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COMPUTATION OF VANISHING DEDUCTION APPLICABLE TO RESIDENT AND

NONRESIDENT CITIZEN DECEDENT


Vanishing deduction is one of the ordinary deductions allowed as a deduction in the
computation of net estate taxable of a resident and nonresident citizen decedent in the
Philippines.
Vanishing deduction is computed with the following format:
Value to take (the lower the amount of the fair market value of properties
xxxx
at the time of inheritance between at the time of death of the decedent)
Less: Mortgage paid assumed (1st deduction)
Initial Basis
Less: Proportionate deduction (2nd deduction)
Initial Basis
Gross Estate

(xxxx)
xxxx
(xxxx)

x ELITe + Transfer for Public Use = Proportionate deduction

Final Basis
Multiply by Vanishing deduction rate (%)
Vanishing deduction

xxxx
xxxx
xxxx

The vanishing deduction rates is based on the period from receipt to decedent's death as follows: (1)
within 1 year-100%; (2) beyond 1 year to 2 years-80%; (3) beyond 2 years to 3 years-60%; (4) beyond 3
years to 4 years-40%; and (5) beyond 4 years to 5 years-20%.

PROCEDURE IN
COMPUTING THE
VANISHING
DEDUCTION:
a) 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.

b) 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".

TOP c) 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
Gross estate

Expenses, losses, indebtedness


taxes, transfer for public use

d) 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
e) 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
2
3
4
5

- 1 year - 100%
- 2 " - 80%
- 3 " - 60%
- 4 " - 40%
- 5 " - 20%
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
Share of surviving spouse:
Conjugal properties ------ P10,000,000
Less: Conjugal deduction
2,000,000
Net conjugal estate ------ P 8,000,000
1/2 share of surviving spouse ------------ 4,000,000
Family home ----------------------------- 1,000,000
Vanishing deduction (80%)
Inherited property -------- P 4,000,000
Less: Mortgage paid ------- 1,000,000
Initial basis [Step (b)]------ 3,000,000
Less:3,000,000 x P2,000,000 -- 400,000
15,000,000
Final basis [Step (d)] ------ P 2,600,000
80% Vanishing deduction [Step (e)] ----- 2,080,000
Total deductions ----------------------------------Net taxable estate ------------------------------------

9,080,000
P5,920,000

Computation of estate tax:


P5,000,000 ---------------- P465,000
920,000 @ 15% -------138,000
Total estate tax due

--------------------------------

P 603,000

ESTATE TAX RATES: (R.A. 8424)

THE ESTATE TAX

OF EXCESS

SHALL BE

PLUS

Exempt

Below P200,000

OVER

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

4. Share of the surviving spouse in the net conjugal properties


5. 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.
a) Must not exceed the value included in the gross estate or
P1,000,000, whichever is lower.
b) The amount in excess of P1,000,000 shall be subject to estate
tax.
c) Must be the decedent's family home as certified to by the
Barangay Captain in the locality.
d) Only one (1) family home may be claimed.
6. Standard Deduction of P1,000,000.
7. Medical Expenses incurred within one year from death in an
amount
not exceeding P500,000.00.
8. Amount Received by heirs under RA No. 4917.
9. Deductions allowable to a non-resident decedent who is not a
citizen
of the Philippines:
a) A proportion of the expenses, losses, indebtedness and taxes:

Formula:
Phil. Gross Estate
------------------ X
World Gross estate

Expenses, losses
indebtedness & taxes

b) Transfer for public purposes


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

L. 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.
M. 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.