GUIDELINES ON ESTATE AND DONOR'S TAX

Atty. Edwin R. Abella

Concept and Nature:

Estate tax is a tax on the right of the deceased person to transmit his estate
to his lawful heirs and beneficiaries. It is not a tax on property. Estate tax is
held to be an excise tax imposed on the privilege of transmitting property
upon the death of the owner. The estate tax is generated by death and
accrues at the time of death. It is governed by the law in force at the time of
death notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary.

Properties Includable In Gross Estate or Gross Gift:

1. Citizen or resident decedent or donor:
1) Real or immovable property, wherever located.
2) Personal property, tangible or intangible, wherever located.(PD1457,
6/11/78)

2. Non-resident alien:
1) Real or immovable property located in the Philippines.
2) Tangible personal property located in the Philippines.
3) Intangible personal property with situs in the Philippines subject to the
rule of reciprocity exemption.

Properties Considered Situated in the Philippines:

1) Franchise which must be exercised in the Philippines.x
2) Shares, obligations or bonds issued by corporation or sociedad
anonima organized or constituted in the Philippines.
3) Shares, obligations or bonds issued by a foreign corporation eighty-
five per centum of the business of, which is located in the Philippines.
4) Shares, obligations or bonds issued by a foreign corporation if such
shares, obligations or bonds have acquired a business situs in the
Philippines.
5) Shares or rights in any partnership, business or industry established in
the Philippines.

Composition of the Gross Estate:

1) Real and personal property, whether tangible or intangible or mixed.
2) Decedent's interest in property.
3) Proceeds of life insurance.
4) Taxable transfers.
5) Transfers for insufficient consideration.

Proceeds of Life Insurance:

1) Includable in gross estate:
a. Revocable beneficiary.
b. Appointed beneficiary is the estate, executor or administrator.
2) Not includable in gross estate:
Received from the GSIS and SSS.

Taxable Transfers:
1) Transfer in contemplation of death (3-year presumption repealed by
PD 1705, 8/1/80)
2) Transfer with retention or reservation of certain rights.
 3) Revocable transfer.
4) Transfers of property under general power of appointment.
a. Existence of general power of appointment held by the decedent.
b. Exercise of such power by the decedent by will or by deed
intended to take effect upon death.
c. Passing of property by virtue of such death.
5) Transfers for insufficient consideration.
a. Covers only the excess of the fair market value over the value of
the consideration.
b. Transfer was made in contemplation of death, otherwise will be
subject to donors's tax.

Kinds of Property:
1) By Nature:
a. Real or immovable property.
b. Personal property, tangible or intangible.
2) By Ownership:
a. Exclusive capital or paraphernal property.
b. Conjugal or community property.

Valuation of Gross Estate or Gift:

1) Valuation date - Time of death or gift.
2) Basis of valuation:
a. Real properties (land)
i. Prior to August 31, 1969 - Comm. Act 466
ii. September 1, 1969 to August 13, 1974 -R.A. 611
iii. August 14, 1974 to November 24, 1976 - PD 539
iv. November 25, 1976 to December 31, 1985 - PD 1054
v. January 1, 1986 - Present - PD 1994
b. Improvements
i. June 10, 1986 to February 4, 1988 - RAMO 3-86
ii. February 5, 1988 to February 18, 1991 - RAMO 1-88
iii. February 19, 1991 to 1994 - RAMO 2-91
iv. 1994-FMV per TD (Latest TD)
v. Shares of stocks, obligations or bonds - RAMO 1-82
vi. Usufruct, annuities, use or habitation - Formula using
American Tropical Experience Table. Beginning January 1,
1998, the valuation shall take into account the probable
life of the beneficiary in accordance with the latest Basic
Standard Mortality Table.
vii. Foreign currency and cash in bank - Peso value at
exchange rate at the time of death.
viii. Other personal properties - Fair market value at the time of
death.

Personal Properties:
1) Shares of stocks, bonds and securities.
2) Interest in partnerships, business or industry.
3) Cash on hand and in banks.
4) Machineries, transportation equipments, farm implements, tools, farm
animals, etc.
5) Antiques, jewelry, silverware, paintings, etchings, engravings,
books, statues, vases, oriental rugs, collection of stamps and coins.
6) Household furnitures, fixtures, appliances and other personal effects.
7) Usufruct, annuities, use or habitation.
 8) Mortgage notes, participation certificates, judgements, obligations and
action which have for their object movables or demandable sums.
9) Goodwill, patents, and trademarks.
Exclusions and Exemption from the Gross Estate:
1) Exempted under Special Laws and Exemptions by Omission:
a. GSIS proceeds/benefits
b. Accruals from SSS
c. Proceeds of life insurance where the beneficiary is irrevocably
appointed.
d. Proceeds of life insurance under a group insurance taken by
the employer (Not taken out by the decedent upon his own life)
e. WAR damage payments.
f. USVA -RA 136.
g. Properties held in trust by decedent.
h. Transfer by way of bonafide sales.
i. Transfer of property to the National Government or to any of its
political subdivisions.
j. Separate property of the surviving spouse.
2) Exempted under the Tax Code:
a. Merger of usufruct in the owner of the naked title.
b. Transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary.
c. Transmission from the first heir, legatee or donee in favor
of another beneficiary in accordance with the desire of the
predecessor.
d. All 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,
provided that not more than 30% of which shall be used for
administration purposes (PD 507, 1974)

Allowable Deductions:
1) Expenses, losses, indebtedness and taxes:
a. Funeral expenses:
i. CA 466 (July 1, 1939) - 5% of gross estate
ii. PD 69 (January 1, 1973) - 5% of gross estate but not
exceeding P50,000.00
iii. RA 7499 (July 28, 1992)- 5% of gross estate but not
exceeding P100,000.00.
iv. RA 8424 (January 1, 1998)- 5% of gross estate but not
exceeding P200,000.00
b. Judicial expenses.
c. Claims against the estate
i. Claims against insolvent persons
ii. Unpaid mortgages or indebtedness
iii. Unpaid taxes
iv. Losses
v. Transfer for public purposes
vi. Vanishing deduction (Property previously taxed)
d. Share of the surviving spouse in the net conjugal properties – ½
of the net conjugal properties.
e. Family Home - Amount allowable is equivalent to the current or
fair market value or zonal value of the decedent's family home,
whichever is higher, but not exceeding P1,000,000.
 i. Must not exceed the value included in the gross estate
or P1,000,000, whichever is lower.
ii. The amount in excess of P1,000,000 shall be subject to
estate tax.
iii. Must be the decedent's family home as certified to by
the Barangay Captain in the locality.
iv. Only one (1) family home may be claimed.
f. Standard Deduction of P1,000,000.
g. Medical Expenses incurred within one year from death in an
amount not exceeding P500,000.00.
h. Amount Received by heirs under RA No. 4917.
i. Deductions allowable to a non-resident decedent who is not a
citizen of the Philippines:
i. A proportion of the expenses, losses, indebtedness and
taxes:
Formula:
Phil. Gross Estate
------------------------- X Expenses, losses,
indebtedness & taxes
World Gross estate

ii. Transfer for public purposes

iii. Vanishing deduction
iv. Share of surviving spouse - Depending on the property
relationship of the husband and wife in the country where
they are national.

Vanishing Deduction
Requisites:
1) Present decedent must have died within five (5) years from the date of
death of prior decedent or date of gift.
2) The property with respect to which deduction is claimed must have
formed part of the gross estate situated in the Philippines of the prior
decedent or taxable gift of the donor.
3) The property must be identified as the same property received from
the prior decedent or donor or the one received in exchange therefore.
4) The estate taxes on the gift must have been finally determined and
paid.
No vanishing deduction on the property was allowed to the
prior estate.

PROCEDURE IN COMPUTING THE VANISHING DEDUCTION:

1) Determine the initial value of the property previously taxed; Rule -
Value of "Property previously Taxed" in computing the estate tax or
donor's tax of the prior transfer or that of the present decedent's
estate, whichever is lower.
2) Deduct any mortgage or lien on the "Property Previously Taxed" paid
by the present decedent prior to his death, where such mortgage or
lien was a deduction from the gross estate of the prior decedent or gift
of the donor. This is the "Initial Basis".
3) The "Initial Basis" in Step (b) shall be further reduced by the following
ratio of the expenses, losses, indebtedness, taxes or transfer for public
purposes:
Initial Basis
------------------ X Expenses, losses, indebtedness taxes, transfer for
public use
Gross estate

4) Compute the final basis of PPT:

Initial Basis (Step (b) x x x
Less: Limitation (Step (c ) x x x
Final Basis (Amount subject to vanishing deduction) x x x

5) Determine the year interval between the date of death of the prior and
present decedent or date of gift and death of present decedent to find
the applicable percentage deduction:
0 - 1 year - 100%
1 - 2 " - 80%
2 - 3 " - 60%
3 - 4 " - 40%
4 - 5 " - 20%
5 over - 0%

The final basis (Step (d) multiplied by the percentage deduction (Step (e) will
be the vanishing deduction allowable.

HYPOTHETICAL EXAMPLE OF COMPUTATION OF VANISHING

DEDUCTION:
"A" a Filipino, married and resident of the Philippines died on July 31, 1998
leaving the following properties:

Conjugal properties
-------------------------------------------------------------------------------- P7,000,000.00
Conjugal family
home------------------------------------------------------------------------------- 3,000,000.00
Property valued for P4,000,000 was inherited from his
father who died on June 30, 1997 together with a
mortgage loan of P1,000,000 which
was paid by "A" on April 30, 1998
------------------------------------------------------------- 5,000,000.00
Gross estate
-------------------------------------------------------------------------------------- P15,
000,000.00
Less: Deductions:
Expenses, losses, indebtedness, taxes
& transfer for public use -------------------------------------------------------------------
P2,000,000.00
Share of surviving spouse:
Conjugal properties --------------------------------------------------------------------------
P10,000,000.00
Less: Conjugal
deduction ---------------------------------------------------------------------- 2,000,000.00
Net conjugal estate
--------------------------------------------------------------------------- P 8,000,000.00
1/2 share of surviving spouse ------------------------------------------------------------------
P 4,000,000.00
Family home
-----------------------------------------------------------------------------------------
1,000,000.00
Vanishing deduction (80%)
Inherited property -----------------------------------------------------------------------------
P 4,000,000.00
Less: Mortgage paid
----------------------------------------------------------------------------- 1,000,000.00
Initial basis [Step
(b)]---------------------------------------------------------------------------- 3,000,000.00
Less:
3,000,000 x P2,000,000
-------------------------------------------------------------------- 400,000.00

15,000,000.00
Final basis [Step (d)] ---------------------------------------------------------------------------
P 2,600,000.00
80% Vanishing deduction [Step (e)]
---------------------------------------------------------- 2,080,000.00
Total deductions
-------------------------------------------------------------------------------- P
9,080,000.00
Net taxable estate
-------------------------------------------------------------------------------- P
5,920,000.00
Computation of estate tax:
P5,000,000
---------------------------------- P465,000.00
920,000 @ 15%
------------------------- 138,000.00
Total estate tax due
------------------------------- P 603,000.00

ESTATE TAX RATES: (R.A. 8424)

THE ESTATE TAX PLUS OF EXCESS

SHALL BE OVER
Exempt Below 0
P200,000
0 5% P200,000
P15,000 8% 500,000
135,000 11% 2,000,000
465,000 15% 5,000,000
1,215,000 20% 10,000,000

Tax Credit For Estate Taxes Paid To A Foreign

Country:
1) The estate tax due shall be credited with the amount of estate tax
imposed by a foreign country on property located in said foreign
country and included in the decedent's gross estate in the Philippines.
 2) Limitation on credit - The amount of credit for estate tax paid to a
foreign country shall not exceed the proportion of the tax due in the
Philippines which the decedent's net estate situated within such
country bears to his entire net estate.
3) The total amount of credit shall not exceed the proportion of the tax
here in the Philippines which the decedent's net estate situated outside
the Philippines bears to his entire net estate.

Reciprocity Provision On Transfer Tax Imposition:

1) The property involved is intangible personal property.
2) The decedent or donor at the time of death or donation was a citizen
and resident of a foreign country.
3) That the foreign country did not impose a transfer tax of any character
in respect of intangible personal property owned by a Filipino citizen
not residing in said foreign country, or
4) The laws of the foreign country allow a similar exemption from transfer
taxes or death taxes of every character or description in respect of
intangible personal property owned by citizens of the Philippines not
residing in that foreign country.

ADMINISTRATIVE PROVISIONS ON ESTATE TAXATION

A. Notice of Death:
• When required:
a) In all cases of transfer subject to tax; or
b) Where, though exempt from tax, the value of the gross
estate exceeds P20,000.00
• Time of filing:
c) Within two (2) months after the decedent's death, or
d) Within two (2) months after the executor or administrator
has qualified.
• Who shall file notice of death:
e) Executor
f) Administrator
g) Any of the legal heirs

B. Estate Tax Return:

• When required:
a) In all cases of transfer subject to tax; or
b) Where, though exempt from tax, the gross value of the
estate exceeds P200,000.00.
c) Regardless of the gross value of the estate, where the said
estate
consists of registered or registerable property.
• Persons required to file:
a) Executor
b) Administrator
c) Anyone of the legal heirs
• Time for filing:
a) Commonwealth Act 466 - July 1, 1939 - December 31, 1972
• Within six (6) months after decedent's death.
• Within twelve (12) months after decedent's death if proceedings
form settlement was filed in court within six (6) months
after death.
 b) Presidential Decree No. 69 - January 1, 1973 to December
31, 1985.
• Within nine (9) months after decedent's death.
• Within twenty-one (21) months after decedent's
death proceedings for settlement was filed in court within nine
(9) months after death.
c) Presidential Decree No. 1994 - January 1, 1986 to July 27,
1992.
• Within ninety (90) days after decedent's death
d) Republic Act 7499 - July 28, 1992 to present:
• Within six (6) months after decedent's death
• Extension to File Return:
• Not exceeding thirty (30) days in meritorious cases.
• Place of Filing:
a) Office of the Commissioner of Internal Revenue
b) Office of the Revenue District Officer, Collection Officer or
authorized treasurer of the Municipality in which the decedent was
domiciled at the time of death.

C. Payment of Estate Tax:

• Time of payment:
a) Commonwealth act 466-July 1, 1939 to December 31,
1972:
 Estate and Inheritance taxes- Payable within nine (9) and Twelve
(12) months, respectively, after death.
 Estate and inheritance taxes - Payable within twenty one (21)
and twenty-four (24) months, respectively, if proceedings for
settlement of estate was filed in court within six (6) months after
death.
b) Presidential Decree No. 69 - January 1, 1973 to December
31, 1985:
 Estate tax is payable at the time the return is filed.
(Within nine (9) days or twenty-one (21) months, as the
case may be)
c) Presidential Decree No. 1994 - January 1, 1986 to July 27,
1992:
 Estate tax is payable at the time the return is filed (Within ninety
(90) days after death)
d) Republic Act 7499 - July 28, 1992 to present:
 Estate tax is payable at the time the return is filed (Within six (6)
months after death)
 Extension to pay estate tax
a) Two (2) years - Estate is settled extrajudicially.
b) Five (5) years - Estate settled judicially.
• Surcharges:
a) Late filing of estate tax return - 25% of tax due per return
 July 1, 1939 to December 31, 1972 - Discretionary or maybe
waived if
a) The return is voluntarily filed without notice from the
Commissioner
b) The failure to file the return on time was due to a
reasonable cause.

b) Late payment of tax:

  July 1, 1939 to August 1, 1980 - 5%
 August 1, 1980 to December 31, 1985 (PD 1705)10%
 January 1, 1986 to present (PD 1994) 25%
• Interests:
a) July 1, 1939 to September 1, 1969 (CA 466)
 Tax per return 12%
 Deficiency tax 6%
b) September 1, 1969 to December 31, 1972 (RA 6110,
8/4/69)----------------------12%
c) January 1, 1973 to January 16, 1981 (PD 69,
11/24/72)----------------------14%
d) January 16, 1981 to present (PD 1773,
1/16/81)------------------------------20%
• Place of filing of return and payment of tax:
a) Commissioner of Internal Revenue, or
b) Regional Director, Revenue District Officer or Collection
Officer of the city or municipality in which the decedent was
domiciled at the time of his death.
• Person liable to pay estate tax:
a) Executor or administrator before distribution of estate
b) Heir or beneficiary subsidiarily liable to the extent of his
distributive share.
DONOR'S TAX
Definition and Concepts:
Gift tax is an excise on the transfer by a living person to another of money or
other property without consideration.
Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another, who accepts it.

What Constitutes A "Gift" For Gift Tax Purposes?

1. Transfer of property without consideration.
2. It also includes sales, exchanges and other dispositions of property for
a consideration to the extent that the value of the property transferred
exceeds the value in money or money's worth of the consideration
received therefor.

Concept of Consideration:
1. Consideration must be measurable in money or money's worth. Mere
legal consideration is not sufficient.
2. The consideration must flow to the donor, mere detriment to the donee
does not satisfy the purpose of the statute.
Commissioner V. Wemyss (324 U.S. 303, 1945)
Marriage is not a consideration reducible to money value. If a person
transfers a property to a trust in consideration of marriage, a gift is
made because no money consideration flows to the transferor/donor.
Donative intent on the part of the tranferor is not an essential element
for the imposition of the gift tax to the transfer.

When Does The "Gift" Occur?

A gift occurs when the donor surrenders CONTROL over the property. If the
donor retains an unlimited power to revoke the gift, it is clear that no gift has
occurred.
ty referred to in Section 24(D) and Section 27(D)(5) of the NIRC).

Requisites of A Taxable Gift:

1. Capacity of the donor
2. Donative intent (Except gift under Section 93 NIRC)
3. Acceptance by the donee, and
4. Delivery of the gift to the donee, actually or constructively.

Kinds of Donation:
1. Inter-vivos
2. Mortis causa
3. Indirect donation (Except real property referred to in Section 24(D) and
Section 27(D)(5) of the NIRC).

Persons Subject to Donor's Tax:

1. (Same as in estate tax)
Before September 1, 1969 - Only donation made by individual is
subject to donor's tax.
2. On or after September 1, 1969 (RA 6110) Donation made by all person,
whether natural or juridical, is subject to donor's tax.
Gross Gifts:
1. Composition -(Same as in estate tax)
2. Valuation - At the time the gift was made (Same as in estate tax)

Deductions from the Gross Gift:

1. Dowries or gifts by parents to children on account of marriage, before
its celebration or within one (1) year thereafter to the extent
ofP10,000.
2. Gifts to the National Government or any of its agencies.
3. Gifts made in favor of an educational, and/or charitable, religious,
cultural or social welfare corporation, foundation, trust or philanthropic
organization or research institution or organization.
4. Encumbrance on the property donated if assumed by the donee in the
deed of donation.
5. Those specifically provided by the donor as a condition of the donation
which will diminish the value of the property received by the donee.
6. Exempt donation under special laws.

Tax Payable by the Donor:

1. On or before December 31, 1972:
a. Donor's and donee's gift taxes were imposed based on
graduated rates.
b. Gifts made during previous year or years are collated to the
present gift and the gift tax computed on the total gift.
2. January 1, 1973 to January 15, 1981 (PD 69)
a. Donor's tax was imposed on graduated rates.
b. Gifts made during the previous year or years are computed
separately.
c. Donor's tax computed on the total gifts made during each
calendar year.
d. Collation of gifts are made only on gifts made during the same
calendar year.
3. January 16, 1981 to July 27, 1992 (PD 1773)
a. Tax payable by the donor in favor of relatives is computed based
on the graduated rates.
b. Tax payable by the donor in favor of stranger is computed at
20% or based on graduated rates, whichever is higher.
c. Gifts made during the same calendar year are collated and the
donor's tax computed on the total gifts during the calendar year.
4. July 28, 1992 to December 31, 1997 (RA 7499)
a. Tax payable by the donor on gifts made in favor of relatives is
computed based on graduated rates.
b. Tax payable by the donor on gifts made in favor of strangers is
computed at 10% of the net gifts.
5. January 1, 1998 to present (RA 8424)
a. Tax payable by the donor on gifts made in favor of relatives is
computed based on graduated rates.
b. Tax payable by the donor on gifts made in favor of strangers is
computed at 30% of the net gifts.
6. Relatives for donor's tax purposes:
a. Spouse, ancestor and lineal decedent
b. Brother, sister (whether by whole or half blood)
 c. Relatives by consanguinity in the collateral lines within the fourth
degree of relationship.

Rates of Donor's Tax (RA 8424)

Donations to Relatives (Graduated Table)

THE DONOR’S TAX PLU OF EXCESS

SHALL BE S OVER
Exempt 0 0
0 2% P100,000
2,000 4% 200,000
14,000 6% 500,000
44,000 8% 1,000,000
204,000 10 3,000,000
%
404,000 12 5,000,000
%
1,004,000 15 10,000,000
%

Donations to Stranger - 30%

SAMPLE PROBLEM OF DONOR'S TAX

Mr. Joseph Ramos, single made the following donations:
1. January 15, 1999 - to his brother, Jun, P100,000
2. March 10, 1999 - to Clara, his sister, P250,000
3. Sept 8, 1999 - to his girlfriend, Loi, a brand new car worth P600,000
4. Oct 25, 1999 - to his father, Carlos, a vacant lot
worth P1,000,000 w/ FMV of P800,000 and zonal value of P1,500,000
5. Nov 12, 1999 - to Luis, his brother in law, P200,000
6. Feb 14, 2000 - to his mother, Maria, P300,000

Answer:

Date Donation Amount Tax Due

a) 1/15/99 Cash 100,000 (brother) Exempt

b) 1/15/99 Cash 100,000

3/10/99 Cash 250,000 (sister)
350,000

Tax on: 200,000 ================

2,000
150,000 x 4% ============
6,000
8,000
Less: Tax on previous
donation (donation a)============
0000
8,000
c) 9/8/99 Cash 600,000 (Stranger)
 Tax Due: 600,000 x 30%==========
180,000

d) 10/25/99 Lot 1,500,000 (ZV) (father)

3/10/99 Cash 250,000
1/15/99 Cash 100,000
1,850,000

Tax on: 1,000,000 ==============

44,000
850,000 x 8% ============
68,000
112,000
Less: Tax on previous
donation (donation a + b) 8,000
104,000

e) 11/12/99 Cash 200,000 (Stranger)

Tax Due: 200,000 x 30% ==========
60,000

f) 2/14/2000 Cash 300,000 (brother-in-law)

Tax On: 200,000 ================
2,000
100,000 x 4% =========== 4,000
6,000
Note: Letter (f) was donated in year 2000 therefore; this is not included in
the cumulative total for 1999's donations.

ADMINISTRATIVE REQUIREMENTS ON DONOR'S TAX

A. Donor's Tax Return:
1. Requirements (State the following information/data):
a. Each gift made during the calendar year
b. Deductions claimed and allowable
c. Previous net gifts during the same calendar year
d. Name of donee and address
e. Other pertinent information
2. Time of filing:
a. Before December 31, 1972:
 On or before March 1 following the close of the calendar
year.
b. January 1, 1973 to December 31, 1997
 Within thirty (30) days after each donation.
 Extension not exceeding thirty (30) days maybe granted.
c. January 1, 1998 to present
 Within thirty (30) days after each donation- No Extension
3. Place of filing of donor's tax return
a. Commissioner of Internal Revenue
b. Revenue District Officer, Collection Officer or duly authorized
Treasurer of the municipality where the donor was domiciled at
the time of donation.

B. Payment of Donor's Tax:

 1. Donor's tax should be paid at the time the return is filed or within thirty
(30) days after the date of gift.
2. Extension to pay tax may be granted not exceeding six (6) months.
 Effective January 1, 1998 (RA 8424), no extension for
the payment of the donor's tax shall be granted.
C. Surcharges:
(Same as estate tax)
D. Interest:
(Same as estate tax)