TRANSFER TAXES What IS TRANSFER TAX A Transfer

TRANSFER TAXES

What IS TRANSFER TAX? A Transfer Tax is any tax levied on the passing of title to property.

Difference between income and transfer tax: INCOME TAX TRANSFER TAX Tax on: income Transfer of property Rates are: Higher: Individuals - 5% to 32% Corporations – 32% Lower: Estate tax – 5% to 20% Donor’s tax - 2% to 15% Exemptions more lesser

MODES OF transfer. RING OWNERSHIP: OCCUPATION INTELLECTUAL CREATION PRESCRIPTIO N SUCCESSION DONATION

OCCUPATION Things appropriable by nature which are without an owner, such as animals that are the object of hunting and fishing, hidden treasure and abandoned movables, are acquired by occupation. (Art. 713 of the Civil Code)

PRESCRIPTION of actions Art. 1139. Actions prescribe by the mere lapse of time fixed by law.

INTELLECTUAL CREATION Art. 721. By intellectual creation, the following persons acquire ownership: (1) The author with regard to his literary, dramatic, historical, legal, philosophical, scientific or other work; (2) The composer; as to his musical composition; (3) The painter, sculptor, or other artist, with respect to the product of his art; (4) The scientist or technologist or any other person with regard to his discovery or invention. (n)

DONATION Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (Art. 725, CC) When a person gives to another a thing or right on account of the latter’s merits or of the services rendered by him to the donor, provided they do not constitute a demandable debt, or when the gift imposes upon the donee a burden which is less than the value of the thing given, there is also a donation. (Art. 726, CC)

SUCCESSION 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 his will or by operation of law. (Art. 774, CC)

ESTATE TAX

What is estate tax? Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

When to file estate tax return (bir Form no. 1801)? If the death occurred: Prior to January 1, 1998 The Gross Estate exceeds P 3, 000 On or after January 1, 1998 The Gross Estate exceeds P 20, 000

What is succession? 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 his will or by operation of law. (Art. 774, CC)

When is the right of succession transmitted? The rights to the succession are transmitted from the moment of the death of the decedent. (Art. 777, CC)

WHAT ARE THE TYPES OF Art. 778. Succession. SUCCESSION? may be: TESTAMENTARY LEGAL MIXED Valid Will Estate called Acceptor Yes Testate Devisee/Legatee None Intestate Heir Partial Mixed Heir Succession By will By operation of Partly by will, law part by law Note: The term legatee is often used to denote those who inherit under a will without any distinction between real property and personal property, but technically, a devisee inherits real property under a will.

Who is a decedent? Is the person whose property is transmitted through succession, whether or not he left a will. If he left a will, he is also called the testator. (Art. 775, CC)

What are the types of decedent and what are included in their gross estate? FILIPINO AND RESIDENT ALIEN DECEDENT All real, tangible/intangible personal property wherever situated. NON-RESIDENT ALIEN DECEDENT • All real and tangible personal property situated in the Philippines. • Intangible personal property with a situs in the Philippines unless exempted on the basis of reciprocity.

GROSS ESTATE INCLUSIONS • Decedent’s interest • Transfer in contemplation of death • Revocable transfer • Transfer under GPA • Proceeds of life insurance • Transfers for insufficient consideration • Prior interests

DECEDENT’S INTEREST To the extent of the interest in property of the decedent at the time of his death.

Transfer in contemplation of death Transfers impelled by the thought of an impending death, without regard of the state of health of the transferor.

Revocable transfers A transfer whereby the terms of enjoyment of the property may be altered, amended, revoked or terminated by the decedent alone or in conjunction with any other person, or where any such power is relinquished in the contemplation of the decedent’s death.

Transfers for insufficient consideration Amount includible in the GE is the excess of the FMV at the time of death over the value of consideration received.

Property passing under GPA What is General Power of Appointment? The power to designate, without restrictions, the persons who shall receive, succeed to, possess or enjoy the property or its income received from the estate of a prior decedent. How is GPA exercised? GPA is exercised by: • Will • Deed executed in contemplation of death • Deed during an executors lifetime.

Proceeds of life insurance Will form part of the GE only if when: Revocable/Irrevocable Beneficiary is the estate, executor, administrator. Revocable only Others

What will be used as basis in the valuation of property? REAL PROPERTY FMV as determined by the CIR, or FMV fixed by assessors No zonal value: FMV in latest tax declaration SHARES OF STOCK Listed shares – average of the highest and lowest quotation at the date of death, if not available, date nearest to death. Unlisted shares – Common stocks: Book Value Preferred stocks: Par value PERSONAL FMV PROPERTY

• • • GE EXCLUSIONS First P 200, 000 of net estate merger of usufruct in owner of naked title; Fideicommisary substitution; transmission from first heir/legatee/ donee in favor of another beneficiary, in accordance with the predecessor’s will; and Bequests/devices/legacies/transfers to social welfare/cultural/charitable institutions; GSIS/SSS proceeds/ benefits Proceeds of life insurance where the beneficiary is irrevocably appointed or under a group insurance taken by employer (not taken out upon his life) War damage payments Transfer of property to the National Government or to any of its political subdivisions Separate property of the surviving spouse Acquisition and/or transfer expressly declared as not taxable or bona fide sales

Merger of usufruct in the owner of the naked title Illustration: A is the owner of the fishpond, has two sons B and C. C his the right of usufruct of the fishpond but B will have the title of the fishpond upon A’s death. When A died – the fishpond will be included in GE and title passes to B. However, C shall have the possession. In case C died – transfer of possession is exempt from estate tax.

FEDEICOMMISARY SUBSTITUTION Illustration: A dies and entrusted B, fiduciary, to transfer the ownership of a lot to C, fedeicommisary, when C reaches legal age. The transfer from A to B is subject to estate tax but the transfer from B to C not subject to estate tax.

Deductions: FILIPINO AND RESIDENT ALIEN • • Expenses, losses, indebtedness, taxes, etc. (ELIT-FJCCULT: funeral, judicial, claims vs. estate/insolvents, mortgages, taxes, losses) Transfer for public use Vanishing deduction Family home Standard deduction Medical expenses Retirement benefits received by heirs under RA 4917 Share of Surviving Spouse NON-RESIDENT ALIEN • Expenses, losses, indebtednes s, taxes, etc. (FJCCULT) • Transfer for public use • Vanishing deduction

Non-resident alien elit formula: Formula: Phil. Gross Estate World Gross Estate X World ELIT

FUNERAL EXPENSES are costs which are actually incurred in connection with the interment or burial of the deceased.

Funeral expenses: § § § Deductible Mourning apparel Wake Expenses Communication and publication Cost of burial plot, tombstones, monuments, and mausoleum Interment/cremation fees and charges All other expenses incident to the interment Non-deductible § Expenses incurred after interment § Portion of funeral expense defrayed by relatives and friends

Funeral expenses: The amount deductible is the lowest among the following: • actual funeral expenses • 5% of the gross estate • P 200, 000

JUDICIAL EXPENSES 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: Executor/administrator fees Attorney’s fees Court fees Accountant’s fees Appraiser’s fees Clerk hire Cost of preserving and distributing the estate • Brokerage fees for selling estate • Expenses for extra-judicial settlement • •

Claims against: ESTATE - debt/demand of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Requisites: • Instrument must be notarized. • Contracted within 3 years before death. • Statement showing disposition of loan. INSOLVENT PERSONS Requisites: • Included in gross estate • Debtors incapacity is proven

UNPAID MORTGAGE Requisite: • Value of the property included in the Gross Estate • Deduction shall be limited to the extent of the mortgage contracted

TAXES Deductible: Not deductible: taxes due at the time of § income tax on income death received after death § property taxes not accrued before death § estate tax

LOSSES Requisites: • Arising from calamity, or casualty; • Not compensated by insurance; • Not claimed as deduction in an ITR of the taxable estate; • Occurring during the settlement; and • Occurring before the last day for the payment of the estate tax

Transfers for public use Requisites: • Value in included in gross estate • Disposition is in a last will/testament • To take effect after death • In favor of the government, or any political subdivision, also contemplates bequests/devices/transfers to social welfare, cultural and charitable institutions • For public purposes.

FAMILY HOME It is the dwelling house, including the land it is situated, where the family reside as certified by the Barangay Captain of the locality. Requisites: q the decedent’s family home. q certified to by the barangay captain of the locality where it is located. q Maximum of P 1, 000 q Total value must be included in the Gross Estate

Medical expenses Requisites to be deductible: • incurred within one year prior to his death • Substantiated with receipts • Maximum of P 500, 000

Vanishing deductions Are deductions allowed for properties which are already subjected to transfer taxes. The purpose is to minimize the effect of double taxation within a short period of time since the same property will be again subjected to tax in the form of estate tax. Requisites to be deductible: § the present decedent died within 5 years from prior transfer. § property must be located in the Philippines. § property formed part of the taxable estate/taxable gift. § estate tax/donor’s tax must have been paid. § property must be identified as the one received from the prior decedent, or something acquired in exchange therefor. § No vanishing deduction was allowed to the estate of the prior decedent.

Standard deduction P 1, 000 without need of substantiation.

Estate tax Formula: Gross Estate (Sec. 85) Less: (1) Deductions (Sec. 86) (2) Net share of the SS in the CP Net Taxable Estate X Tax rate (Sec. 84) Estate Tax due Less: Tax Credit [if any] (Sec. 86[E] or 110[B] Estate Tax Due, if any

What is estate tax credit? Is a remedy against international double taxation to minimize th onerous effect of taxing the same property twice. WHO MAY AVAIL? Only the estate of a citizen o resident alien at the time of the death can claim for any estate taxes paid to a foreign country.

What amount of estate tax credit may be claimed? ONE COUNTRY MORE THAN ONE COUNTRY THE LOWER AMOUNT BETWEEN: Limit A. Whichever is lower between: • Estate tax paid to the • Estate tax paid to foreign country • NTE, foreign country X Phil. estate tax NTE, world • NTE, foreign country X Phil. ET Limit B. Whichever is lower between: NTE, world • total estate taxes paid to all foreign countries • NTE outside Phil. X Phil. estate tax (NTE - Net Taxable Estate) NTE, world

Effective January 1, 1998 up to Present Plus Of the Excess Over 5% P 200, 000. 00 2, 000. 00 P 15, 000. 00 8% 500, 000. 00 2, 000. 00 5, 000. 00 135, 000. 00 11% 2, 000. 00 10, 000. 0 5, 000. 00 465, 000. 00 0 15% 5, 000. 00 10, 000. 00 20% 10, 000. 00 Over But not Over P 200, 000. 00 P 200, 00. 00 500, 000. 00 The Tax Shall be Exempt 0 1, 215, 000. 00

Who are liable to pay estate tax? PRIMARILY LIABLE: Estate thru the administrator or executor. When there are 2 or more administrators or executors, they are solidarily liable. SECONDARILY The heir or beneficiary up LIABLE: to the point of inheritance.

FILING OF NOTICE OF DEATH WHO FILES: The executor, administrator or any of the legal heirs WHEN TO FILE: Within 2 months after decedent’s death, or within a like period after qualifying executor or administrator TO WHOM FILED: CIR

Filing of estate tax returns WHEN TO FILE: Within 6 months from decedent’s death, except in meritorious cases, the CIR may grant extension of not more than 30 days MANDATORY • Transfers subject to estate tax. FILING: • GE exceeds P 200, 000. • Regardless of value when BIR Clearance is needed for valid transfer of ownership. WHERE TO FILE: • AAB • RDO • City/Muncipal Treasurer • If there is no legal residence, the CIR • Philippine embassy/consulate

Payment of tax GENERAL RULE: Time return is filed EXCEPTION: Due to undue hardship, CIR may extend time for payment: §Judicial settlement – not to exceed 5 years §Extra-judicial settlement – not to exceed 2 years. He may also require a bond not exceeding twice the amount of the tax. RESTRICTION: No extension shall be allowed when taxes are assessed for reason of: §Negligence §Intentional disregard of rules and regulations §Fraud

Distribution of estate • Upon payment of tax, the estate tax clearance shall be issued to the administrator by the CIR or RDO having jurisdiction over the estate. The clearance shall serve as authority to distribute the inheritance to any heir or beneficiary. • In case of installment payments, the clearance shall be released only with respect to the property the tax has been paid.