TAXATION

2 ATTY. LIM
Lecture Transcript
I
 2 [TAXATION 2 ATTY. LIM] 3B 2016-2017

TAXATION 2 What is the justification for the imposition of
estate tax?
Dr. Virginia Jeannie P. Lim, LLM, Ed. D. The government helps the decedent in the
accumulation of the properties belonging to the
January 27, 2017 decedent when he dies.
The government is a passive, hidden, silent partner in
ON ESTATE TAX the course of the accumulation of wealth; as a result,
the government is entitled to a share in the
How do we transfer properties? properties that you left behind.

Time Element: What are the contributions of the government as
During our lifetime Donation a silent partner?
Upon the death of the decedent Protection, Peace and Order, Resources,
Incentives, Maintains conducive climate
If during lifetime- donors tax
If upon death- estate tax SALIENT FEATURES OF THE ESTATE TAX UNDER
THE TAX CODE
But there are instances wherein a person transfers
properties during his lifetime but the effectivity of 20, 000
the transfer will take effect upon his death. 200, 000
2,000,000
Example: If a person has income-generating
properties and he wants to avert tax implications, 20, 000
and he transfer the properties to his heir during
his lifetime with the condition that the transferor GENERAL RULE: Anybody who dies leaving behind
will continue to enjoy the income derived from the properties valued at PHP 20, 000 and more, their
properties during his lifetime and the heir will family is required to submit to the BIR a notice of
only get everything upon his death. (this death within 30 days from death. (Mandatory)
transaction will not include the imposition of

donors tax but estate tax.)
You can have an extension of another 30 days but this

must be asked within the original 30-day period.
What if the donors tax has already been paid?

Then the donors tax already paid will be
Consequence in case of failure to submit notice of
considered as advance payment of the estate tax due.
death:

There will be additional penalties at the time
TWO KINDS OF DONATION
of payment. (PHP 1000 minimum)


1. Donation Mortis Causa- Donation made during
EXCEPTION: Notice of death is required
the lifetime of the donor but the effectivity of the
notwithstanding the fact that properties left behind is
donation will be upon the death of the donor. (estate
less than PHP 20, 000 if and when the properties
tax)
left behind is a registrable property (ex. Certificate

of Shares of stocks, bank deposits, intangible
2. Donation Inter Vivos- Donation during the
personal properties)
lifetime of the donor and effective immediately upon

donation subject only to the conditions provided by
What is a registrable property?
law. (donors tax)
A property that cannot be transferred

without a tax clearance.
*Bakit mahal ang estate tax?

Kasi hindi tinitignan ang decedent, ang
*Estate tax is payable within 6 months from death.
tinitignan yung mga recipient ng properties.


Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 3

*Upon the death of the decedent all his properties What will be included in the tax return?
cannot be moved without tax clearance including his All the properties left behind including their
bank deposits (except for funeral expenses but only fair market value.
in the amount of 20, 000).
If you cannot comply with the 6-month period, you
200, 000 can ask for an extension of another 30 days provided
the extension is prayed for within the original 6-
Estate tax is an IR tax, therefore it belongs to the month period.
national government collected through accredited
banks. Increments when estate tax return is submitted
beyond the prescribed period:
All IR taxes are self-assessing taxes, self-computing Surcharge, interest, other penalties.
taxes.
*Estate tax is payable only when the properties left
Computation and assessment must be submitted to behind are more than 200, 000.
the BIR in a prescribed form (TAX RETURN).
Requirements: If properties left behind are less
*Tax returns- are self-serving documents and than 200, 000:
therefore the government is not bound by it. 1. Notice of death
2. Estate tax return
The Commissioner is empowered to amend
the tax return. Requirements: If properties left behind are more
than 200, 000:
In the event of failure to submit a tax return: 1. Notice of death
The Commissioner has the authority to 2. Estate tax return
prepare a tax return in behalf of that taxpayer. 3. Tax payment

*IR TAXES LANG ANG MAY TAX RETURN, LOCAL 2 MILLION
TAXES, REAL PROPERTY TAXES AND IMPORT EXPORT
TAXES WALANG TAX RETURNS YAN.
Requirements: If the gross estate left behind is

more than 2 Million:
What is the materiality of knowing whether or

not a tax is payable with or without a tax return?
1. Notice of death

2. Estate tax return
GENERAL RULE
3. Tax payment
If payable with a tax return- it has a prescriptive
4. CPA certificate (Financial reports duly
period.
audited by an accountant)


If payable without a tax return- usually
ON TAX SITUS
imprescriptible.


Where to pay the estate tax?
EXCEPTION
Where the decedent last resided prior to his
Local taxes and real property taxes in which
death.
the local government code provided for prescriptive
Where the properties of a non-resident is
periods.
located.


When is an estate tax return due?
SC IN ONE CASE: It can be paid also at the place
Within 6 months from death.
identified in the death certificate where the

decedent last domiciled.



Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 4 [TAXATION 2 ATTY. LIM] 3B 2016-2017

SC IN ANOTHER CASE: Intention to reside is also capacity to pay and therefor they should share the
considered. cost of government.
*No double taxation when the taxing authorities are
different. e. State-taxpayer Partnership Theory
Government is a hidden, silent, passive
*Absence of debtor is not a bad debt-- the debtor partner in the accumulation of wealth by the
must be insolvent, and there must be an earnest decedent, hence, the government is entitled to
effort to collect the debt. receive a share of the same upon the death of the
decedent.
*Recapture rule- bad debts that were written off but
subsequently paid are subject to tax as fresh income. *Right of succession- the corporation is not affected
by all the changes happening involving the
Requisites: incorporators.
1. The debt must be included in the gross
income. Two kinds of taxpayers that will be covered by
2. There must be proof that the debtor can no estate tax:
longer pay because of insolvency.
a. Resident decedent- RA, NRC, RA
Theories that will justify the collection of estate b. Non-resident decedent- NRA
tax:
Benefit-Received Theory Resident Alien
Back Tax Theory Alien that permanently resides in the Philippines.
Re-Distribution of Wealth Theory Subject to income tax and Philippine estate tax.
Ability-to-pay Principle Being taxed for income earned only within the
State-taxpayer Partnership Theory Philippines.
Properties within and without the Philippines are
a. Benefit-Received Theory subject to estate tax (including those abroad).
The relationship of government and taxpayer
(Symbiotic: mutual reciprocal support and protection) What should be included in the estate tax return
of a decedent?
The family receives some benefits from the
government such as when there is a will left and the RESIDENT- all properties wherever situated. (peso
will must subject to probate, the services rendered by value)
the government to effect the will must be NON RESIDENT- properties located within the
compensated. Philippines. (peso value)

b. Back Tax Theory *The intangible personal properties of a non-resident
Presumption that the decedent, during his decedent is subject to taxation in the Philippines only
lifetime, did not properly pay all his taxes or there when there is NO recognition of the principle of
were some taxes unpaid, hence the deficiencies must reciprocity.
be settled through estate tax collection.
*Principle of reciprocity has no application to resident
c. Re-Distribution of Wealth Theory decedents.
Disparity between the rich and the poor-
equalize the playing field. *Shares of stocks issued by a domestic corporation
Taxes are converted to basic services. are always considered properties within the
Philippines.
d. Ability-to-pay Principle
Looking at the heirs- considering that they Example: There is a Japanese national looking for
are inheriting something, that means they have the possible business ventures, he went to the
Philippine stock exchange, he decided to buy.
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 5

Foreigners buying stocks in domestic Example: A wealthy old woman who transferred
corporations, will always be taxed regardless of her income generating properties to her children
the residence of the foreigner, regardless of the with a condition (conditional transfer) that
location of the certificates. upon transfer, she will still enjoy the income from
the transferred properties, that she will still be in
But if the shares are foreign, the principle of full control of the income until she departs. That
reciprocity applies. when she dies, the transferees will now enjoy full
ownership (the usufruct plus the naked title).
FEBRUARY 3, 2017
3. Revocable Transfers
RECAP: Transfers where the person has still the right
to revoke the transfer.
If a decedent is a RESIDENT DECEDENT, which
refers to a RESIDENT CITIZEN, NON-RESIDENT Example: When a parent transferred an income
CITIZEN, and a RESIDENT ALIEN, all his properties generating property to his child who is about to
wherever situated will form part of his gross estate. take the BAR. However, there is a condition that
when the child fails to pass the BAR, the parent
will revoke the transferred property.
What is indicated in the Estate Tax Return is the peso

value of all the properties left behind, current fair
Assuming that the parent died before the
market value.
release of the results of the BAR, the value of the

transferred property will still form part of his gross
The sum total of the properties left behind, which is
estate, notwithstanding the fact that the power to
inclusive of real properties, personal properties, and
revoke is not exercised.
intangible properties, forms part of the gross estate.


Regardless of the exercise of the power to
TESTAMENTARY DISPOSITIONS Situation
revoke, the value of transferred property will still
wherein the value of the transferred properties,
form part of the gross estate of the decedent.
those that are no longer in the name of the decedent,

still form part of the estate of the decedent.
Intervivos transfers. 4. Transfers for insufficient consideration
The decedent, during his lifetime, transferred
INTER VIVOS TRANSFERS / TESTAMENTARY his properties without knowing that he is dying. An
DISPOSITIONS SUBSTITUTES CR2IG impending death under this situation is not an issue.

1. Transfers in contemplation of death The fact is he sold the property for a
considerably very low price.
The decedent has a positive and clear

knowledge of his impending death. To avoid the
If you sold the property below its fair market
payment of estate tax, he transferred his properties,
value, the law will impose more taxes which the
during his lifetime, in the name of those whoever he
taxpayer will have to pay.
desires. If he dies, the value of the properties still

forms part of the estate.
Example: You have a property worth Php 5 Million

(fair current market value of the property)
Reason: The primary purpose is to avoid estate tax.


FMV= Php5M
2. Transfers with reservation of certain rights X 30%
and interests Php 1.5M
When only naked title is transferred, and
control is still with the transferor, estate tax must Php 5M Php 1.5M = Php 3.5M
still be applied.
Any value lower than Php 3.5M is an insufficient
consideration.
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 6 [TAXATION 2 ATTY. LIM] 3B 2016-2017

If the owner of the property is no longer a income derived from the property will be used to
Filipino citizen and the property is located in the pay taxes and those who are working in the land
Philippines, the property is still subject to estate tax and the building. I prepared a GPA.
for the reason that the property is within the
Philippines. My son, who is holding this kind of
authority, is practically the owner of the property.

He can sell this, he can mortgage this, he can
If the owner of the property is a Filipino donate this, he can burn this, he can destroy this,
citizen, the property wherever situated is subject to he can remove my name there, cancel it, and write
estate tax. his own name there because he has the full
authority. GENERAL means you can do anything.
NOTE! For these four CR2I (transfers in IN TAXATION, YOU ARE THE OWNER by reason of
contemplation of death, transfers with reservation of this authority.
certain rights and interests, revocable transfers, and
transfers for insufficiency of funds) the DOCTRINE All the taxes of the property will be on the HOLDER of
OF THREE YEAR PRESUMPTION (D3YP) applies. the GPA.

D3YP The government will determine if these four For example: A very wealthy person named U, has
transactions happened three years PRIOR TO death. several assets, some are capital assets and some
are ordinary assets. They are all registered in his
name. Now he is going abroad.
If they did, the value will form part of the

inclusion.
He prepared an authority, a GPA, and then he left.
He gave the GPA to his nephew.
If they did not, the inclusion of the value of
the property will not be considered anymore. The nephew holds the authority. Subsequently the
nephew died. The value of all the properties
Example: The decedent died 3 February 2017. will form part of his gross estate because he is
Within six months, the family will pay the Estate a holder of a GPA. Because FOR TAX PURPOSES,
Tax Return. (Requirements upon death: Notice of he is considered to be the owner of those
Death; Estate Tax Return, Estate Tax Payment). properties.
Under the D3YP, the BIR is authorized to look
back three years PRIOR to death and determine (For tax purposes, a person holding a GPA is
if any of the four happened. considered as the owner. And when he died, the value
of the property under his authority will form part of his
The BIR is allowed to look back if any of the gross estate because he is considered as the owner of
CR2I happened within three years PRIOR to the the said properties.)
death of the decedent.
WHAT IF: The nephew did not cancel the name of
If any of the four happened, the value of the U. He merely holds the authority. The one who
properties will form part of the gross estate. But if died first was U. What will happen to the
any of them happened beyond the three-year period properties?
prior, it is not included anymore. The value of the properties will form part of
the gross estate of U.
Remember! Government is allowed to move back
only for three years. Why? There is a GPA, right?
REASON: The written authority is
5. Properties passing under a general power of extinguished upon the death of the principal.
appointment (GPA)
(Written authority is extinguished upon the death of
Example: I have a piece of land, and I am going
the principal. GPA will be automatically revoked /
out of the country. And so I gave my son authority
to manage the property, which is income extinguished. The property will then form part of the
generating. I gave him the authority that the principals gross estate.)
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 7

COMPOSITION OF THE GROSS ESTATE OF THE RESULT: Additional 50% over and above all other
DECEDENT penalties. The 50% is FRAUD PENALTY.

REAL PERSONAL INTANGIBLE( (IF the tax paid is lower than 30% of the tax supposed
Shares of to be paid, then the return is a fraudulent return.
stocks; Consequence: plus 50% fraud penalty)
Obligations(
includes bank What will happen to the fraudulent return?
deposits; The BIR will just consider the amount paid as
Bonds) advance payment.
Resident The CIR is going to amend the return and
Decedent ALL PROPERTIES WHEREVER include the fraud penalty.
-Resident SITUATED
Citizen; When may the CIR look into a bank deposit:
Non- 1. If it involves an estate tax.
Resident 2. If there is a compromise proposal from a
Citizen; taxpayer and the reason for that proposal is financial
Resident inability to settle.
Alien
Non- Within Within Within Under this situation, the government will
Resident accept the compromise proposal ONLY WHEN the
Decedent taxpayer WAIVES the Bank Secrecy Law.

3. When there is a waiver.
IN BANK DEPOSITS With consent of the depositor.

H and W. H died. The W was advised to settle During the tax investigation of the BIR, the
the estate within 6 months and she did. She asked an BIR does not have the authority to demand to look
accountant to help her because the assets left behind into your bank deposits. Because looking into bank
is more than Php 2M. You have to submit and ETR deposits is not part of the power of BIR.
with the assistance of an accountant because the
accountant has to certify the validity of the Return. Whether or not a bank deposit is included
There should be a CPA Certificate. in the gross estate will be determined based on
the classification of the bank deposit.
W indicated that H has a deposit in
Metrobank worth Php 50K. The BIR then reviewed If the bank deposit maintained by a H and W
the said amount. The BIR then asked if W is in fact is a SURVIVORS ACCOUNT OR WINNER TAKES ALL
Metrobanks depositor. Then, BIR asked the amount. ACCOUNT (in bank practices it is written as H
Metrobank then invoked RA 1405 The Bank Secrecy and/or W account), it will NOT form part of the
Law. gross estate.

BIR shall invoke that the one involved is an REASON: When the H dies, all the money will go to
ESTATE TAX. the W. You cannot charge the W an estate tax because
she is still alive.
NOTE: ESTATE TAX IS EXEMPT FROM BANK
SECRECY LAW. (A Survivors Account or an AND/OR Account will not
form part of the gross estate of the decedent. Because
IF the BIR found out that the taxpayer has all the money when one spouse dies goes to the other.
MORE THAN 30% of deficiency in tax payment. And the other who is still alive is not subject to estate
Then the taxpayer is deemed to have submitted a tax.)
FRAUDULENT RETURN.
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 8 [TAXATION 2 ATTY. LIM] 3B 2016-2017

If it is a JOINT ACCOUNT ( H AND W ), if the never taxable. It is the fruit of the capital that is
H dies, of the deposit will be subject to estate tax. taxable.

IN LIFE INSURANCE PROCEEDS In ESTATE tax: Same scenario as above. The
decedent bought an insurance policy by himself. He
IF there is a problem in insurances, find out what got one with a face value of Php 800K. The W and the
kind of insurance is given. 3 kids were named as beneficiaries. H died so the
proceeds were distributed among the beneficiaries.
If it is an accident insurance, it has no tax implication.
Why? For estate tax purposes, since money is property, it
Because the money that you will receive is is considered to form part of the gross estate of the
compensation for injuries sustained, this is an decedent. Will it form part of the ETR as properties left
inclusion. If it is property insurance, it is a mere behind?
return of capital and there is also no tax implication.
When is LIFE INSURANCE POCEEDS forming part
Life insurance has a tax implication. The of the gross estate of the decedent?
money which will be given to you upon the 1. When the insurance policy is a revocable policy.
happening of the eventuality is called a life insurance
proceeds. Income tax or estate tax may be imposed. What if the policy is ambiguous?
Under the Insurance Code, when the
In INCOME tax: The decedent himself bought the policy is ambiguous, it is always considered a
insurance policy. It is not a company insurance. It is revocable policy.
an insurance which he bought personally. He named
his W and his 2 kids as beneficiaries. It has a face 2. When there is a court-appointed administrator
value of Php 600K. who will take charge of all the properties left behind.
The proceeds will automatically form part of
If he dies, what will happen? the gross estate.
The 600k will be divided equally among the
beneficiaries. 3. There is an executor.
Decedent during his lifetime has named
Are these beneficiaries subject to income tax? someone who will take charge over his property.
NO. It is an inclusion. The money, which they
received, does not form part of the fruit of capital, 4. Money goes to back his estate. The estate will be
their labor, or their labor and fruit capital combined. the taxpayer.
IT IS NOT SUBJECT TO INCOME TAX.
Example: If the money is used as an additional
When is life insurance proceeds taxable to the capital of the business.
beneficiaries?
If they use such proceeds as capital or COMPOSITION OF THE GROSS ESTATE OF THE
business, and they have acquired a gain. The gain DECEDENT
now is from the use of the capital and is taxable. The
gain is taxable, but never the capital.

If you are inheriting a property, that is not
subject to income tax.


Inheritance is not subject to income tax.
Intangible Personal Properties (IPR): Shares of
But if you use your inheritance to produce an income,
stocks; obligations (includes bank deposits,
the income is taxable, but never the inheritance.
promissory notes, credits); and bonds.
Inheritance is considered a capital, and capital is

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 9

Shares of Stocks: Shares of stocks issued by a domestic corporation are
considered as properties within the Philippines.
If the decedent is a RESIDENT DECEDENT, and he Where the owner is located or where the certificate is
owns shares of stocks of a DOMESTIC located are immaterial. For as long as the S/S is
CORPORATION, these are ALWAYS subject to issued by a domestic corporation, it is always
Philippine taxes (ALL KINDS of taxes including considered as properties within the Philippines.
ESTATE TAX).
SITUATION:
Example: Cash dividend- 5% FWT; Stock There was this Japanese guy who brought an attach
dividend- normally exempt but with XPNs (there case filled with certificate of foreign shares of stocks.
in the book) He cohabited with a Filipina. He left his attach case
under his table and then he died.
If the decedent is a RESIDENT DECEDENT and he
owns FOREIGN shares of stocks, those which are The certificates are physically within the Philippines.
issued by corporations that are outside the
country, will he be taxable on said shares? Are they subject to Philippine Estate Tax?
YES. FOREIGN shares of stocks are subject Apply the principle of reciprocity.
ONLY TO ESTATE TAX.
An XPN to this answers the question: WHEN ARE
NRD refers to a NON-RESIDENT ALIEN - will be FOREIGN SHARES SUBJECT TO PHILIPPINE ESATE
subject to Philippine Estate tax if he has properties TAX.
WITHIN the Philippines.
WHEN ARE FOREIGN SHARES SUBJECT TO
Example: A Japanese who went to the Philippines, PHILIPPINE ESTATE TAX (owned by a NON-
fell in love with a Filipina, and bought a
RESIDENT DECEDENT):
condominium unit. Since he used his money, the
unit is registered in his name. He has property
within the Philippines. 1. If the shares were used in the Philippines in
furtherance of profit.
If the Japanese dies regardless whether within or
outside the Philippines, because he owns property Illustration: these S/S may be used as collateral
in loans. The loanable value of the S/S will be 40%
within the Philippines, the property will be subject to
of the current FMV of the property.
estate tax. (the property is subject to estate tax
because of location) If the loan proceeds are used in the business, the
certificates will be under chattel mortgage, and the
NRDs personal properties will be subject to same will be registered in the RD.
Philippine Estate Tax if they are WITHIN the
Philippines. 2. When it has acquired business situs in the
Philippines- registered in any government
Shares of Stocks of NRD: agency.

A. If issued by a DOMESTIC CORPORATION When the certificates of S/S are already
Subject to Philippine Estate Tax registered, then the certificates has acquired
BUSINESS SITUS.
B. If issued by a FOREIGN CORPORATION apply
the PRINCIPLE OF RECIPROCITY Acquiring business situs in the Philippines means
that the property was registered, for whatever
Bank Deposits: purpose, in the Philippines.

A. Within Subject to Estate Tax 3. If the foreign corporation that issued the
B. Without NOT subject shares has more than 85% of his business

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
10 [TAXATION 2 ATTY. LIM] 3B 2016-2017

activities in the Philippines. Then the shares estate tax has been paid already so the property even
issued are considered properties within the if you dont get your share on that its not yet yours.
Philippines. Donors tax will not come in if what youre giving is
not your property so that is still subject to estate tax,
Example: Foreign corporations operating in the there is no donors tax there.
Import/Export processing Zone.
And then. Xs marriage was legally annulled and she
IF THE PRINCIPLE OF RECIPROCITY APPLIES, IT IS was awarded alimony by the court of 50k per month,
NOT TAXABLE. is the alimony subject to donors tax?
NO. because the amount is less than 100k.
2 LAYER ANALYSIS: Didnt we say that donors tax will come in if the gift
is more than 100k. Income tax will not also come in
Are shares of stocks considered properties because that 50k was not source from capital, labor,
located in the Philippines? or combined.

First Layer: If YES, determine next During the lifetime of Xs parent xxx xxx.
There will be an estate tax there, if you
Second Layer: W/N the Principle of renounce an inheritance. Tax implication: Estate tax
Reciprocity applies. If it applies, it is NOT is payable under the given facts.
taxable.
X is engaged in selling construction materials xxx
xxx.
How do you determine the recognition of the Dacion, there is no CGT here because what
principle of reciprocity? has been transferred is an ordinary asset or
2 FACTORS: properties for sale. CGT will come in only when the
1. The presence of same or similar property is not used in business, so apparently under
kind of tax. the given facts, condominium units subject of
2. Are Filipinos in the said country business transaction are moving from one person to
also allowed to enjoy the same benefits which another so walang CGT, ordinary income tax ang
are given/extended to foreigners in the papasok dyan.
Philippines?
Confidentiality of tax return, so we said a tax
February 10, 2017 (No Class) return is highly confidential and the only time you
February 17, 2017 (Quiz) can open it is upon court order, by order of the
president of the republic, by order of the sec of
February 24, 2017 - Transcription (Taxation) finance, or by order of the CIR when the tax return is
a subject matter of an investigation, and upon
QUIZ ANSWER consent of the taxpayer.

Number 1 talks about properties left behind by a X inherited an agricultural land in the province
decedent and whether or not these properties will be xxx xxx. Is the BIR correct?
covered by estate tax, so the composition of the gross NO. the BIR is not correct because what has
estate is very material here. When it comes to shares been transferred is a capital asset so sa capital asset
of stocks of a non-resident alien, principle of hindi pumapasok ang insufficient consideration,
reciprocity will come in. Emphasize on that. Alright. papasok lang yan sa ordinary asset.

Number 2 we said that when you renounce an Six. Just find out whether the amount involved is
inheritance that is not subject to donors tax but it more than 1,919,500 if more than that, the sale is
is subject to estate tax because if it is still an always vatable. If 1,919,500 or less, percentage tax
inheritance the presumption here is it has not yet yan. And then what kind of item is being sold, if the
been transferred because the facts did not state that item being sold is excisable goods, papasok ang
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 11

excise tax. Excise tax will not depend on the tax ang papasok diyan pag may income. Pag wala
threshold, basta you are selling excisable items, naman, wala kang babayaran na income tax.
you are always subject to excise taxes.
The contract of lease is entered into in the Ngayon, kung ang ordinary asset nasa ibang
Philippines xxx xxx is the transaction subject to bansa, papasukan yan ng income tax, because
VAT, why or why not. income tax is not withholding tax. Papasukan yan
The transaction is not subject to VAT because dahil Filipino ka na nagbebenta. Diba Filipinos are
the property subject matter of this question is subject to income tax wherever earned.
abroad. Find out the requisites of the VAT, the
property is abroad, so there is no VAT there. Yung estate tax, a Filipino has or owned
properties in the Philippines then he went abroad,
If property is involved in the question, the first still a Filipino, he died abroad. Estate tax will come
thing to do is what kind of property is involved, is in because he is a Filipino.
this an ordinary asset or a capital asset. After that
find out where the property is located. After that find Granting that he was naturalized abroad, so
out who is the taxpayer. yung mga properties nya dito nasa pangalan pa rin
nya, papasukan pa rin ng estate tax yan yes
A capital asset, a property that is not used in because yung properties are located in the
business, papasukan ito ng CCGT unang-una if the Philippines.
property is located in the Philippines because a CGT
is in the nature of a withholding tax. So if Filipino, estate tax is payable because of
citizenship.
Withholding tax applies only in the Philippines.
If foreigner, estate tax is payable by reason
So if the property is abroad, walang CGT yan. of the location of the property.
Let us say, I own a condominium in Singapore
and I am a Filipino, CGT will not come in under the If the decedent is a Filipino, all properties
doctrine of territoriality. wherever located (within/without) is subject to
Philippine estate tax.
So wala akong CGT dyan, but because I am a
Filipino kung kumita ako doon dun sa benta ko na If the decedent is a foreigner, estate tax will
yon, then that money earned by way of income be owed provided that properties are within the
taxation now is subject to Philippine income tax. Pero Philippines.
walang CGT dyan.
DONORS TAX
Ngayon kung ang binebenta mo ay ordinary asset
naman, dun sa CGT insufficiency of consideration is Donors Tax is imposable if the amount of the
not material. property donated is more than 100k.

Even if you sold it at 1peso, papasukan ka ba? This tax is payable within 30 days.
Yes. Even if you sold the property sustaining a
loss. CGT will come in. Maski nalugi magbabayad. Payable by the donor.
Maski ilagay mo piso, hindi susundin yung piso mo
kasi the computation of a CGT is based on the The recipient of the donation is immaterial.
consideration or zonal value whichever is higher,
so kung piso nilagay mo pero yung zonal value e 50 Even if the donee is an unborn child, that
million, 50 million yung susundin. transaction is subject to donors tax because the
donee is immaterial.
Doon sa Capital asset walang insufficiency of
consideration doon lang yan sa ordinary asset kasi We will just look at the donor, is this donor donating
yung ordinary asset pag binenta mo yan, income a property? Is he Filipino? So if he donates a property
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
12 [TAXATION 2 ATTY. LIM] 3B 2016-2017

wherever located, that donation for as long as it is the year. Donors tax return is still required. But
more than 100k will be subject to donors tax. the first donation (80k) should be added to the
second donation because they were made within
If the donor is an alien, he will be covered to the year. Gift splitting is void. Gift splitting is
breaking the gift into small pieces for purposes of
donors tax only if the property donated is within the
avoiding the payment of donors tax. Gift splitting
Philippines. is illegal and not allowed.

Estate tax payable in the place where the When is gift splitting valid?
decedent last resided. Location of the property is
not material. 90k given on Dec. 31, 2016, and then 60k
given on Jan. 1, 2017. No need to add the two
The donors tax, however is always paid wherever because they were made in two different tax
the donor is residing. period.

If he is a non-resident alien, the 1. Gifts subject to donors tax.
donors tax is payable directly to the office of
the CIR, that is the tax situs. Paano niya All kinds of gift, whether real,
babayaran kung wala siya dito, well, that will personal or intangible. Giving a right is
be the responsibility of the donee. The also a taxable transaction.
donors tax is normally payable by the
donor, but if the donor cannot be located Example: Right to put up a business
government can enforce the payment of the inside a mall given to your brother is
tax against the donee. So donee sometimes taxable.
end up paying the donors tax.
Indirect donations are also taxable.
Donation in favor of government, for public use,
whether national or local is always exempt from Example: X has a son S (3y/o). X
donors tax. transfers his property to Y, both during
their lifetime but with the condition that
Donations to GOCC is taxable because GOCCs are when S reaches the age of 21, Y has to
government in business. They are not existing for transfer the property in the name of the
public purposes. son. So there is a transfer now, and there
will be another transfer.

Donation to traditional exemptees will also be
Only the first transfer is taxable, the
exempt from donors tax.
second is not because this is a conditional
This should be entities that are operating
transfer, an indirect transfer.
within the Philippines (domestic corporations).


Pinahawakan lang nya. Pero hindi talaga
So if you donate to an international civic sa kanya yun, itatransfer din nya paglaki ng bata.
organization, your donation is not exempt from This is still a taxable transaction but only one
donors tax. transaction is taxable, the original one. The second
one will be exempt.
Splitting of donation to avoid donors tax.
Donors tax is imposable only in
First donation 80k, second donation 70k. First cases of valid donations.
donation exempt from donors tax but not exempt
from filing a donors tax return. Because donation Void donation is not subject to
is a transaction that is taxable under the tax code donors tax.
whether or not there are taxes to be paid, a
donors return/tax return is mandatory. Second Example: donation between husband and wife. As
donation is taxable. The computation of donors a rule this kind of donation is void, except when
tax is cumulative. Meaning add all donation within
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 13

there is family rejoicing, valid donation yan, The bene will be subject to income tax based on their
papasukan yan ng donors tax. separate distributive share. The income of the money
will be taxable in the name of this money. Because if
2. Condonation of debt is subject to donors tax. this is irrevocable, the money is considered an
Consequences of debt condoned. artificial person subject to income tax.

Remember, debt condoned is not a gift. Gift is All income is taxed in the name of that money if it is
something given out of pure generosity, pure an irrevocable trust. At the time that the money is
liberality, debt condoned is not. If D (debtor) is given to the bene (at the end of the contract), the
solvent, it is considered as a remuneratory donation. donors tax will be payable at the time that the money
It is subject to income tax. If D is insolvent, it is is distributed.
exempt from income tax.
Contra, a revocable trust, yung income divided
3. Sale of ordinary asset for insufficient between the grantor and the bene, or with a
consideration is also subject to donors tax. condition na at the end of the contract, the money
No donating intent here. will be returned to the grantor.

Ordinary asset lang, pag capital asset, walang If this happens, all income will be taxed in the
donors tax kasi pag binenta mo yan kahit piso lang name of the grantor, the money is not a taxpayer, the
ang consideration, papasukan ka ng CGT hindi ng bank will be taxed on the commission, the bene will
donors tax, miski palugi, CGT ang papasok. Hindi be taxed based on their distributive share.
apektado ang gobierno kung ang binebenta mo ay
capital asset kasi CGT is always payable based on the If the trust is revocable, all parties will be
zonal value or consideration whichever is higher. subject to income tax.

Example: Sale of ordinary asset. Property worth And the money will be subject to donors
7M multiply by 30 percent = 2.1M, ibawas sa 7M = tax if the money will be distributed at the end of the
4.9M. I am not allowed to sell this property below
period to the bene.
that amount. For example I sell this property for
3.5M that is selling an ordinary asset for
insufficient consideration. So the difference of Pag irrevocable, the grantor is exempt from
1.4M is subject to donors tax. income tax. Again money will be subject to donors
tax at the time of distribution. Money is considered as
4. The creation of an Irrevocable Trust is subject an artificial taxpayer only when the trust is
to donors tax. irrevocable.

Parties: Example: The irrevocable trust of G for the
Grantor account of 1234 - name of the tax payer.
Trustee
Beneficiaries. Condonation, sale (of ordinary asset) for
insufficient consideration, and irrevocable trust =
Irrevocable when the bene cannot be substituted. By no donating intent but there is donors tax.
all means sila lang ang tatanggap ng fruit of the
money. And at the end of the contract, the money When you want to donate but dont want to be
subject of the irrevocable trust must be distributed to covered by a donors tax, ask the recipient to go to
the bene. the BIR and ask for a certificate of tax exemption as a
donee, kasi pag binigyan mo ng walang ganun na
Tax implication: certificate, the donation is taxable.
The bank will be subject to income tax, based on the
commission it gets. Tax exemption is not self-executing. It is not
automatic.

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
14 [TAXATION 2 ATTY. LIM] 3B 2016-2017

Example: Red Cross, IBP, Radio Veritas, ALLOWABLE DEDUCTIONS
ABSCBN foundation = exempt.
All taxes under the tax code, meron allowable
Churchs collection for Christmas Evening Mass deductions dyan. Apply the substantiation rule.
amounted to 300K = not subject to donors tax. Pero meron ding mga items na di na kailangan ng
Hindi totality, but the individual donation. receipts, like standard deduction. That is given under
the law, you can deduct 1M outright from the gross
Pag may nagbigay doon ng more than 100K, estate, and there is no need of supporting documents
papasukan ba ng donors tax? there because that deduction is provided under the
NO. Hindi pa rin kasi you are donating to a law.
traditional exemptee.
1. Dowry deduction (Max amount 10K)
It is not the totality that will determine whether Given by a parent to a child who is getting
the transaction is covered by a donors tax but the married. This is a wedding gift.
individual donation.
If the wedding gift is valued more than 100K
TWO SETS OF RATE: papasukan ng donors tax yan pero meron syang
dowry deduction na 10K.
1. If donation is in favor of persons within the 4th
civil degree, the rate is 2-15% (2, 4, 6, 8, 10, 12, and What kind of child?
15.) LILA (legitimate, Illegitimate, Legally
Adopted.)
2. If donation is in favor of persons outside the 4th
civil degree, referred to as donation to strangers The gift is given only on occasion of marriage.
= 13% flat.
Given before the marriage or 1 year after the
Are corporations donating properties subject to marriage.
donors tax?
Yes, they are. Donors tax is both applicable Example: A father giving a piece of land
to natural and juridical persons, whereas estate tax valued at 400K as a wedding gift to his LILA
is applicable only to a natural person. son.

Under the Omnibus Election Code, donations to PHP 400K -Value of the gift
politicians, pol parties and/or political -PHP 10K -Dowry deduction (allowable
candidates are exempt from donors tax. deduction)
PHP 390K
However, the donation is subject to 5% withholding -PHP100K -First Sum Exempted (first
tax. 100K is always exempt from
donors tax)
Example: Donation of 200pcs t-shirt worth 17K = 290K SUBJECT TO DONORS TAX
pay only 95% in cash and remit to BIR 5% and
give the receipt to the person. The 5% receipt can Husband and wife donating a conjugal
be used to credit other IR taxes. It is a creditable property valued at 2M to their child (LILA) who is
withholding tax.
getting married. The title will be transferred in the

name of their child together with their daughter in
A politician who receives so much donations but
law. 2 donors and 2 donees. (Whenever a husband
were not consumed at the end of the campaign
and wife is donating a conjugal property, the two have
period, will be considered as income to the politician
to split the donation into 2 equal halves, as if one party
subject to income tax.
gave half of donation and the other party gave the

other half, if it is a conjugal property.)


Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 15

ILLUSTRATION: AMENDMENT IN VAT:

Husband 1M Wife 1M The completion of document must be made within
Son Daughter-in- Son Daughter-in-law the original 2-year period.
law
500K 500K 500K 500K March 3, 2017 (No Class)
-10K No dowry -10K No dowry
dowry dowry March 10, 2017
-100K -100 FSE -100K -100K FSE
FSE FSE Remedies will depend on the due date.
390K 400K 390K 400K
Estate Tax is an IR tax. There are 44 IR Taxes (one is
Donors Tax rate: very insignificant) so there are 44 in all.

Son: 2-15% (gift to a person within 4th civil degree) All of these taxes will accommodate deductions.
Daughter-in-law: 13% flat (gift to a stranger)
Example: The decedent left behind a will. So you
have to submit that will to the court. Because you
Donation given by a non-resident alien (coming
cannot distribute properties if you have a will on
from abroad) is not subject to donors tax, because your own. You have to bring in the participation of
the property is not within the Philippines. the government. That is mandatory. But if you
submit that will to the court, you have to pay the
2. Encumbrances attached to the properties filing fees (because there is a hearing involved like
donated. an ordinary trial). You have hire yourself a lawyer,
Obligations attached to the property given so you have to pay for the acceptance fee,
publication, payment of taxes, etc. etc. So there are
Example: A car bought payable on installment, expenses that are necessary in the process of
which is not yet fully paid, is donated; the partitioning the properties, SO THESE ARE
remaining balance is an allowable deduction from ALLOWABLE DEDUCTIONS.
the donors tax payable.
So all taxes, like in businesses, you bought
How to compute the donors tax: supplies, a lot of them and you are engaged say in a
Declare the whole amount of the car, minus grocery and you sell soy, toyo etc., and when
the obligation attached to the property, minus the delivered, many of them are broken (basag), yung
First Sum Exempted (FSE) what remains is subject to mga basag nay an as long as yung ulo niya at yung
a donors tax. tansan andoon pa, di pa nabubuksan, yung mga basag
na ulo nay an pwede pang palitan yan, basta wag mo
Question: My brother is getting married, I gave him a aalisin yung tansan don sa ulo niya, papalitan nila
vacant lot as a wedding gift (property clean, walang yan.
utang) but I also gave him the burden to pay the
donors tax. I passed the donors tax to him. Is the Bad orders, spoiled delivery, wrong orders,
donors tax payable an allowable deduction? damages or kung ano ano, lahat yan deductible yan sa
business expenses.
When the donee assumes the donors tax, the
amount assumed is not an allowable deduction In income taxation, there are also allowable
because donors tax is not an encumbrance attached deductions depending upon who taxpayer is, there is
to the property (rate 2-15% brother is within 4th personal exemption, additional exemption, allowable
degree) deductions.




Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
16 [TAXATION 2 ATTY. LIM] 3B 2016-2017

ON ESTATE TAX check whether these recipients withheld upon
receipt of that payment for income tax purposes.
Flash Report: Current Events
Sabi ng mga comments sa facbook post ko yes
Secretary Alvarez on planning to tax religious Maam, basic in taxation, we learned that from you
organizations, educational institutions, because they and some of them are already judges yes we still
are collecting so much tuition fees from students, remember what you are emphasizing on the board.
Ateneo, UST, San Beda, bakit daw hindi i-tax ang
tuition fees. And eto naman BIR Commissioner said yes we will
look for the return, eh saan ka maghahanap? Eh wala
Nag post ako sa facebook, sabi ko these institutions naman return, Annual Information Return ang meron
are run by sectarian, run by religious organization, sila.
and therefore the DOCTRINE OF INCIDENTAL
EXEMPTION applies, tapos sinasabi ko, yung mga In fact these institutions are exempt from property
schools that are public, UP, PUP, and other tax for as long as the property is used in line with
government run institutions, non-stock, non-profit. their main objectives. They exempt from income tax
Constitutional mandate, Tax Code mandate, they are on income earned from the use of the property.
exempt from property taxes and income tax.
If the school is run by a religious organization, they This school, University of Santo Tomas, madaming
are also exempt from property taxes and income tax. tindahan diyan, kainan diyan, pinapaupa, so yung
mga umuupa nay an, they will be paying their own
But if the school is a private school, like FEU, UE, not income tax BUT AS FAR AS THIS SCHOOL IS
run by religious organization. Then these institutions CONCERNED, the school has to pay RENT INCOME. So
will apply the PREDOMINANT TEST RULE. yon and taxable. BUT NEVER INCOME FROM
TUITION FEES. Income from commercial activities
So iba ibang entities yan ah with different rules that under the YMCA CASE.
will apply. And pinagpipilitan ni Alvarez na I produce
daw ni Commissioner of Internal Revenue yung ALLOWABLE DEDUCTIONS
income tax payment ng mga eskwelahan na ganito, na
collecting so much tuition fee. Sa loob loob ko, mag Gross Estate- is the peso value of all the properties
tax nga ito sa akin, nakakainis, nakakainis. left behind by the decedent. Just add them together.
Sum total of that is the gross estate.
Sa post ko sa facebook sabi ko, Excuse me Sir,
pinapatawag niyo yung BIR Comissioner, eh wala From these, you have to first deduct the allowable
naman magagawa si BIR Commissioner kung wala deductions.
siya ma i-produce na income tax return kasi nga,
WALA NAMAN INCOME PAYMENT YANG MGA YAN. After deducting the allowable deductions, you arrive
Ang meron sila, ANNUAL INFORMATION RETURN, at the Net Taxable Estate.
but never an income tax return.
You now multiply with the applicable rates.
ANNUAL INFORMATION RETURN is a return that is
submitted by a tax exempt entity showing in that Whatever you arrive at will be the AMOUNT OF TAX
return who within the year ang binayaran ng pera so PAYABLE.
that the BIR could check who among these recipients
of payment if nag withhold naman itong mga taong Formula:
ito upon receipt of that payment for income tax
purposes. Gross Estate
-Allowable Deductions
Net Taxable Estate
ANNUAL INFORMATION RETURN is a return that is
X (applicable rate %)
submitted by a tax exempt entity showing in that Amount of Tax Payable
return who persons whom it paid so that the BIR can
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 17

ALLOWABLE DEDUCTIONS captain will attest to the fact that during the lifetime
Page 580 of the decedent, hes been staying at that place and
that it was his principal residence. THERE MUST BE
1. Standard Deduction (max Php 1.0 Million) BARANGAY CERTIFICATE TO THAT EFFECT.
2. Share of surviving spouse in the net conjugal
property (1/2 of the net estate) If the decedent has several houses, he has one in
3. Family Home (max Php 1.0 Million) Baguio, another here in Manila and another one for
4. Ordinary Deductions (MUST BE SUPPORTED example in Pampanga, HE CAN ONLY DEDUCT ONE.
BY RECEIPTS; SUBSTANTIATION RULE That place where he last resided prior to his death. So
APPLIES) that is the Family Home, ONE ONLY, with BARANGAY
4.1. Funeral Expenses CERTIFICATE. If you do not have the Barangay
4.2. Claims against the estate (decedent is the Cerificate, tyou cannot deduct the Php 1 Million.
debtor)
4.3. Claims against insolvent persons Next deduction is the funeral expenses. In the
(decedent is the creditor) deduction of Funeral Expenses, you should have thee
4.4. Unpaid mortgage indebtedness figures.
4.5. Judicial expenses of the testamentary or
extra-judicial expenses of the intestate HOW TO DETERMINE FUNERAL EXPENSES AS
proceedings DEDUCTIBLE:
4.6. Losses
4.7. Unpaid taxes FIRST: is the 5% of the Gross Estate (estimate on the
5. Medical Expenses (max Php 500k) value of the gross estate at the time of death and
-those incurred within one year from date of multiply it by 5% and that is the Estimated 5% of the
death Gross Estate).
-substantiated with receipts
6. Vanishing deductions SECOND: Compute the Actual Expenses incurred
7. Amounts received by heirs under RA 4917 directly by the family (includes the coffin, the burial
8. Transfers for public use plaque, all expenses from the time of death, during
9. Estate tax paid abroad the wake and on the day of the interment. EXPENSES
AFTER THE BURIAL ARE NO LONGER ALLOWED TO
Example: BE INCLUDED. Only expenses directly incurred, so if
someone donated the coffin, the same cannot be
The decedent left behind Php 4 Million worth of included anymore. If also, there is already a burial
properties (peso value 4 Million). plaque in the memorial park and the family did not
incur any expenses for that, it is not included
First Deduction will be standard deduction (Php 1 anymore.
Million pesos) no need of supporting receipts. That is
given under the law. THIRD: The maximum allowed by law for purposes
of funeral expenses is Php 200,000.00 (Php 200K).
Then you leave the share of the surviving spouse,
dont touch that. Of those three, the LOWEST FIGURE is what you can
claim.
Now you deduct from this point to that point.
EXAMPLE:
After that, you deduct, granting, Family Home (max
Php 1 Million pesos). 5% of the Gross Estate is Php 7 Million
Actual Expenses Php 395, 000.00
You can deduct Family Home provided it was the Maximum allowed by Law is Php 200K.
principal residence of the decedent prior to his
death. And therefore, to deduct this, you have to Of those three, the lowest figure is what to
secure a BARANGAY CERTIFICATE. The barangay be claimed as a funeral expense.
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
18 [TAXATION 2 ATTY. LIM] 3B 2016-2017

enforcing its claims from the heirs contending that
The BIR is very strict with the funeral the heirs have some properties in their possession
expenses as deduction. Because most lawyers or the belonging to the decedent and therefore, all these
accountant deduct Php 200K automatically as funeral heirs should share in the payment, settlement of that
expenses. THAT IS NOT AUTOMATIC. You have to tax left unpaid proportionately based on their
determine the three figures. distributive share.

You have to be very careful with Estate Tax. The heirs opposed arguing that the BIR was in fact a
The government is very serious and very strict as far creditor questioning the BIR why did it not file its
as Estate Tax is concerned because that is the last tax claim in the court. And under the Rules of Court, if
that this government can collect. After that, after you are a creditor, and if you are not able to file your
partition, mahihirapan na ang gobyerno maghabol. claim seasonably, your claim is barred.

CLAIMS AGAINST THE ESTATE RULING: THE DOCTRINE OF NON-CLAIM DOES NOT
These are the debts of the decedent during APPLY TO THE BIR IN TAXATION.
his lifetime that werent paid. So all the creditors
would now come forward to file their claim before So does this mean that the BIR can collect
the estate, before the probate court. Present anytime thereafter?
documents and the court will determine whether or NO. Collection should always be acted upon
not those claims are still demandable, still valid and WITHIN A PRESCRIPTIVE PERIOD.
subsisting. So the court will determine.
So even if the Doctrine of non-claim does not
CASE: apply to the BIR in taxation, the claim must, however
be within the period.
Decedent, during his lifetime, was a big
businessman; he has a lot of business. He left behind If there is a conflict between the doctrine of non-
a will and he died. And when he died, he has a lot of claim and prescriptive period, PRSCRIPTIVE
outstanding obligations in his businesses so the court PERIOD WILL PREVAIL.
called all his creditors BY WAY OF PUBLICATION. So
that is notice to the world. If you are the creditor ad CASE: DIZON CASE
you werent able to read that article, are you
exempted? NO YOU ARE NOT EXEMPTED. The decedent during his lifetime was a
Publication is notice to the world. So you cannot businessman, so he had a lot of properties, some of
claim that you did not receive any notice. theme are income generating some of them are
capital asset, so they are all in his name. He also left
The court will then determine, and when behind obligations left unpaid.
everything was done with, here now is the court
ordering payment of those creditors. Because the What the administrator did in preparation for
creditors should always be paid. Be they a sole the payment of the estate tax, they identified all the
proprietor, partnership, corporation, everytime they peso value of all the properties and they deducted all
close or go bankrupt, ang unang masasatisfy dapat the unpaid debts. Because debts unpaid are
ang mga creditors. deductible. BIR accepted it without any question
asked.
After paying the creditors, the court now
ordered that the Estate Tax be paid. After that, the If the government accepted your payment
court then should order the partition of the without any question, is the government
properties to the qualified heirs. estopped thereafter to run after you under that
return?
Then after so many months, the BIR ran after NO. Because the DOCTRINE OF ESTOPPEL
the estate claiming that during the lifetime of the DOES NOT APPLY TO THE GOVERNMENT.
decedent, he has so many taxes left unpaid. BIR was
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 19

The fact of admitting your return,
accepting your payment does not mean that the Now, the family should include all these debts
government is estopped to run after you. WALANG as part of the gross estate. Collectibles, account
DOCTRINE OF ESTOPPEL SA TAXATION AS FAR AS receivables, all of them, they have to be included
THE GOVERNMENT IS CONCERNED. Pag may there. The amounts then, in this case, are allowable
diperensya, balikan ka. deductions.

So after many months, the BIR run after the REMEMBER: NO INCLUSION, NO DEDUCTION.
administrator because the BIR found out that some of
the obligations were condoned. So the BIR argued Insolvency is the criteria. The debtor must be
that when the obligations were condoned, you should insolvent for claims against insolvent persons.
have not deducted it. Because you deducted them, Include first and deduct.
kulang na ngayon yung bayad niyo sa estate tax.
UNPAID MORTGAGE INDEBTEDNESS
The Dizons opposed. During the presentation of the gross estate,
even properties mortgaged are part of the gross
RULING: DATE OF DEATH VALUATION RULE estate. All unpaid mortgage indebtedness.
What should be deducted for purposes of estate tax
are those that are existing at the time of death. POST EXPENSES FOR JUDICIAL TESTEMENTARY
TAX DEVELOPMENT WILL NOT AFFECT THE TAX PROCEEDINGS
PAID.
CASE:
In this case, after deducting those that were
existing at the time of death, here comes the creditor Typical of a Filipino family, during the wake,
saying bayaan mo na, wala naman na si kumpare, hindi pinag-uusapan yung mga ari-ariaan ng
sige na okay na yan, okay na yan. namatay. You dont discuss in front of the cadaver
how you will divide the properties. Parang hindi yata
The court ruled, post tax development will maganda yon. Pero pass na yan yung ganyan na
not affect the tax paid. What happened after the ugali. Dapat nga pinag uusapan yan before the person
payment will no longer affect the tax payment as long dies.
as the circumstances are not within the knowledge of
the administrator or the heirs at the time of death of Like example, a mother with four children.
the decedent. At the time of the preparation of the She now wants to donate all her properties to her
estate tax return, they do not have the knowledge children because apparently donors tax is cheaper
that the creditor would be condoning the obligations than estate tax. Now, if they are not happy with the
so they should not be faulted by deducting said sums. partition, they can ask the mother and she will still be
Had they known of it, perhaps they would not have there to answer them. So that is a child questions the
deducted them. partition and the mother feels that the child is really
aggrieved with the partition, the mother can readjust
The claims against the estate sa unpaid debts the donated property among them.
ginagamit yan, hindi sa kung saan saan. That applies
only to unpaid debts. So back in the case, there was this wealthy
family from up north, they have a lot of agricultural
CLAIMS AGAINST INSOLVENT PERSON lands. So the last parent died, so all of them came as
some of them are already abroad, the attended the
The decedent during his lifetime, marami wake and the last rites. And the parent was buried
siyang pautang. He is now the creditor. There are a with no discussion whatsoever on property
lot of people borrowing money from him. During his partitions. Eventually, the caretaker have been calling
lifetime, he was not able to collect from them them to send money because the properties are still
anymore because these persons became insolvent subject to expenses. May mga taxes pa na babayaran
and then he died. diyan. Hindi porke namatay yung may ari wala na din
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
20 [TAXATION 2 ATTY. LIM] 3B 2016-2017

taxes. Real property tax is one of them. That comes RULING: EVEN EXTRA-JUDICIAL EXPENSES SHOULD
every year. BE DEDUCTIBLE. Extra-judicial expenses incurred in
relation to the distribution of the properties (no will
So during the first few years, okay lang left behind) are also deductible.
walang problema. Eventually nagaaway away na Story of Atty. Lims family. Regarding the bunso na
yung mga magkakapatid kasi sabi ikaw naman na lalake And their mom gave bulk of her properties to
laging ako, last year ako. Ikaw naman na magbigay. the bunso. Atty. Lim protested arguing that there
Nagututuruan na. Ayaw na magbigay and because of should be equal partition.
that nag aaway away na talaga sila.
LESSON: You dont put premium to
Finally, nung third death anniversary nung irresponsibility.
last parent, they all decided to go home to attend na
to the properties and do the partition of the Atty. Lim said that you should advice your
properties. The parent did not leave behind a will. So clients to divide the property during his lifetime kasi
they talked among themselves. There were so many problema palagi ang partition.
properties scattered everywhere. Some were in
Manila, there is a condo, maron sa Makati, meron sa In the event na magka problema ang heirs sa
province, meron sa kung saan saan. Hindi ngayon sila partition, PUT UP A CORPORATION. And those
magkaintindihan sa valuation ng properties. And properties will be used as a contribution of the
properties in the province are valued way lower than parents to that corporation and in return for the
those in the city. So there is a big difference in payment of the properties, you give the parents share
pricing. They then hired the services of an accredited of stocks AND THEN THE SHARE OF STOCKS WILL
appraiser to determine the fair market value of the BE DIVIDED EQUALLY. In the event na ibenta ang
properties left behind. Mahal yan. Mahal ang bayad property, pantay pantay ang hati. CORPORATION IS
diyan. ALWAYS A SOLUTION TO DISTRIBUTION OF
PROPERTIES AMONG HEIRS na hindi
Because the properties were above Php nagkakaintindihan.
2Million, they have to hire the services of an
accountant. NOTE: When you exchange properties with shares of
stocks, for as long as they are of equal value, it is not
Note: If the estate is more than Php 2 a taxable transaction. No taxation is involved there.
Million, the estate return should include financial
statements of the decedent. LOSSES
Losses are deductible for income tax
Back to the case. Because the decedent did purposes, and it is likewise deductible for estate tax
not leave behind a will, they have to hire the services purposes.
of a lawyer for the extrajudicial settlement of
partition of properties. So they incurred a lot of RULE: The loss should occur within six months from
expenses. Publication. At the end of the day they death and the fact of loss should have been recorded
deducted everything. in the concerned government agency.

When they were ready to pay, they submitted Example:
the return to the BIR. The BIR however denied the
return contending that under the Tax Code, only The decedent during his lifetime, had a bakery. He
JUDICIAL EXPENSES for testamentary proceedings. died. And within six months that bakery got
burned. Now the fact of loss should be recorded in
Ibig sabihin dapat may will. Eh walang will, so sabi ng
the fire department, the barangay, the BIR.
BIR non-deductible.


NO RECORDING, NO DEDUCTION. (The same goes
Felt aggrieved, the heir fought it out and
true with income taxation, there must be proper
nakarating sa Supreme Court.
documentation, otherwise, it is not a deductible loss.)

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 21

KINDS OF LOSSES DEDUCTIBLE: TRECUSO History of the passage of RA 4917.

Loss occasioned by: Theres this employee from a paper factory,
which makes boxes and puts an indention in these
Theft boxes. The factory was full of reminders mag-ingat
Robbery everywhere within its premises. And this employee
Embezzlement was assigned there to make the indentions, there
Calamity was an accident and the employee died. The
Unexpected Sudden Occurrence employee who died had many children. The wife
came to the employer asking for some financial
These are called casualty (TRECUSO) losses. assistance because the husband died while at work.
They are deductible. The employer refused contending that it had
reminded the employees sufficiently with the the
The value of the loss can be deducted mag-ingat posted everywhere. That it was the
provided it occurred within 6 months from death employees negligence. The wife aired her situation in
with proper documentation with the proper the radio and asked for help for her to bury her
government agencies. husband and a congressman heard her situation. So
that is the offshoot of that law.
TAXES
Those that the decedent paid during his Why is it that youve been hearing this rule in
lifetime, they can be deducted from the gross estate taxation? Include and Deduct, Include and
because those taxes must be paid. Deduct.
This is not an exercise in futility because the
MEDICAL EXPENSES more you include the higher is your tax rate. So after
Max is Php 500k incurred within 1 year prior you have included all, the amount of the gross estate
to death. will determine the tax rate. After determining the tax
Substantiation Rule applies. rate, you hold on to that. You now deduct the
allowable deductions and whatever the amount you
Example: arrive at, you will multiply with the tax rate youve
A wealthy family and a member thereof has determined a while ago. The purpose of inclusion and
cancer. They really wanted to prolong hi life. So deduction is for the government to collect more
they had the member undergo gamma knife. It
taxes.
costs millions of pesos. The family, one year prior
to death incurred Php 7 Million pesos all
supported with receipts. DONATIONS IN FAVOR OF GOVERNMENT FOR
PUBLIC USE
Under the rule, only Php 500k is deductible as The government can be a national
medical expense. The Php 6.5 Million, you can place government or a local government. The amount
that under claims against the estate. Because that is donated is an allowable deduction.
an obligation incurred during the lifetime of the
decedent. REMEMBER: PLEGEDES ARE NON DEDUCTIBLE.
But DONATIONS are deductible from the gross
AMOUNT RECEIVED BY HEIRS UNDER RA 4917. estate and in fact the donation is even exempt
RA 4917-The law requires the employer to from donors tax.
give financial assistance to the family of the employee
who met an accident or died while in active duty. DONATIONS:
That is now mandatory. The heirs now will receive Deductible from gross estate.
money under this law. The heirs now are required to Exempt from donors tax
include such money as part of the gross estate and
after inclusion, they are allowed to deduct. INCLUDE
AND DEDUCT.

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
22 [TAXATION 2 ATTY. LIM] 3B 2016-2017

TAXES PAID ABROAD REQUISITES OF VANISHING DEDUCTION:
Refers only to estate tax. Estate taxes paid
abroad on those properties left behind is considered There must be two sets of transfer taxes
as an allowable deduction. and the two deaths occurred within a period
of five years.
Reason: Estate tax is a universal imposition. Every
state has its own estate tax. Say a person has a Example:
condominium in Singapore; the title thereto cannot T died 04 December 2009
be transferred to the son without paying estate taxes W died 11 January 2014
there. Whatever estate taxes paid abroad, they are
deductible on Philippine taxes. Determine whether the two deaths occurred
within 5 years.
VANISHING DEDUCTIONS The two deaths occurred: 4 years 1 month 7
Here is decedent, during his lifetime, he days.
acquired properties and they are all registered in his
name. some of them are income generating, some of Within 5 years therefore, Vanishing Deductions
them are not. If he dies, say the WIFE gets the will apply?
properties. So the wife, cannot cancel the name of the NOT YET!
decedent T here, without paying estate taxes. If you
are holding a property that is not under your name, TAKE NOTE: There should be two sets of estate
you cannot mortgage that, you cannot sell that, you taxes paid.
cannot capitalize on that property. Once cannot
maximize the earning capacity of that property if it is First Transfer, can be by way of DONATION
not under his name. The estate tax should be paid or by way of SUCCESSION.
before she can cancel the name of T on those
properties. Say she already settled it. Now the Second Transfer should ONLY AND
properties can be registered in her name. ABSOLUTELY be by way of SUCCESSION.

The problem is, the wife also died. And the The second heir will enjoy the vanishing deduction.
two deaths occurred within a period of five years. So So S will enjoy the vanishing deduction but not W.
who will get the property? Lets say the Son (S) will
get the properties. Again, S cannot cancel the name W TAX REMEDIES
without paying estate tax. (Note: Movements of
properties create tax events). So S has to settle the Remedies are both important to both the
estate tax before he can cancel the name of W in the government and the taxpayer.
properties.
For the government, it needs remedies for the
Please note that S here will enjoy a special reason that money has to be with it as soon as
discount called the Vanishing deduction. possible otherwise all its projects and activities will
be jeopardized.
VANISHING DEDUCTION:
Is a special discount that will be enjoyed by Legal Basis: LIFEBLOOD DOCTRINE
the second heir inheriting the same property.
For the taxpayer, remedies are needed because of
Purpose: It reduces the harshness of successive the right to due process.
taxation involving the same property passing from Consultation with the people in the local level is
one heir to the other heir within a short period of mandatory are proposed to be introduced.
time (within a span of five years).
If people will not agree and has strong objection, THE
It is S who will be enjoying the discount. Si W, POWER OF TAXATION WILL STILL PREVAIL.
wala.
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 23

Consultation is needed for the sanggunian to preparation of the return can be delegated to
be aware of the plight of these constituents. somebody who understands math, accountant or
bookkeeper.
In the national level, there is no need to
consult with the people. A congressman was already The preparation of a tax return by a taxpayer
chosen to be the representative of the people to the is a delegable authority.
lawmaking body. He is the voice of the people.
But when delegated, principal-agent
FOUR REMEDIES relationship comes in, therefore, one is bound by all
the mistakes of the agent.
If it is a Local Tax, like business permit,
business licenses, apply the Local Tax Code. If once submitted but noticed errors upon
submission, there two remedies for erroneous
If it is a property tax, then apply the return:
remedies under the real property tax code.
1. Submit an amended the return to correct
If it is an import-export tax, then apply the the error (Amended return)
Tariff and Customs Code.
2. Submit a supplemental return to complete
If it is an IR tax, then apply the Tax Code. an incomplete return (Supplemental return)
Period: you can amend or supplement a
Only the Tax Code requires a Tax Return. return within 3 years from submission of that
erroneous return provided there is no
IR taxes are self-assessing. investigation yet.

The computation must be in a prescribed Once investigation begins, you cannot touch that
form called the tax return . return anymore and no remedies are available
anymore.
Tax Returns are considered self-serving
documents. If you submit that, the BIR is not bound CASE:
by that tax return. There was this corporation, and they
submitted their return. Several months later, they
If the CIR does not believe your gross income, noticed errors in the return. They caused the
the BIR can amend your return. correction of that erroneous return by submitting
and amended return. They were able to do that
The CIR is empowered to amend a return. because there was no investigation yet. After
submission, several months have passed. And here
If somebody reported that he gave you money now is an investigation. Tax audit. To cut the story
but you did not report it in your return, then the short, when the taxpayer is already facing the BIR, T
government can prepare your tax return for failure to noticed that what the BIR was holding was the old
submit one when one is required. return and not the new return.

BIR CAN AMEND. BIR CAN PREPARE. So T argued that they have already amended
that return and requested the BIR to look into the
Tax returns are highly confidential. Once new return. But the BIR argued that the old return
submitted, the same cannot be withdrawn from the will still be considered because it is part of its
BIR. You are bound by all the mistakes you records.
committed in that return.
RULING: All papers and documents submitted will be
There is no mandate under the Tax Code that included in the investigation including those
the Taxpayer should prepare his own tax return. The
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
24 [TAXATION 2 ATTY. LIM] 3B 2016-2017

amended return to be looked into because they form LATE PAYMENT: the 3-year period to assess
part of the records. commences to run from actual payment if it
was paid late.
THIRD PARTY VERIFICATION RULE:
TWO-YEAR PERIOD TO CLAIM INVALID PAYMENT
BIR is authorized to gather evidence UNDER SECTION 229 OF THE TAX CODE.
wherever, whenever in support of tax audit and tax
examination, with or without the knowledge or EARLY PAYMENT: Two-year period
consent of the taxpayer. commences to run from payment if paid
early.
PEOPLE REQUIRED TO SUBMIT A TAX RETURN:
(Please refer to the book) LATE PAYMENT: Two-year period
commences to run from due date if paid late.
PEOPLE EXEMPT FROM SUBMISSION OF TAX
RETURN: 10-a-w are the exceptions to the 3 year period within
(Please refer to the book) which the government can assess.

If you have only one employer, you are exempt (10) When during the 3-year period for the
from submitting an income tax return because the government to go over the return, fraud is discovered
employer will do that for you. (Only for income tax or there is failure or omission to file a return when
return but not for other returns) one is required to be filed, the right of the
government to assess the taxpayer is automatically
The employer will prepare that for you and extended to 10 years and the 10-year period
on the part of the employer, that is called the ALPHA commences to run from discovery.
LIST, listing down all the names of the employees,
their tax account number, their exemptions, the Fraud cannot be presumed. Fraud must be
number of children, and their compensation and the established concrete, valid, acceptable, legal
withholding taxes. evidence.

MATERIALITY OF TAX RETURN: HOW THE BIR ESTABLISHES FRAUD:
Tax return is a stepping-stone to a full-blown
tax investigation. Example:

When a tax return is submitted, the government is The employer submitted a return showing that
only given 3 years to look into that return. your salary for the whole year amounting to Php 3
Million pesos, but the employee submitted a

return of only Php 500K gross income. Now
Prescriptive period to assess, investigate, audit, between the employers and employees return,
examine, compute: the EMPLOYERS RETURN WILL PREVAIL because
that is supported with a payroll and
Generally, the government has 3 years to go over the acknowledgement voucher.
tax return. If within the 3-year period, the
government finds something in your return, they will Over claiming of deductions is also a proof of
call your attention. fraudulent return.

RECKONING POINT OF THE 3-YEAR PERIOD TO Fraud penalty will then apply which is 50% of the
ASSESS: main tax.

EARLY PAYMENT: the 3year period to assess Other charges
commences to run one day after the due date Surcharge is 25 %.
if the tax was paid early. Interest is 20% per annum.

Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 3B 2016-2017 [TAXATION 2 ATTY. LIM] 25

How will the BIR get in touch with the taxpayer? After receiving the NIC, one can dispute the same
within 15 days.
The BIR will send a Notice of Informal Conference
(NIC). (A). Agreement. If the taxpayer would request the
NIC is an invitation for you to appear there BIR for another meeting and bring with him his
and also an avenue to present supporting documents accountant or bookkeeper, the BIR can accommodate
to the alleged deductions. No assessed tax liability yet him for that. However, the taxpayer MUST SIGN an
in this stage. agreement that the taxpayer will not apply the 3 year
prescriptive period.
Example:The BIR is investigating you for the year
2012. You received the notice today (March 10, If there is an agreement between the BIR and the
2017), is that a valid investigation? taxpayer to give more time for the taxpayer to
NO. Because the 3-year period already lapsed. explain and substantiate his position, then the 3-year
prescriptive period will not apply. However, the
Explanation: agreement must be in writing.

2012 is the year sought to be investigated. Tax return After NIC comes now the Preliminary Assessment
for that year is payable April 15, 2013. Today, March Notice (PAN).
10, 2017, you received a letter. Because the 3-year
period already lapsed. PAN- a notice showing an alleged tax liability.

REMEMBER: An UNCONTESTED ASSESSMENT Prospective Assessment- the alleged tax liability
ripens into a collection case. mentioned in the PAN.

During the hearing, the uncontested If the taxpayer does not agree with the PAN, he has
assessment can no longer be assailed because the 15 days from receipt to dispute the PAN.
failure to dispute it seasonably, means that you have
waived all you defenses against the validity of that NOTE: Prospective Assessment is not appealable
assessment. What you can only question is the to the CTA because that is interlocutory.
VALIDITY OF THE COLLECTION but never now the
validity of the assessment. The NIC and PAN with the Prospective Assessment
should be within the original 3-year period within
ASSESSMENT NOTICE which the government may assess.
Is an assessment sent to the taxpayer,
showing a fixed and determined tax liability. The prospective assessment should provide the legal
basis for the alleged tax liability. It should provide the
Purpose: It fixes, shows and determines a tax particular law or provision of the Tax Code that is
liability. violated, otherwise, it is a violation of the taxpayers
right to due process.
DEFENSES WHEN THERE IS A JUDICIAL CASE FOR
COLLECTION UNDER AN UNCONTESTED REQUISITES OF A VALID ASSESSMENT
ASSESSMENT:
It must be within the 3-year period.
1. The court is without jurisdiction It must state the facts and the law as legal
basis for the alleged tax liability.
2. The right of the government to collect has
prescribed. If the taxpayer would dispute the assessment,
it must also present and cite the legal basis of the
3. The collection was not approved by the CIR dispute. I do not agree would not suffice.
or by the Regional Director.
The next will be the Final Assessment Notice (FAN).
Javier, Landayan, Macalintal, Mercado
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
26 [TAXATION 2 ATTY. LIM] 3B 2016-2017

The taxpayer has 30 days from receipt to dispute the
FAN.

If no agreement is arrived at under the FAN, it will be
the FAN that is appealable to the CTA.

REMEMBER: Any issue regarding the FAN is
appealable to the CTA.

If the taxpayer received the FAN outside the 3-
year period, can the government enforce
collection?
YES. Because a FAN without a PAN is void.
PAN is mandatory before a FAN.

Good Luck!

Javier, Landayan, Macalintal, Mercado