Deductions from GE – Tax Law Rev Abella November 4, 2019

Deductions from GE – For residents or citizens of the Philippines

 Standard deduction of Php 5 Million

 Claims against the estate (including claims against insolvent and unpaid mortgages)
o Look at the requirements
 If for example subject of loan or contract, look at the document of loan
 Disposition of proceeds of the loan must be shown there
o
 Casualty losses
 Property previously taxed
 Transfer for public use – mode of transfer
 Family home – Php 10 million
 Benefits under RA 4917
 Net share of the surviving spouse in the conjugal property

Deduction of nonresident estate

 Standard deduction Php 500,000

 Claims against the estate
 Property previously taxed
 Transfer for public use
 Net share of the surviving spouse in the conjugal property

Note: the claims that may be allowed as deduction shall be in proportion of the value of the
gross estate in the Philippines bears to the value of his worldwide estate.

Legal Requirements of Vanishing Deduction

 Location of property
 Identification with substitution
 Interval of transfer
 Previous payment of estate tax or donor’s tax
 No vanishing deduction in previous estate involving the same property or property in
exchange

Waiver of hereditary right in favor of a specific heir is a taxable donation

Repudiation of inheritance is not taxable; it shall follow the rule on accretion where the share
shall be divided among the remaining heirs

 Multiplied by the claims against his estate worldwide

Estate tax rate

 The graduated rates of 5% to 20% imposed on the net estate in excess of Php 200,000
were changed to a single rate of 6% of net estate
 Rate now: 6% of net estate
 Standard deduction increased to Php 5 million
 Exemption for the first Php 10 million of the family home

Filing of the estate tax return

 Who will file – executor, administrator, or heirs

 Time for filing & payment – within 1 year from death
o Pay-as-you-file procedure
o Extension of time to file return - not more than 30 days
 Extension of time to pay due to financial difficulties
o 5 years if settled judicially and 2 years if settled extra-judicially
 Effects of non-payment of estate tax
o No property can be transferred to an heir

Purpose and Definition (of Donor’s Tax)

 The donor’s tax law was enacted not only to prevent estate tax avoidance, but also to
prevent income ta avoidance by reducing yearly income and thereby escaping the effect
of the progressive rates of the income tax (Smith v. Shaughnessy, 318 US 176)

 Donation – a valid transfer of property from one person to another without

compensation or consideration therefor (Prentice Hall Federal Tax Course)

What constitutes a gift?

 Transfer of property without consideration (Direct Donation) - with donative intent
 Sales and exchanges if the consideration received is lower than the fair market value of
the property transferred – Indirect or deemed gift
o The amount of donation is the difference between the consideration received
and FMV of property transferred
o No deemd gift if property transferred is a real property subject to the 6% capital
gains tax
o If sale is made in the ordinary course of business, it is not considered as taxable
donation

Meaning of consideration

 The word “consideration” means that, when the transferor gives something away and
does not at the same time replace it with money of equal value or some goods or
 services capable of being valuated in money, he is deemed to have made a gift within
the taxing law (Commissioner v. Bristol, 121 F(2d) 129)
 Consideration must be measurable in money or money’s worth. Mere legal
consideration is not sufficient.
 The consideration must flow to the donor; merely detriment to the donee does not
satisfy the purpose of the statute

When does a gift occur?

 A gift occurs when the donor surrenders CONTROL over the property. If the donor
retains an unlimited power to revoke a gift, no gift has occurred.
 If the donor does not relinquish control over the property during his lifetime (i.e. right of
possession, enjoyment, income), the donation is a donation mortis causa subject to the
estate tax.

Composition of the Gross Gift

 Only properties upon which the donor divests himself of CONTROL during his lifetime
 Residents and Citizens – all properties wherever situated
 Non-resident Aliens – Only properties situated in the Philippines, provided that, with
respect to intangible personal properties, we follow the rule of reciprocity
 Section 98 in relation to Section 104, NIRC

Rules of Valuation

Concept of Net Gift

 Net gift refers to the economic benefit that accrues to the donee
 If a donee will be given a property but he will be required to assume the mortgage
thereon, the net gift would be the difference between the FMV of the property donated
minus the mortgage assumed
 Tax Base – Cumulative net gifts during the calendar year

Rate of Donor’s Tax

 Rate now is 6% without distinction whether donation is between relatives or strangers

 First 250,000 of net gifts is exempt from the donor’s tax