements actually, directly or indirectly, used
for charitable and religious purposes shall be
exempt from taxation
Basic Principles of a Sound Tax System
1. Fiscal adequacy – sources of revenue as a whole
should provide enough funds to meet the
expanding expenditures of the government
2. Theoretical justice – taxes must be based on the
taxpayer’s ability to pay
3. Administrative feasibility:
– clear to the taxpayer,
– not unduly burdensome and discouraging to business,
– convenient as to time and manner of payment and
– capable of enforcement by competent public officials
Essential Characteristics of a Tax
• Forced contribution
• Exacted pursuant to the legislative authority
• Proportionate in character
• Payable in money
• Imposed for the purpose of raising revenue
• Used for a public purpose
Tax Distinguished from License Fee

Taxes License Fee

Purpose Raise revenue Police power of the state

Maintain government Regulate certain business


function or occupation

Amount Unlimited Should not unreasonably


exceed the expenses of
issuing the license and
supervision
Classification of Taxes
• As to subject matter
– Personal, capitation or poll tax (persons or
residents of a specified territory)
– Property tax (properties located within a
taxing jurisdiction)
– Excise tax (performance of an act or
enjoyment of a privilege)
• As to who bears the burden
– Direct (whom the law intends to pay)
– Indirect (shifted or transferred to someone
else)
• As to determination of amount
– Specific (standard of weight or measurement)
– Ad Valorem (value of the subject)
• As to purpose
– General
– Special
• As to scope
– National
– Local
• As to proportionality
– Progressive (tax rate increases is proportional
to the tax base increases)
– Regressive (tax rate increases is not
proportional to the tax base increases)
– Proportional (fixed percentage of amount of
the base)
Week 2 - 5
Estate Tax
• Gross Estate
• Classifications of Decedents
• Inclusion to Estate
• Valuation of Estate
• Exclusion/ Deduction from Estate
• Net Estate
• Computation of Estate Tax
Gross Estate
1. Gross estate includes real properties
a) Land
b) Building
c) Anything attached to the soil with permanence
2. Tangible personal property – can be seen &
touched
3. Intangible personal property – cannot be
seen and touched
Classification of Decedent
• Class A
1) Citizen of the Philippines, residing in the
Philippines
2) Citizen of the Philippines, residing abroad
3) Citizen of a foreign country, residing in the
Philippines
• Class B
– Citizen of a foreign country, residing abroad
Inclusions to Gross Estate
• Gross estate of a resident or citizen of the
Philippines (Class A) consists of
1) real estate and
2) personal property (tangible or intangible),
regardless of location.
• Gross estate of a non-resident who’s not a citizen
of the Philippines (Class B) consists of
1) real estate located in the Philippines and
2) tangible personal property in the Philippines, and
3) subject to exception (reciprocity clause), intangible
personal property in the Philippines.
Exercises
Compute for Gross Estate if the deceased is (1) Class A
decedent or (2) Class B decedent with reciprocity and (3)
Class B decedent without reciprocity
1. Obligations due from a foreign company P 250,000
2. Lot in Mindoro, Phil. 1,150,000
3. Land in Marikina, Phil. 950,000
4. Notes receivable, debtor from Japan 1,000,000
5. Furniture in Manila, Phil. 200,000
6. Shares in Ayala Corp (Phil. Company) 50,000
7. Truck in Baguio, Phil. 1,200,000
8. Bonds of Apple Corp (US Company) 500,000
9. Business right in “Kuya J” (Phil. Company) 1,500,000
10. House & lot in Makati 10,000,000
Estate Tax Computation
Old Tax Table
but not of excess
over over tax shall be plus over
200,000 exempt
200,000 500,000 0 5% 200,000
500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 and over 1,215,000 20% 10,000,000

New Estate Tax Rate starting


from Jan 2018 = Flat 6%
Disposition of Transfers Prior to Death
• Transfers in contemplation of death – Motivated
by the thought of death although death may not
be imminent such as donation mortis causa.
• Revocable transfer – terms of enjoyment of the
property may be altered, amended, revoked or
terminated by the decedent. It is sufficient that
the decedent has the power to revoke though he
did not exercise the power to revoke.
• Transfer under the general power of
appointment – designate person or persons who
will succeed to the property of a prior decedent.
Insurance Proceeds
Life insurance proceeds are included in the gross
estate if beneficiary is:
1) Estate of the decedent, his executor or
administrator
2) A revocable third person beneficiary
Valuation of Gross Estate
• For personal property : at Fair Market Value at
time of death
• For real property (whichever is higher):
– Assessed value
– Fair Market Value
– Zonal value
Deductions from Gross Estate – Old NRIC
 Ordinary deductions
1) Funeral expenses: actual incurred or 5% of gross estate whichever is lower,
but not over P200,000. The term "FUNERAL EXPENSES" is not confined to its
ordinary or usual meaning. They include:
– (a) The mourning apparel of the surviving spouse and unmarried minor children of
the deceased bought and used on the occasion of the burial;
– (b) Expenses for the deceased’s wake, including food and drinks;
– (c) Publication charges for death notices;
– (d) Telecommunication expenses incurred in informing relatives of the deceased;
– (e) Cost of burial plot, tombstones, monument or mausoleum but not their upkeep.
In case the deceased owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible;
– (f) Interment and/or cremation fees and charges; and
– (g) All other expenses incurred for the performance of the rites and ceremonies
incident to interment.
Expenses incurred after the interment, such as for prayers, masses, entertainment, or
the like are not deductible. Any portion of the funeral and burial expenses borne or
defrayed by relatives and friends of the deceased are not deductible. Actual funeral
expenses shall mean those which are actually incurred in connection with the
interment or burial of the deceased. The expenses must be duly supported by
official receipts or invoices or other evidence to show that they were actually
incurred.
Deductions from Gross Estate – Old NRIC
2) Judicial expenses or intestate proceedings : (Sec 6 (A)(2) of RR 2-2003)
Expenses allowed as deduction under this category are those incurred in the
inventory-taking of a assets comprising the gross estate, their
administration, the payment of debts of the estate, as well as the
distribution of the estate among the heirs. In short, these deductible items
are expenses incurred during the settlement of the estate but not beyond
the last day prescribed by law, or the extension thereof, for the filing of the
estate tax return. Judicial expenses may include:
– (a) Fees of executor or administrator;
– (b) Attorney’s fees;
– (c) Court fees;
– (d) Accountant’s fees;
– (e) Appraiser’s fees;
– (f) Clerk hire;
– (g) Costs of preserving and distributing the estate;
– (h) Costs of storing or maintaining property of the estate; and
– (i) Brokerage fees for selling property of the estate.
– Any unpaid amount for the aforementioned cost and expenses claimed
under “Judicial Expenses” should be supported by a sworn statement of
account issued and signed by the creditor.
Deductions from Gross Estate – TRAIN
3) Claims against the estate: requisites for deductibility of claims against the
Estate? (Sec 6(A)(3) of RR 2-2003)
(a) The liability represents a personal obligation of the deceased existing at the time of his
death except unpaid obligations incurred incident to his death such as unpaid funeral
expenses (i.e., expenses incurred up to the time of interment) and unpaid medical
expenses which are classified under a different category of deductions pursuant to these
Regulations;
(b) The liability was contracted in good faith and for adequate and full consideration in
money or money’s worth;
(c) The claim must be a debt or claim which is valid in law and enforceable in court;
(d) The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed.
4) Claims against insolvent persons: after preferred creditors & ordinary
creditors are paid and the properties are not sufficient to pay the obligations
5) Expenses, losses, indebtedness, taxes, etc:
• Unpaid mortgage or indebtedness on property : Gross FMV reflected & unpaid
mortgage deducted
• Unpaid taxes: accrued before death such as income taxes due and property taxes
• Losses: not insured, not claimed as deduction in the ITR, occurred during settlement
of the estate and before last day of payment (6 months after death.
6) Transfer for public use – in the last will & testament, transfer in favor of the
government for public purposes
Deductions from Gross Estate - TRAIN
7) Vanishing deduction: Purpose – to minimize the effects
of a double taxation on the same property within a short
period of time.
• No consecutive deaths within 5 years of a previous decedent
• Property located in the Philippines
• Part of the prior decedent’s estate, finally determined and paid
• Identified as the one received from prior decedent or something
in exchange for
• No vanishing deduction on the property claimed by prior
decedent’s estate
• Rates applied as follows:
– 100% within one year to the death of the decedent
– 80% >1 <2 years to the death of the decedent
– 60% >2 <3 years to the death of the decedent
– 40% >3 <4 years to the death of the decedent
– 20% >4 <5 years to the death of the decedent
Procedures in Computing Vanishing Deduction
1. Determine the initial value by comparing the FMV of the
property used in computing the first transfer tax paid with the
FMV of the property in the present decedent. The lower of
the two is the initial value.
2. From the initial value taken, deduct any mortgage or lien on
the property previously taxed which was paid by the present
decedent prior to his death. This is the initial basis.
3. The initial value taken, as reduced by Step 2, shall further
reduced by prorated deductions for Expenses, Losses,
Indebtedness and Taxes and transfers for public purpose only,
allocated to the property previously taxed as follows:
Initial Basis / Gross Estate x Deductions = Portion Deductible
4. Final basis. Determine the time interval between the present
decedent and death prior to decedent and date of gift (if the
property was acquired by donation) to find the applicable
percentage of vanishing deduction.
5. Multiply the final basis by the percentage of vanishing
deduction to arrive at the vanishing deduction.
Deductions from Gross Estate
 Special deductions (for class A only; not
available to the estate of a non-resident, non-
citizen of the Philippines.)
1) Family home: dwelling house where the person and
his family resides: FMV or P10,000,000 (P1M
before) whichever is lower
2) Standard deduction: P5,000,000 (P1M before)
3) Medical expenses: within one year from death
substantiated with receipts but not over P500,000
(Old NRIC)
4) Amount receivable by heirs: from decedent’s
employer
Net Taxable Estate
1) Gross Estate: real property + tangible personal
property + intangible personal property
2) Less: Ordinary deductions (a. Claims, expenses,
losses, indebtedness, taxes, etc; b. Transfer for
public use and c. Vanishing deduction)
3) Less: Special deductions (a. Family home b.
Standard deduction c. Amount receivable by
heirs from employer)
4) Equals: Net Taxable Estate
• Mr. Jimenez, a citizen of the Philippines, single, died a
resident of the Phil., leaving the following properties:
– Real property in the U.S. inherited from
father 3 years ago P25,000,000
- Personal property in the Phil. inherited
from father 12,000,000
- Family home in the Phil. 10,400,000
Following expenses & obligations are being claimed
- Actual funeral expenses P 500,000
- Medical expenses within the year 200,000
- Other obligations within the last 2 years 250,000
- Claims against Jo, a pauper 20,000
- Mortgage payable to BPI (no MRI) 1,200,000
GROSS ESTATE OF MARRIED DECEDENT
The determination of the gross estate of the decedent
who is married will depend upon the property relations
between the spouses. The spouse may, in
the marriage settlements, agree upon the regime of
absolute community, conjugal partnership of gains,
complete separation of property, or any other regime. In
the absence of a marriage settlement, or when the
regime agreed upon is void, the property relations of the
spouses shall be governed by the following regime or
system:
1. Conjugal Partnership of Gains, if married before August
3,1988.
2. Absolute Community of Property, if married on or after
August 3,1988 ( Art. 75, FamilyCode)Note: the
Family Code took effect on August 4, 1988.
Conjugal Partnership of Gains
CONJUGAL PROPERTIES
1. Those acquired by onerous title during the marriage at the expense of the common
fund, whether the acquisition be for the partnership, or for only one of the spouses;
2.Those obtained from labor, industry, work, or profession of either both the spouses;
3.The fruits, natural, industrial, or civil, due or received during the marriage from the
common property, as well as the net fruits from the exclusive property of each spouse;
4.The share of either spouse in the hidden treasure which the law awards to the finder or
owner of the property where the treasure is found;
5.Those acquired through occupation such as fishing and hunting;
6.Livestock existing upon the dissolution of the partnership in the excess of the number of
each kind brought to the marriage by either spouse and;
7.Those which are acquired by chance, such as winnings from gambling or betting.
However, losses therefrom shall be borne exclusively by the loser-spouse.
EXCLUSIVE PROPERTIES
1. That which is brought to the marriage as his/her own;
2.That which each acquires during the marriage by gratuitous title;
3.That which is acquired by right or redemption, by barter or by exchange with property
belonging to only one of the spouses; and
4.That which is purchased with the exclusive money of the wife or of the husband.
Absolute Community of Property
COMMUNITY PROPERTIES
1. ALL properties owned by the spouses at the time of the
marriage, and
2. ALL properties acquired thereafter.
EXCLUSIVE PROPERTIES
1.Property acquired during the marriage by gratuitous title
by either spouse, and the fruits as well as income thereof,
if any, unless it is expressly provided by the donor, testator
or grantor that they shall form part of the community
property;
2.Property for personal and exclusive use of either
spouse. However jewelry shall form part of the community
property; and
3.Property acquired before the marriage by either spouse
who has legitimate descendants by a former marriage, and
the fruits as well as the income, if any, of such property.
Married Decedent
Mr. Ramos, a resident Filipino, under the
property relationship of absolute community of
property during marriage died with properties
and obligations below:
1. Real properties inherited from father 8 years
ago before marriage P15,000,000
2. Real property received as gift 3,000,000
3. Income derived from gift above 1,000,000
4. Real property of Mrs. Ramos 3,500,000
5. Real property (family home) 12,000,000
6. Obligations incurred during marriage 800,000
TRAIN Law
Estate Tax
The estate tax rate was also changed from 5% to 32% of the net estate to a flat rate of
6%. Additionally, the following deductions allowed in computing the net estate (to
be subjected to estate tax) were increased:

Simplified tax compliance


The following measures were adopted to simplify its computation and payment:
– In lieu of actual funeral expenses (up to P200,000) and medical expenses (up
to P500,000), Train increases the standard deduction (wherein no
substantiation is required) from P1,000,000 to P5,000,000
– Notice of death is no longer required
– CPA certification is now required only if the gross estate is above P5,000,000
(up from P2,000,000)
– The deadline for filing of estate tax return is now one year from death
(before, 6 months from death)
– Bank deposits left by the decedent may be withdrawn by the heirs subject
only to 6% withholding tax. Before a certification from the BIR that estate tax
has been paid was required.
A COMPARATIVE ANALYSIS ON THE PROVISIONS OF THE 1997 TAX CODE &
AMENDMENTS/REPEALS INTRODUCED BY TAX REFORM FOR ACCELERATION &
INCLUSION (TRAIN) LAW

OLD TAX CODE New TRAIN Law


End of Prelim