KVG
April 4
Midterm Exam Answer
I.
Merger of Naked Owner and Usufructuary
- No BIR ruling
- 2018 ruling that the transfer of usufruct
shall not be considered as sale, thus the
transfer shall not be subject of CGT
BIR Ruling 810-18 dated 10 May 2018
A CONTRACT OF USUFRUCT IS NOT
SUBJECT TO CAPITAL GAINS TAX; HENCE,
A CERTIFICATE AUTHORIZING
REGISTRATION IS NOT REQUIRED IN
ORDER FOR THE SAME TO BE
ANNOTATED ON THE TITLE OF THE
PROPERTY. A Contract of Usufruct does not
involve transfer, conveyance or disposition
of any portion of the real property or its
ownership. A Contract of Usufruct is not a
sale of transfer of real property because the
owner of the property retains ownership
thereof as it is expressly stated in the
Contract that landowner reserves the right
to sell, transfer, dispose of, mortgage,
charge, hypothecate, create liens over or
encumber the property to, or in favor of, a
third party. Such being the case, the
landowner is not subject to the payment of
capital gains tax (CGT) imposed under
Section 27 (D) (5) of the NIRC of 1997, as
amended. It is however understood that the
income, if any, derived by the
Usufructuaries from and as a consequence
of the grant of the right to use the said
property is subject to income tax.It should
be noted that CGT is a tax imposed on the
gains presumed to have been realized by
the seller from the sale, exchange, or other
disposition of capital assets located in the
Philippines, including pacto de retro sales
and other forms of conditional sale. BIR
Ruling No. 810-18, May 10, 2018.
Facts: A Co. and B Co. entered into a
Contract of Usufruct over a parcel of land
owned by A Co. The contract stipulates that
A Co. reserves the right to sell, transfer,
dispose of, mortgage, charge, hypothecate,
create liens over or encumber the property
to, or in favor of a third party. The contract
also stipulates that the usufructuary, B Co.,
shall cause the annotation of the contract
on the TCT of the land. Pursuant to Section
58 (E) of the Tax Code, a CAR must be
secured from the BIR stating that the
transfer of real property has been reported
and the CGT or creditable withholding tax,
if any, has been paid before the Register of
Deeds may effect the registration of any
1
document transferring real property on the
title covering the same.
Issue: Is B Co. required to secure a CAR
before causing the annotation of the
Contract of Usufruct on the TCT of the
subject property?
Ruling: No. Usufruct gives the usufructuary
the right to enjoy the property of another
with the obligation of preserving its form
and substance, unless the title constituting
it or the law otherwise provides. Clearly, a
Contract of Usufruct does not involve
transfer, conveyance or disposition of any
portion of the real property or its
ownership. Honoraria and allowances
given to public school teachers and other
qualified citizens who serve during the
Barangay and SK Elections shall not be
subject to income tax and withholding tax
on compensation; provided, that the annual
taxable income of such persons do not
exceed the Php250,000 threshold under
the TRAIN Law. Usufructuary does not
need to secure a CAR before causing the
annotation of the Contract of Usufruct on
the title of the subject property. 8 | Tax
Bulletin Here, the Contract of Usufruct is
not a sale or transfer of real property
because the A Co. retains ownership
thereof as it is expressly stated in the
contract that A Co. reserves the right to sell,
transfer, dispose of, mortgage, charge,
hypothecate, create liens over or encumber
the property to, or in favor of a third party.
Consequently, there being no sale,
conveyance, transfer or disposition of the
land registered in the name of A Co., B Co. is
not required to secure a CAR before causing
the annotation the Contract of Usufruct on
the TCT of the subject property.
Property and succession pursuant to a will
of a decedent
Usufruct is part of the estate
existing at time of death in succession. In
property law, usufruct is a right existing at
time of death.
Situation:
1. X is the decedent, Y is the naked owner,
and Z is the Usufructuary for period of
25 years. If Z will die the usufruct shall
remain for the heirs for the remaining
period of 25 years.
 Term of usage is specified.
Subject to estate tax. Use RR,
because right of usufruct is
transfer.
2. If Z will not die. Upon expiration of 25
years the usufruct shall be
extinguished. Thus, there is no transfer.
KVG
As a consequence it is not subject to
estate tax. No property right existing at
time of death.
II.
2 questions whether taxable and required to file
return. Common is that all employees are subject to
compensation income and all income is derived
from one employer. They are qualified to substitute
filing when the income withheld is equal to amount
of tax due. Assume regularity.
Kronge Konsult, Inc. (KKI) is a Philippine
corporation engaged in architectural design,
engineering, and construction work. Its principal
office is located in Makati City, but it has various
infrastructure projects in the country and abroad.
Thus, KKI employs both local and foreign workers.
The company has adopted a policy that the
employees' salaries are paid in the currency of the
country where they are assigned or detailed.
Below are some of the employees of KKI.
Determine whether the compensation they
received from KKI in 2017 is taxable under
Philippine laws and whether they are required to
file tax returns with the Bureau of Internal Revenue
(BIR). (2% each)
(a) Kris Konejero, a Filipino accountant in
KKl's Tax Department in the Makati
office, and married to a Filipino
engineer also working in KKI;
- State if resident citizen or not. As a
rule all citizens are required to file a
return except NRAEB. Kris Konejero is
subject to tax because he is a resident
citizen for income earned in the
Philippines, and he is not require to file
tax return because qualified under
substitute filing.
(b) Klaus Kloner, a German national who
heads KKl's Design Department in its
Makati office;
- Subject to tax for salary earned in the
Philippines. He is qualified for substitute
filing and hence not require to file return.
(c) Krisanto Konde, a Filipino engineer in
KKl's Design Department who was hired to
work at the principal office last January
2017. In April 2017, he was assigned and
detailed in the company's project in
Jakarta, Indonesia, which project is
expected to be completed in April 2019;
- he is liable to pay tax for income earn from
January to March, excluding April to
December because it was earn outside by
2
NRA. Not require to file a return because he
is qualified under substitute filing.
(d) Kamilo Konde, Krisanto's brother, also
an engineer assigned to KKl's project in
Taipei, Taiwan. Since KKI provides for
housing and other basic needs, Kamila
requested that all his salaries, paid in
Taiwanese dollars, be paid to his wife in
Manila in its Philippine Peso equivalent;
and
- Not liable for tax because he is NRC
earning income outside from Philippines.
Not require to file return because his
income is exempt from tax.
(e) Karen Karenina, a Filipino architect in
KKl's Design Department who reported
back to KKl's Makati office in June 2017
after KKl's project in Kuala Lumpur,
Malaysia was completed.
- Subject to tax income from her arrival
June to December. Not require to file a
return because he is qualified under
substitute filing.
III.
To pay of its indebtedness to Y corporation
worth 5 million, X corp give P2 Million cash
to Y and issued share with FMV of P2
million. Share with FMV of P2 million was
sold to P3 million. The parties executed
dacion en pago whereby it states that in lieu
of the receipt, Y corp releases X corp from
liability.
5m -2m cash- share with 2m FMV (sold to
3m) = 1M
How to treat the difference of sale of share
amounting to 3M and the FMV of share in
the amount of 2m?
 Additional Value is called
Additional paid in capital or
share premium. Not considered
as a gain but increase in capital,
investment of the investor. It is
not subject to sale it is not a
sale.
Sale vs Issue (corporation code)
Issue Sale
If Melfort bought If Melfort transfer or sell
share of stock share of stock and there is
from PG Corp. certificate of stock to Eros
from PG Corp,
If PG Corp bought a
share from San
Miguel and sells it to
KVG
Smart Corp, it is a
sale.
IV
Spouses Konstantino and Karina are Filipino
citizens and are principal shareholders of a
restaurant chain, Karina's, Inc. The restaurant's
principal office is in Makati City, Philippines.
Korina's became so popular as a Filipino restaurant
that the owners decided to expand its operations
overseas. During the period 2010-2015 alone, it
opened ten (10) stores throughout North America
and five (5) stores in various parts of Europe where
there were large Filipino communities. Each store
abroad was in the name of a corporation organized
under the laws of the state or country in which the
store was located. All stores had identical capital
structures: 60% of the outstanding capital stock
was owned by Karina's, Inc., while the remaining
40% was owned directly by the spouses
Konstantino and Korina.
Beginning 2017, in light of the immigration policy
enunciated by US President Donald Trump, many
Filipinos have since returned to the Philippines and
the number of Filipino immigrants in the US
dropped significantly. On account of these
developments, Konstantino and Karina decided to
sell their shares of stock in the five (5) US
corporations that were doing poorly in gross sales.
The spouses' lawyer-friend advised them that they
will be taxed 5% on the first PhP100,000 net
capital gain, and 10% on the net capital gain in
excess of PhP100,000.
Is the lawyer correct? If not, how should the
spouses Konstantino and Karina be taxed on the
sale of their shares? (5%)
- No, because those rates applies only as to
share issued by domestic corporation. It in
violation of the principle of territoriality.
The spouses shall be subject of normal tax
because they are resident citizen.
LISTED AND UNLISTED SHARE OF
DOMESTIC CORPORATION ONLY
 2018 TRAIN: 15% and 6/10 of
1% applies only to domestic
corporation
 Pior 2018:5% on the first
PhP100,000 net capital gain,
and 10% on the net capital gain
in excess of PhP100,000
3
III and IV related. Issue is not subject to
tax.
V
Kim, a Filipino national, worked with K-Square, Inc.
(KSI), and was seconded to various KSl-affiliated
corporations:
1. from 1999 to 2004 as Vice President of
K-Gold Inc.,
2. from 2004 to 2007 as Vice President of
KPB Bank;
3. from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water
Corporation, where Kim served as CEO for
seven years until his retirement last
December 12, 2017 upon reaching the
compulsory retirement age of 60 years.
All the corporations mentioned are majority-
owned in common by the Koh family and covered
by a BIR-qualified multiemployer-employee
retirement plan (MEE RP), under which the
employees may be moved around within the
controlled group (i.e., from one KSI subsidiary or
affiliate to another) without loss of seniority rights
or break in the tenure. Kim was well-loved by his
employer and colleagues, so upon retirement, and
on his last day in office, KSI gave him a Mercedes
Benz car worth PhP 5 million as a surprise, with a
streamer that reads: "You'll be missed. Good luck,
Sir Kim."
(a) Are the retirement benefits paid to Kim
pursuant to the MEERP taxable? (2.5%)
50, 10, 1+= RBP
(b) Which internal revenue tax, if any, will
apply to the grant of the car to Kim by
the company? (2.5%)
o Given during existence of er-ee,
Fringe benefit in the rate of 35%.
Not apply the 90k for other benefit
because it falls under
HEVHIMVTHEL. Apply only 90k if
not fall in HEVHIMVTHEL and de
minimis.
MOCK BAR EXAM: section 30 and consti
provision !!!!
KVG 4

ADMINISTRATIVE REQUIREMENTS

Section 84 of Tax Code

Tax base of the estate tax is the net estate.

If the value of the net estate is between 0-200k: exempt from tax Lowest rate is 5%
à Highest rate is 25%

DETERMINE THE TIME OF DEATH!!!!!!

DOCUMENTS TO BE FILED:

Notice of death ( removed in TRAIN)

-no penalty if failed to file in 2018

Estate tax return

Statement of a certified public accountant

RA 8424 vs. TRAIN

Document Gross Estate Exceeds Due Date TRAIN TRAIN: DUE DATE

Not Required

Notice of Death >20k 2 months - Removed

from the date of death;

or

from the date when the

administrator or
executor

has been qualified

GE exceeds 200k is 1 year from the months

6 months from date of removed. Limit is from date of death
Estate Tax Return >200k; or death removed.

ESATE is subject to tax Extension: 30 days

or includes registered or
registrable property
wherein 1 month is regardless of the
includes a registered or equivalent to amount

registrable property 30 days

Regardless of the
amount.

Filing of estate tax

return is required as to
bank account

Statement of Certified 6 months from date of

Public >2M death >5M GE

1 year from the months

Accountant Extension: 30 days from date of death

Extension: 30 days
KVG
Payment of ESTATE TAX:
- Tax should be paid at the time return is filed. 1 year or 6months from death.
Exception: it is subject to extension if the heirs would show justifiable reason. It can be extended up
to 5 years if it is judicial, for extra judicial 2 years. There must be application for extension prior to the
lapse of 6 months extension. There would be imposition of interest. The CIR may impose bond not
double the amount of tax liability. (all
similar in 8424 and TRAIN.)
Additional in TRAIN:
Train: there can be an extension more than
years if there is insufficiency of cash. It is
not subject to penalty.
 Extension to File and Pay
When the Commissioner of Internal Revenue finds
that the payment on the due date of the estate tax
or of any part thereof would impose undue
hardship upon the estate or any of the heirs, he may
extend the time for payment of such tax or any part
thereof not to exceed five (5) years, in case the
estate is settled through the courts, or two (2)
years in case the estate is settled extra-judicially. In
such case, the amount in respect of which the
extension is granted shall be paid on or before the
date of the expiration of the period of the extension,
and the running of the Statute of Limitations for
assessment as provided in Section 203 of the
National Internal Revenue Code shall be suspended
for the period of any such extension.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the Commissioner.
If an extension is granted, the Commissioner of
Internal Revenue or his duly authorized
representative may require the executor, or
administrator, or beneficiary, as the case may be, to
furnish a bond in such amount, not exceeding
double the amount of tax and with such sureties as
the Commissioner deems necessary, conditioned
upon the payment of the said tax in accordance in
the terms of extension.
The application for extension of time to file the
estate tax return must be filed with the Revenue
District Officer (RDO) where the estate is required
to secure its Taxpayer Identification Number (TIN)
and file the tax returns of the estate. The
application shall be approved by the Commissioner
or his duly authorized representative.
5
CASH BANK ACCOUNT
RA 8424
Section 97. Payment of Tax Antecedent to the
Transfer of Shares, Bonds or Rights. - There shall not
be transferred to any new owner in the books of
any corporation, sociedad anonima, partnership,
business, or industry organized or established in
the Philippines any share, obligation, bond or right
by way of gift inter vivos or mortis causa, legacy or
inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and
due thereon have been paid is shown.
If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or
jointly with another, it shall not allow any
withdrawal from the said deposit account, unless
the Commissioner has certified that the taxes
imposed thereon by this Title have been paid:
Provided, however, That the administrator of the
estate or any one (1) of the heirs of the decedent
may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty
thousand pesos (P20,000) without the said
certification. For this purpose, all withdrawal slips
shall contain a statement to the effect that all of the
joint depositors are still living at the time of
withdrawal by any one of the joint depositors and
such statement shall be under oath by the said
depositors.
The TRAIN Law has sufficiently addressed this
concern with the appropriate revision of Sec. 97 of
the National Internal Revenue Code which now
allows any withdrawal from the account of a
deceased depositor without the need of payment of
any estate tax, subject to a final withholding tax of
6% on the amount of the deposit. Upon
determination by the bank as to who the rightful
heirs of the deceased depositor are (pursuant to
the bank’s internal policies and procedures), the
bank can allow the deposit to be withdrawn as long
as it withholds the required 6% tax.
KVG 6

Interestingly, the old Tax Code explicitly provided No. 1904 of the estate, duly stamped received by
for the authority of the BIR to look into the bank the concerned BIR Revenue District Office (RDO).
deposits of a deceased depositor for the purpose of
computing the tax due on his estate. This was The bank shall issue the corresponding
considered as an exception to the prohibition BIR Form No. 2306 certifying the withholding of
against unauthorized inquiry, disclosure and 6% final tax, file the prescribed quarterly return
examination of Philippine currency bank deposits on the final tax withheld and remit the same on or
under Republic Act 1405, otherwise known as the before the last day of the month following the
Law on Secrecy of Philippine Currency Bank close of the quarter during which the withholding
Deposit. The TRAIN law did not retain the was made. All withdrawal slips shall contain a
provision. Perhaps, the framers did not see the sworn statement by any one of the surviving joint
need for it because the release of such deposit is depositor/s to the effect that all the other joint
subject to the 6% withholding tax anyway. depositor/s is/are still living at the time of
However, if the intention is to withdraw from the withdrawal, and a statement that the withdrawal
BIR such authority and the current laws on the is subject to 6% FWT.
secrecy of information about bank deposits do not
expressly allow disclosure to the heirs, the latter Bank deposit/s already declared for Estate
will have a real cause for concern if the deceased Tax purposes and is/are indicated in the eCAR
depositor withheld from them information about issued by the concerned RDO to the executor,
the bank deposits. Should banks take the more administrator, or any of the legal heir/s of the
conservative position and the strict interpretation decedent, presented to the bank for withdrawal of
on bank deposits secrecy law, the heirs may end up the said bank deposit/s, shall no longer be subject
getting nothing for sheer lack of knowledge that the to the 6% FWT.
funds exist. To compound their woes, if the account
of the deceased depositor becomes dormant due to
lack of activity for at least ten years, the funds will
be escheated in favor of the government under the Withdrawal of Bank Account
Unclaimed Balances Law. In other jurisdictions, the
funds stay with the depository bank in the absence RA 8424 TRAIN
of claims against the deposit. Not in the Philippines. Estate Tax return is 6% FWT without
Moral of the story. Transparency about the required because certificate authorizing
depositor’s assets to his rightful heirs. Knowledge, banks are required registration (CAR) wihin 1
anyway, is not equivalent to grant. The depositor to file submission year of the death.
should share the appropriate information with his of certificate
heirs or at least, adopt a mechanism to let them authorizing - Even exempted
know about it after his death. Otherwise, the registration. (eg. 5M-5M
depositor’s hard-earned wealth may just end up in deduction=0)
the hands of unintended beneficiaries. - Remedy: wait for
issuance of CAR
REVENUE MEMORANDUM CIRCULAR NO. 62-
2018 issued on July 10, 2018 clarifies the
CAR is mandatory After 1 year from time of
requirements on the withdrawal from the bank
death, the 6% FWT is
deposit account/s of a deceased depositor/joint
inapplicable. CAR is
depositor without the required Electronic
required to be submitted
Certificate Authorizing Registration (eCAR).
by executor or
administrator.
The executor, administrator, or any of
the legal heir/s of a decedent who, prior to
death, maintained bank deposit/s may be Tax rate
allowed withdrawal from the said bank
deposit account/s within one (1) year from the RA 8424 TRAIN
date of death of the depositor/joint depositor Schedular tax rate 6%
but the amount withdrawn shall be subject to
six percent (6%) Final Withholding Tax - 200k or less is -
(FWT). For joint account, the FWT shall be exempted
based on the share of the decedent in the joint
bank deposit/s.

Prior to such withdrawal, the bank shall

require the executor, administrator, or any of the
legal heir/s withdrawing from the deposit account
to present a copy of the Tax Identification Number
(TIN) of the estate of the decedent and BIR Form
KVG 7

Place and Filing of Return:

RC: At the place where the decedent resides at CIR vs. Pineda
the time of death

NRC: filed before the Revenue District
Office(RDO) of the place where executor or
administrator is regisrtered, if not registered it
in the place of resident of the executor or
administrator.
16 heirs involved. Each heir received 2500 worth
of inheritance.
BIR Final Assessment of Tax Liability: 760
Manuel Pineda alleges that he shall only be liable to
his proportionate share out of the 760.

- If no executor or administrator: it must be The Government has two ways of collecting the tax
filed before office of the commissioner. in question.

1. One, by going after all the heirs and collecting

LIABILITIES
2. Another remedy, pursuant to the lien created by
Who is primarily liable?
The executor or administrator
The heir or beneficiary has
subsidiary liability for the payment
of the tax which his distributive
share bears to the value of the total
net estate
Approval of probate court is not
necessary.
Estate tax must be paid for the
distribution of the estate.
Liability of Heir: MODES of
COLLECTING
1. Collect from all heirs with respect to their
proportionate share.
from each one of them the amount of the tax
proportionate to the inheritance received.
Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer
for unpaid income tax, is by subjecting said
property of the estate which is in the hands of
an heir or transferee to the payment of the tax
due, the estate. This second remedy is the very
avenue the Government took in this case to
collect the tax. The Bureau of Internal Revenue
should be given, in instances like the case at bar,
the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax
Code above quoted, because taxes are the
lifeblood of government and their prompt and
certain availability is an imperious need. And as
afore-stated in this case the suit seeks to achieve
only one objective: payment of the tax. The
adjustment of the respective shares due to the
heirs from the inheritance, as lessened by the tax,
is left to await the suit for contribution by the heir
from whom the Government recovered said tax.

2. Constitute as tax lien to the inheritance

collecting from one heir bit the tax to be
collected must not exceed heir’s
distributive share.