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2. But in case of condominium units, the association fees are subject to income and value added tax
3. Senior citizens due are exempted from value added tax, but they are not exempt from income tax
expanded senior citizens act
6. Estate tax
(1) person who died
(2) it is not about corporation
(3) prior to settlement of estate, prior to distribution
(4) when a person dies, until such time that the property has not yet been distributed, it is called
an estate
(5) estate represents the value of the property, personal or real, tangible or intangible, wherever
situated, provided that in the case of a non resident, only those properties located within shall
be subject to tax
7. There are two consequences when a person dies:
(1) personal exemption of 20,000 (for those individuals who are earning purely compensation
income, and he dies)
Pending distribution, the estate is an income tax payer, and the estate being an individual
income tax payer, the deduction allowed on the estate as such is personal exemption of 20,000
pesos
All the income of the tax payer deceased will be subjected to income tax, just like an ordinary
tax payer depending on whether the deceased is a resident citizen, non-resident citizen,
resident alien or a non resident alien
It is not about whether the person who died is a business man or an employee
There is another exemption allowed by law, and that is the exemption for the deceased tax
payer as far as being an income tax payer, and the exemption is 20,000 pesos
There are only two kinds of estate: (1) resident estate, and (2) non-resident estate
8. kinds of decedent estate
9. In the income tax side, the question is, what are the income of testate while the assert or properties
are not yet distributed
The estate is an income tax payer, and the estate will be subject to estate tax
Sec 85 says gross estate refers to the value of all the properties, whether real or personal, tangible
or intangible, wherever situated, provided that in the case of estate of non resident alien, only those
properties located within shall be subject to estate tax
Kinds of E IN OUT
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It covers the value of all the property, wherever situated. Provided that in case of a non resident
decedent, only those property located within shall be subject to tax
For income tax purposes, only a resident citizen shall be subject to income tax for income realized
within and without
But in the case of estate tax, even a non resident citizen decedent or estate and the resident alien
estate, all the properties located within and outside the Philippines shall be subject to estate tax
In the income tax side, a non-resident alien, is subject to income tax if the income is derived from
Philippine sources. But if it is derived from outside, then no tax
In the estate tax side, for non-resident citizens, even properties located outside are subject to
estate tax; and for resident aliens, even the properties located outside shall be treated as subject to
estate tax
Double taxation
In both tables, double taxation in the broad sense is very much evident
Because in the case of a resident alien, the income from the Philippines is subject to tax here and
most likely, that income will also be subjected to income tax in the country where he is a citizen of
In the case of non resident alien, the income here in the Philippines, and definitely, they will also be
subjected to income tax in the country where they are either residing or a citizen of
In income tax, the remedies to reduce impact of double taxation in the broad sense are:
3. In estate tax, if the tangible real property or real property is inside the map of the Philippines, it is
within
4. Taxability of intangible property (situs of intangible properties for estate tax purposes)
For intangible properties, the situs for estate tax purposes, is found in Sec 104
According to Sec 104, in case of non resident alien decedent, there are 5 intangible personal
properties (non resident decedent)
(1) if these 5 intangible properties are owned by a non resident alien decedent at the time of his
death, these 5 intangible properties are considered as within
X is a US citizen, residing in Paris. He has shares of stocks in San Miguel Corp or PLDT in the
Philippines, a domestic corporation. The value of the shares of stocks is worth 5M
X died.
If it is shares of stocks with a foreign corporation, 85% of the business of which must be located
in the Philippines to be considered as within - Section 104?
The first one is, when the dividends were issued by a foreign corporation, it is considered as
within
But if 3 years before the issuance of the dividend, the earnings of the corporation from the
Philippines is less than 50% of its total earnings, it means that not all of its earnings are within.
Only a part of it
The second one is in Sec 104. If the shares of stocks are issued by a foreign corporation,
whether resident or non-resident in the Philippines, and 85% of the business of which is located
in the Philippines, then all of its shares are considered within. Therefore, whoever is the owner,
everything will be taxable
5. Considered within if the owner is a non resident alien, and he died, all of these are considered
within, and so it is taxable
(1) Shares, obligations and bonds issued by a foreign corporation, 85% of the business of which is
located in the Philippines,
(4)
(5)
6. Reciprocity rule
If they do not collect estate tax on the same shares of stocks when Filipino dies in that
country, then we also do not impose estate tax
a) If in the country in which he is a citizen, they do not impose estate tax in full for those same
intangible properties listed under Section 104 owned by a Filipino citizen who died as an
alien in that country, then we will also give the same rate of exemption
8. What is the exemption for purposes of income tax of the estate as an income tax payer?
(1) usufructuary dies sec 87
11. Estate tax covers all transfers of properties taking effect after death (mortis causa)
(2) What is the value of all his properties at the time of his death
(3) Decedents interest
All DTRP of a resident citizen within and without shall be subject to estate tax
All DTRP of a non-resident citizen within and without shall be subject to estate tax
All DTRP of a resident alien within and without shall be subject to estate tax
But in the case of a non resident alien, all DTRP located in the Philippines shall be subject to
estate tax
(1) It is the extent of ones interest over the property at the point of his death
(2) If one owns a land with usufruct, and he dies, what is included is the value of the property less
usufruct
(3) If it is the usufructuary who dies, it is not included. Because that is an exemption
(4) If the owner dies, he remains the owner of the land, so it is included in his gross estate
(decedents interest)
(5) If it is the usufructuary, the usufruct is merged to the owner of the naked title. That is exempted
insofar as the usufructuary. It is not included in the estate of the usufructuary
(6) Owner dies, then it is the value of the land less usufruct
(7) But if it is the usufructuary who dies, the usufruct will return to the owner. The usufruct is not
included in the estate of the usufructuary. That is exemption 1 under Sec 87
(1) When it is the thought of impending death, which made him transfer the property while alive,
then it is a transfer in contemplation of death. The law says it is included.
(2) If the house was bought at 5M, and its fair market value now is 6M, but the doctor said that
owner has only 2 months to go
Because of this, he transferred it to Y for 4M
He died of cancer. After 2 months the value of the house became 4.5M
If it is the thought of impending death which made him transfer the property while alive, then it
is included
Not the purchase price, not the fair market value at the time of diagnosis, not the selling price,
but the value at the time of death
(3) if he did not die of cancer, but instead was shot, the value of property transferred in
contemplation of death will still be included
(4) If he did not die within 3 months, but died after 10 years, then it is still included. What will be
included is the value 10 years after. This is because gross estate refers to the value of the
property at the point of death
(5) If at the time of transfer, it is the thought of impending death that made him transfer, then it
should be included.
17. Properties (parlor and house) in the Philippines and in the States were bought for 1M each.
(1) It was sold for 200k each in contemplation of death, because the doctor says that he has cancer
It was the thought of impending death which made him transfer the properties
a) For the house in the Phil, it is always CGT of 6% under Sec 24D
b) For the 3 others (house in the states, parlor in the Phil, and parlor in the US), it is estate tax
Donors tax
1. It will become donors tax, if the transfer is not (1) in contemplation of death, if it is not (2)
revocable transfer, and if it is not (3) passing under a general power of attorney
1) There is revocable transfer when, while the person is still alive, he sold the property and he
reserved certain rights for himself (seller).
He reserves either the (1) right to revoke the sale or the (2) right to enjoy the fruits or the (3)
right of possession over the property
If these rights are reserved by the seller at the time of sale, and he died, then it is called
revocable transfer
And the value at the time of death, not the value at the time of transfer will be included in the
gross estate
1) X sold his property to Y, on the condition that upon Ys death, Y is going to transfer it to
whomever Y wants (general power of appointment)
As distinguished from a special power of attorney, wherein X sells the property to Y for 5M, on
the condition that upon Ys death, Y is going to transfer it to Mr. A as dictated by X
When Y dies in the first scenario, under a general power of appointment, since Y has the choice
on whoever will be the subsequent transferee, the value of the property there is included in the
gross estate of Mr Y.
But in the second scenario, in SPA, Y does not have the choice as to who would be the
subsequent transferee, because it was X who dictated on him, then this time, here it will be
excluded in the estate of Y
In other words,
If the property is transferred and the same is under a general power of appointment, then
include it in the gross estate of Mr Y
But if the property is transferred pursuant to a special power of appointment, wherein Y does
not have any control on who will be the subsequent transferee, because the subsequent
transferee is dictated by X, then it is excluded in the estate of Y
3. The rule of thumb in estate tax is whether at the time of death, there is degree of control. If the
answer is yes, then that is included in the estate
So if Y has a choice on whoever is the subsequent transferee, then it is included in the estate of Y.
If it is X, who has a choice on whoever is the subsequent transferee, then it is excluded in the estate
of Y
At the time Y died, he has no interest or control, because it was dictated to him to transfer it to a
specific person
1) Income tax
X insured his life, paying premium of 5k, proceeds go to the wife (1 million), 10% interest, and
ROP
2) Estate tax
Proceeds of life insurance policy of 1M, 10% interest, and ROP, are these included in the gross
estate of X, such that it will be subject to estate tax?
The rule is, if the designated beneficiary wife is the executor or administrator, whether
designation is revocable or irrevocable, include
If the wife designated beneficiary is not the executor or administrator, and the designation is
revocable, include
But if the designated beneficiary is irrevocable, the same will be excluded from the gross estate
of Mr. X, and therefore no estate tax consequence
2) These 3 were taken by the tax payer while he was still alive
The law effective upon the time of death shall be the one applied
These 3, whether taken before the effectivity of the tax code, after the effectiviy of the tax code,
and then he dies later on, these 3 are included
2) because while a person is alive and he marries another, each of them has his own properties.
3) What the law says is that once H dies, the property of the surviving spouse (W) is not included
6) Do not consider the properties of the surviving spouse because they are not your properties
18. What are the items of exempted by law from payment of estate tax?
In income tax, the items excluded by law from payment of tax are:
1) PCSO
2) Lotto winnings
3) Interest on long term deposit which one does not pre-terminate for 5 years
Income tax - treated by law as exemptions because they are excluded are: Sec 32 par b
1) Life insurance proceeds
2) ROP
3) Gifts, bequest and devices
4) Income exempt under a treaty
5) Compensation for injuries or sickness
6) pensions
7) Miscellaneous items
If there is an owner of the land with usufructuary, and he dies, the value of the property is
included in his gross estate less the usufruct
If it is the usufructuary who dies, the usufruct will be merged to the owner of the naked title. It
is exempted from estate tax (Sec 87, 1)
2) Transfer of the property from the fiduciary heir to the fideicommisary heir
In the last will testament testator appoints one to be a fiduciary heir, who is required by the
testator to preserve the property in favor of another, the fideicommisary heir
If fideicommisary dies, then it is exempted, which means it is not included in the gross estate of
testator
3) Transfer of the property from the first heir to the second heir
Simple substitution in succession
If testator dies, and he owns the property, then it is included in his gross estate
If he appoints a person as first heir, substitution, for the purpose of preserving the property in
favor of a second heir
If the first heir dies, it is not included in his (first heirs) estate
If the second heir dies first before the first heir, there is no more substitution, and so the first
heir becomes the only and original heir. So subsequently, if the first heir dies, then
subsequently, that property will be included
It is no longer exempted
4) Transfer in favor of various organizations, provided that not more than 30% is used for
administration purposes (Sec 87)
In income tax, the formula is gross income, less allowable deductions is equal to taxable net income,
multiplied by the rates, individual and corporate, is equal to tax due, less tong if any, is the net
income tax due
The formula is gross estate less allowable deductions is equal to taxable net estate, multiply by the
rates. That is the tax due, less tong or tax credit if any, is equal to the net estate tax due
All transfers of properties, taking upon death, is included (85 and 87)
a) 5% of the actual gross estate or the actual funeral expense whichever is lower but not to
exceed 200,000 pesos
b) actual funeral expense covers all the expenses from the time the person dies up to the time
that he was buried, but it should not exceed 200,00 pesos
c) examples are:
(1) obituary
(2) notice of death
(3) telephone calls
(4) funeral services
(5) (ataul, ilaw, bulaklak, damit ng namatay, pang embalsamo, damit ng naiwanan habang
umiiyak / morning apparel, pagkain habang nakaburol, pamisa)
(6) lapida
(7) burial lot
(9) In contrast, in the case of a resident citizen or non-resident citizen or resident alien, the
entire 15k is taxable
It means that for as long as one could account or support the expense, then it can be
deducted
j) X and Y died
k) They (debtor) died without paying Z (110k + 165K)
l) In special proceeding, the estate of X and Y cannot be settled extra-judicially, because the
rule in extrajudicial settlement is there should be debt
These 110k and 165k can be claimed by X and Y as deduction in the gross estate
(3) If Z (creditor) is alive, he calls it bad debt, deduction in the income tax side
(5) But the requirement is that the estate of Z who died, must first include 165k and 110k in
the gross estate, before he can claim these as claims against insolvent persons
(6) The estate of Z will have to add 165 and 110 as part of the gross estate and claim it as a
deduction (165 and 110)
(7) There is a need to add, because credit is an intangible property owned by the decedent
Z at the time of his death. And according to Sec 85, it is included (tangible or intangible,
wherever situated)
a) debtor, who has a loan with a mortgage, died without paying the loan
c) the deductions will be the value of the unpaid mortgage loan, but one has to add the value
of the property
d) If the value of the property is 1M, and the mortgage loan is 700k (representing 70% of the
value of the house)
e) Out of 700k, only 200k was paid. The 500k remains unpaid
g) The law says that the 500k may be deducted (claimed as deduction)
But the value of the property (3M) must be added to the gross estate
This is because X is the owner of the house and lot. It is called decedents interest
So at the time of death, the value of house and lot should be added to the gross estate, but
the unpaid mortgaged loan can be claimed as deduction
c) When the GG worth 25k was stolen, Y cannot claim it as a deduction, because Y is only
entitled to claim 1,2,3
d) X can claim GG as deduction valued as 50k when it was stolen
e) If X and Y are dead, M income because of the GG he stole is taxable, and the kind of tax is
NIT
f) There is casualty loss in income tax, and there is casualty loss in estate tax
(1) the distinction between the two is, in the case of Y who died, he cannot claim it in the
income tax side, but he can claim it in the estate tax
When it comes to X, X can claim it in the income tax side, or he can claim it in the estate
tax side
But if the casualty loss has already been claimed for income tax purposes
(2) The scenario is the same. It must be characterized by suddenness of the loss. The loss
must arise from death, robbery, embezzlement, or from fire, storm, shipwreck, and
other natural calamity, not compensated for by the insurance
(3) For income tax side, Y cannot claim it, while X can claim it
(4) X can claim it in the income tax side or estate tax side. But Y can claim it only in the
estate tax side
(5) X can claim it either in the income tax side or estate tax side
g)