Tax 102 – Business and Transfer Tax

Prepared by: Mark Paul I. Ramos

MODULE 7
Estate Taxes – Part 2

INTRODUCTION
This module discusses the inclusions and exclusions of gross estate of the decedent,
single and married, deductions from gross estate, computation of net estate and estate tax.
This will also discuss the filing of returns and payment of estate tax.

INTENDED LEARNING OUTCOMES

ILO 1 – Understanding gross estate of the decedent – inclusions and exclusions, deductions
from gross estate and net estate
ILO 2 – Application of principles in the computation of net estate and estate tax and credits
ILO 3 – Use of principles for filing and payment of estate tax

GROSS ESTATE

Citizens of the Philippines

The following are considered citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of this
Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine
citizenship upon attaining the age of majority; and
4. Those who are naturalized in accordance with law.

Residence for estate tax purposes

The term “residence” does not necessarily mean the actual place of residence. It
refers to the permanent home, the place to which whenever absent, for business or
pleasure, one intends to return, and depends on fact and circumstances, in the sense that
they disclose intent.

Properties included in gross estate

The properties to be included in the gross estate will depend on the citizenship
and/or residence of the decedent.

Filipino citizens are called “citizens” while those who are not Filipino citizens are
called “aliens”.

The value of the gross estate of a resident or citizen decedent shall be determined by
including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated. Provided however, that in the case of a nonresident decedent
who at the time of his death was not a citizen of the Philippines, only the part of the entire
gross estate which is situated in the Philippines shall be included in his taxable estate.

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If the decedent is a citizen or resident alien, the gross estate shall include the
following properties:
1. Real properties within and without
2. Tangible personal properties, within and without
3. Intangible personal properties, within and without

In case of a nonresident alien, the gross estate shall include only the following:
1. Real property within
2. Tangible personal properties, within
3. Intangible personal properties, within, unless exempted under the
principle of reciprocity.

Rule on reciprocity
The rule on reciprocity applies only to nonresident aliens, particularly on mortis causa
donations when the properties are intangible personal which are located in the following
instances:
1. If the decedent at the time of his death was a citizen and resident of a
foreign country which at the time of his death did not impose a transfer tax
on intangible personal property of the citizens of the Philippines not
residing in that foreign country

ILLUSTRATION Jack, a resident and citizen of “A” foreign country died leaving real
properties to Jill which are located in that country and shares of stocks
of a domestic corporation in the Philippines. Will these properties be
included in the gross estate of Jack and therefore subject to estate tax
in the Philippines?

ANSWER Jack, being a nonresident alien is taxable on properties situated in the

Philippines only.
Since the real properties are situated in “A” foreign country, they are not
included in the gross estate and therefore, not taxable.
The shares of stocks of the domestic corporation are not taxable in the
Philippines if “A” foreign country does not impose transfer tax of any
character on intangible properties owned by Filipinos and which are
situated in that foreign country.
Otherwise, such transfer shall be included in the gross estate of Jack
and therefore, subject to estate tax in the Philippines.

2. If the laws of the foreign country of which the decedent at the time of his
death allows a similar exemption from transfer taxes of every character or
description in respect of intangible personal property owned by citizens of
the Philippines not residing in that foreign country.

ILLUSTRATION Philip, a resident and citizen of “A” foreign country died leaving real
properties to Pilar which are located in that foreign country and shares of

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stock of a domestic corporation in the Philippines. At the time of his death,

his country imposes transfer taxes on donations of intangible personal
properties located in that country. However, that same tax law grants tax
exemption on intangibles owned by Filipinos therein. Will the transfer be
included in the gross estate of Philip and therefore subject to estate tax in
the Philippines?

ANSWER No, because the law of his country allows exemption on intangible
personal properties owned by Filipinos in that foreign country.
If no exemption is granted to Filipinos, the intangible personal property of
Philip shall also be subject to estate tax in the Philippines.

Real and personal properties

Real properties are also known as “immovables” while the personal properties are
known as “movables”.

The real properties are enumerated in article 415 of the Civil Code of the Philippines.

Personal or movable properties Are those that are not real. In order to determine
whether an object is movable or not, the following tests must be applied in the successive
order.
1. Whether the object can be transported from place to place
2. whether the change of location can take place without injury to the immovable
to which it may be attached
3. whether it is not included in the enumeration found in article 415 the Civil
Code

If the answers to the above questions are in the affirmative, the object is movable

The predominant criterion, however, in the distinction of property into real and
personal is the possibility of transfer of the latter or of its movement in space, whether by
itself as in the case of animals, or by some external acts.

Real or immovable property presupposes stability or the impossibility of transfer from

place to place.

Intangible personal properties within

The following intangible personal properties are considered situated within the
Philippines:
1. Franchise which must be exercised within the Philippines
2. Shares, obligations or bonds issued by any corporation or Sociedad anonima
organized or constituted in the Philippines in accordance with its laws
3. Share, obligations or bonds issued by any foreign corporation 85% of the business of
which is located in the Philippines
4. Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines

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5. Shares or rights in any partnership, business or industry established in the

Philippines.

ILLUSTRATION Fina Thai, a decedent single, left the properties:

A. House in Thailand
1,200,000
B. Land in Davao City
80,000
C. Condo unit in Manila
3,000,000
D. Car in Thailand
700,000
E. Car in the Philippines
650,000
F. Jewelries in Thailand
125,000
G. Franchise exercised in Thailand
260,000
H. Franchises exercised in the Philippines
380,000
I. Accounts receivable, debtor residing in the Philippines
275,000
J. Accounts receivable, debtor residing in Thailand
240,000
K. Investment in Lovers Co., partnership established in Thailand
730,000
L. Investment in Mahalia Co., partnership established in the
Philippines 300,000
M. Domestic shares, certificate kept in the Philippines
140,000
N. Domestic shares, certificate kept in Thailand
250,000
O. Foreign shares, 90% of business in the Philippines
100,000
P. Foreign shares, 30% of business in the Philippines, but acquired
business situs in the Philippines 270,000
Q. Foreign shares, 70% business in the Philippines
425,000
TOTAL 9,125,000

REQUIRED AND ANSWERS:

Citizenship of Fina Thai Gross Estate
1 Resident or Citizen 9,125,000
(Letters A-Q)
2 Nonresident alien (no reciprocity) 5,445,000
(Letters B,C,E,H,I,L,M,N,O,P)

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3 Nonresident alien (with reciprocity) 3,730,000

(Letters B,C,E)

Property relations between spouses

The determination of gross estate of a married decedent shall depend on the system
of property relationship that governed the spouses which could have been either any of the
following:
1. Absolute community of property regime
2. Conjugal partnership of gains
3. Complete separation of property
4. Any other regime

Marriage settlement governing the spouses

The system of property relationship that shall govern the spouses will depend upon
the marriage settlements they have executed before the celebration of the marriage.

Needless to say, an unmarried decedent shall not be governed by anyone of the

systems enumerated because all of his properties are exclusively owned by him.

The term “unmarried” shall refer to either single (never been married), legally
separated, widow/widower, or one whose married has been annulled.

In the absence of a marriage settlement, or when the regime agreed upon is void, the
system of absolute community of property shall govern, unless the marriage was celebrated
prior to August 3, 1988 (effectivity of Family Code, per EO 227), because those celebrated
before the effectivity of the Family Code, which had no prior agreement on the system of
property relationship, were governed by the conjugal partnership of gains.

ILLUSTRATION Mar and Cielo were married together on August 3, 1970. Prior to that
date, they entered into pre-nuptial agreement in writing that they shall be governed by the
regime of absolute community of property.

1. What marriage settlement governs the spouses?

- Mar and Cielo are governed by the absolute community of property regime – the
marriage settlement that they had agreed upon before the marriage.

2. Suppose there was no pre-nuptial agreement between the spouses, what settlement
governs the properties of Mar and Cielo?
- The spouses are under the conjugal partnership of gains because the marriage
was celebrated before August 3, 1988.
- If the marriage was celebrated on or after the aforementioned date and there was
no prior agreement as to the property ownership, the spouses shall be governed
by absolute community of property regime.

Absolute community of property

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Unless otherwise provided, the community property shall consist of (1) all the
property owned by the spouses at the time of the celebration of the marriage, or (2) acquired
thereafter.

The following shall be excluded from the community property:

1. Property acquired during the marriage by gratuitous title by either spouse, and the
fruits as well as the income thereof, if any, unless it is expressly provided by the
donor, testator or grantor that they shall form part of the community property
2. Property for personal and exclusive use of either spouse. However, jewelry shall form
part of the community property
3. Property acquired before the marriage by either spouse who has legitimate
descendants by a former marriage, and the fruits as well as the income, if any of
such property

Property acquired during the marriage is presumed to belong to the community,

unless provided that it is one of those excluded therefrom.

Charges upon and obligations of the absolute community

The absolute community of property shall be liable for:
1. The support of the spouses, their common children, and legitimate children of either
spouse, however, the support of illegitimate children shall be governed by the
provisions of the Family Code on support
2. All debts and obligations contracted during the marriage by the designated
administrator spouse for the benefit of the community, or by both spouses, or by one
spouse with the consent of the other
3. Debts and obligations contracted by either spouse without the consent of the other to
the extent that the family may have been benefited
4. All taxes, liens, charges and expenses, including major or minor repairs, upon the
community property
5. All taxes and expenses for mere preservation made during marriage upon the
separate property of either spouse used by the family
6. Expenses to enable either spouse to commence or complete a professional or
vocational course, or other activity for self-improvement
7. Ante nuptial debts of either spouse insofar as they have redounded to the benefit of
the family
8. The value of what is donated or promised by both spouse in favor of their common
legitimate children for the exclusive purpose of commencing or completing a
professional or vocational course of either activity for self-improvement
9. Ante nuptial debts of either spouse other than those falling under paragraph 7 of this
part, the support of illegitimate children of either spouse, and liabilities incurred by
either spouse by reason of a crime or a quasi-delict, in case of absence or
insufficiency of the exclusive property of the debtor-spouse, the payment of which
shall be considered as advances to be deducted from the share of the debtor-spouse
upon liquidation of the community
10. Expense of litigation between spouses unless the suit is found to be groundless

ILLUSTRATION Kulukutoy, Filipino, married to Aida on February 10, 2005, died during
the current year leaving the following properties:

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Riceland bought by Kulukutoy in 2007 200,000

Income of the Riceland 35,000
House and lot which he brought into the marriage 800,000
Income of a portion of the house being leased to student boarders 26,500
Subdivision lot inherited by Kulukutoy from his father in 2007 350,000
Rent income of the subdivision lot 12,000
Coconut land inherited by Aida from her father who died in September 250,000
1995
Income from the coconut land 15,000
Passenger jeepney given as birthday gift to Aida by her mother in 2007 160,000
Income from the jeepney 8,000
Jewelries 50,000
Savings deposit in a bank earned by the spouses during the marriage 875,000
Interest on bank deposit, net of tax 3,500
One-half share of Kulukutoy in the time deposit with PNB; 200,000
Interest earned of this account 6,000
The money was acquired by kulukutoy and Bebang, his former wife who
died in 2003. Their marriage was blessed with one child, Koykoy

REQUIRED Compute for the gross estate of Kulukutoy if the marriage was under absolute
community of property regime.

ANSWER
Community property
Riceland 200,000
Income of Riceland 35,000
House and lot 800,000
Income from lease to boarders 26,500
Coconut land 250,000
Income of coconut land 15,000
Jewelries 50,000
Savings deposit 875,000
Interest on savings deposit 3,500 2,255,000

Exclusive property
Subdivision lot 350,000
Rent income on lot 12,000
Share in time deposit 200,000
Share in interest (6000 x ½) 3,000 565,000
GROSS ESTATE 2,820,000

1. The passenger jeepney is an exclusive property of Aida because it was

acquired by gratuitous title during the marriage. The income of the jeepney is
also an exclusive property of Aida.
Exclusive properties of the surviving spouse are not included as part of the
gross estate.

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2. The share in the time deposit and in the interest is an exclusive property of
Kulukutoy because they were acquired during a former marriage in which
there was a legitimate descendant in that marriage.

Donation of community property by either spouse

Either spouse may dispose by will of his or her interest in the community property.

Neither spouse may donate any community property without the consent of the other.
However, either spouse may, without the consent of the other, make moderate donations
from the community property for charity or on occasions of family rejoicing or family distress.

ILLUSTRATION After death of the wife, may the husband now donate a portion of the
community property to anybody?

ANSWER No, he should first liquidate the community property, either judicially or
extrajudicially, within one year from such death.
If he fails to do so, any disposition or encumbrance involving the community
property of the terminated marriage shall be void.
The term liquidation means the determination and settlement of liabilities, and
includes the apportionment of the community property to those who may
have entitlements there over.

Conjugal partnership of gains

The regime of conjugal partnership shall apply only to spouses (1) whose marriage
took place before the effectivity of the Family Code and the spouses did not execute a
marriage settlement or if they did, they have adopted the conjugal partnership of gains, and
(2) those whose marriage were celebrated under the Family Code whereby the spouses
agree to the conjugal partnership.

All property acquired during the marriage, whether the acquisition appears to have
been made, contracted or registered in the name of one or both spouses, is presumed to be
conjugal unless the contrary is proved.

Under the conjugal partnership of gains, the spouses retain the ownership,
possession, administration and enjoyment of their exclusive properties.

The following are conjugal partnership properties:

1. Those acquired by onerous title during the marriage at the expense of the
common fund, whether the acquisition be for the partnership, or for only one
of the spouses
2. Those obtained from the labor, industry, work or profession of either or both
of the spouses
3. The fruits, natural or industrial, or civil, due or received during the marriage
from the common property, as well as the net fruits from the exclusive
property of each

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4. The share of either spouse in the hidden treasure which the law awards to the
finder or owner of the property where the treasure is found
5. Those acquired through occupation such as fishing or hunting
6. Livestock existing upon dissolution of the partnership in excess of the number
of each kind brought to the marriage by either spouse, and
7. Those which are acquired by chance, such as winning from gambling or
betting. However, losses therefrom shall be borne exclusively by the loser-
spouse.

The following properties are excluded from the conjugal partnership of gains because
they shall be the exclusive property of each spouse:
1. That which brought to the marriage as his or her own
2. That which each acquires during the marriage by gratuitous title
3. That which is acquired by right of redemption, by barter or exchange with
property belonging to only one of the spouses, and
4. That which is purchased with exclusive money of the wife or of the husband

Property bought on installments paid partly from exclusive funds and partly from
conjugal funds
Property bought on installments paid partly from exclusive funds of either or both
spouses and partly from conjugal funds belongs to the buyer or buyers if full ownership was
vested before the marriage and to the conjugal partnership if such ownership was vested
during the marriage. In either case, any amount advanced by the partnership or by either or
both spouses shall be reimbursed by the owner or owners upon liquidation of the
partnership.

Ownership of credit payable within a period of time

Whenever an amount or credit payable within a period of time belongs to one of the
spouses, the sums which may be collected during the marriage in partial payments or by
installments on the principal shall be exclusive property of the spouse. However, interests
falling due during the marriage on the principal shall belong to the conjugal partnership.

Ownership of improvements on a separate property

The ownership of improvements, whether for utility or adornment, made on the
separate property of the spouses at the expense of the partnership or through the acts or
efforts of either or both spouses shall pertain to the conjugal partnership, or to the original
owner-spouse, subject to the following rules:
When the cost of improvement made by the conjugal partnership and any
resulting increase in value are more than the value of the property at the time
of the improvement, the entire property of one of the spouses shall belong to
the conjugal partnership, subject to the reimbursement of the value of the
property of the owner-spouse at the time of the improvement; otherwise, said
property shall be retained in ownership by the owner-spouse, likewise subject
to reimbursement of the costs of improvements.

In either case, the ownership of the entire property shall be vested upon the
reimbursement, which shall be made at the time of the liquidation of the
conjugal partnership.

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Charges and obligations of the conjugal partnership

The conjugal partnership shall be liable for:
1. The support of the spouses, their common children, and legitimate children of either
spouse, however, the support of illegitimate children shall be governed by the provisions
of the Family Code on support
2. All debts and obligations contracted during the marriage by the designated administrator
spouse for the benefit of the community, or by both spouses, or by one with the consent
of the other
3. Debts and obligations contracted by either spouse without the consent of the other to the
extent that the family may have been benefited
4. All taxes, liens, charges and expenses, including major or minor repairs, upon the
conjugal property
5. All taxes and expenses for mere preservation made during the marriage upon the
separate property of either spouses
6. Expenses to enable either spouse to commence or complete professional, vocational
course, or other activity for self-improvement
7. Ante-nuptial debts of either spouse insofar as they have redounded to the benefit of the
family
8. the value of what is donated or promised by both spouse in favor of their common
legitimate children for the exclusive purpose of commencing or completing a
professional, vocational course of either activity for self-improvement, and
9. Expenses of litigation between the spouses unless the suit is found to be groundless.

EXCLUSIONS/EXEMPTIONS FROM GROSS ESTATE

Exemption of certain acquisitions and transmissions

Transfers exempt from estate tax are transfers mortis causa which are not subject
thereto. That is why they are not included in the gross estate of the decedent.

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The exemptions from estate tax may be either under the provisions of the National
Internal Revenue Code or by reason of special law.

Transfers exempt from estate tax under the Code

Under the code, the following shall not be taxed:
1. the merger of the usufruct in the owner of the naked title
2. the transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary
3. The transmission from the first heir, legatee or done in favor of another beneficiary, in
accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers, to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any individual.
Provided, however, that not more than 30% of the said bequests, devises, legacies,
or transfers shall be used by such institutions for administration purposes
5. The exclusive (separate) properties of the surviving spouse

Common requisites to the first three exclusions

The first three enumerated exclusions have common requisites. They are the
following:
1. there must be 2 transmissions of the same property or a portion thereof
2. the transfer from the prior decedent must be testamentary in character
3. the first transfer is subject to estate tax, while the second transfer is the one exempt

Merger or usufruct in the owner of the naked title

Usufruct is defined as a real right, of a temporary nature, which authorizes its Holder
to enjoy all the benefits which results from the normal enjoyment of another’s property, with
the obligation to return, at the designated time, either the same thing or, in special cases, its
equivalent.

In a usufruct there are two rightful claimants to a thing, namely; the usufructuary, and
the owner of the naked title.

The usufructuary has the right to enjoy the property, to the same extent as the owner,
but only with respect to its use in the receipt of its fruits.

The owner of the naked title, during the usufruct, can exercise all the rights of
ownership consistent with the enjoyment of the thing by the usufructuary. But none of these
acts can affect the rights of the usufructuary.

There is merger of the usufruct in the owner of the naked title when the naked
ownership and the usufruct come to be held by the same person.

Transmission from fiduciary heir to the fideicommissary

Fideicommissary substitution is that by virtue of which a testator institutes a first heir,
any charges him to preserve and transmit the whole or part of the inheritance later to a
second heir.

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For example, Tess institutes Cea as first heir. The will states the Cea should
preserve and transmit later on the estate to Sarry, Cea’s daughter.

In the example above, Tess is the testator, Cea is the first heir or fiduciary heir, while
Sarry is the second heir or the fideicommissary.

In a fideicommissary substitution, there must be a first heir and a second heir whose
relationship must be one degree such that of parent and child, vice versa.

Second transfer in accordance with the desire of predecessor

This is referring to the transmission of property from the first heir, legatee or donee in
favor of another beneficiary in accordance with the desire of the predecessor.

This exemption and in the others (merger or usufruct in owner of naked title and
transfer from fiduciary heir to fideicommissary) is premised on the fact that there is only a
single transmission of the property, i.e. from the testator – to the owner of the naked title, or
to the fideicommissary, or to the second beneficiary, as the case may be. Hence, the
exemption from the tax because the transfer was subject previously thereto.
Donations to social welfare, cultural, and charitable institutions
This is the estate tax counterpart of the more familiar income tax charitable deduction
provision. However, this charitable deduction is unlimited in the sense that it is not subject to
percentage restrictions such as are applicable to the income tax deductions for contributions
to charity.

It might be a charitable act to leave money to a poor person, but the statute
authorizes no deduction for such direct philanthropy, requiring instead that bequests be
made the qualified recipient organizations.

Thus, a nonprofit hospital may be a qualified recipient, even where small changes
are made for use, except where restricted to less than the entire community, but a nonprofit
cemetery association not exclusively for charitable purposes will not qualify.

Moreover, no exemption is assured merely because a portion of the decedent’s

wealth actually reaches a qualified organization; it must get there by way of a bequest,
legacy or a devise.

The donations must be given to an institution which is duly accredited by a

recognized accrediting entity.

Note that the donations shall be exempt from estate taxation only if not more than
30% of said bequests, devises, legacies, or transfers shall be used by such institutions for
administration purposes.

Separate property of the surviving spouse

The exclusive (separate) property of the surviving spouse of the decedent shall not
be deemed part of the gross estate.

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This is based on the rationale that the separate property of the husband or the wife
cannot be the subject of succession while the owner is still living because succession is
made effective only from the moment of death of the decedent.

However, the share of the surviving spouse in the conjugal/community property shall
be included in the computation of the gross estate.

Exemptions under special laws

The following transfers are exempt from estate tax by reasons of special laws:
1. benefits received from the GSIS
2. benefits received from the SSS
3. amounts received from the Philippine government in the United States government
from damages suffered during the last war, and
4. benefits received from the US Veterans Administration

The benefits received from SSS and GSIS Which are exempt from estate tax are
those that pertain to funeral and death benefits. Thus, maternity, leave, loan, accident and
other benefits are not included in the exemption.

Inheritance by the State

If a person dies intestate, leaving no heir within the 5th degree in the collateral line or
a person by law entitled to inherit to the properties of the decedent, the State shall inherit the
whole estate.

This process of succession by the State to property considered “ownerless” is called

escheat.

Succession by the State is based on the principle that ultimately it is the State that
owns all property within its territorial jurisdiction.

The personal property shall be assigned to the municipality or city where the
deceased last resided in the Philippines, and the real property to the municipalities or cities,
respectively, in which the same is situated.

If the deceased never resided in the Philippines, the whole estate shall be assigned
to the respective municipalities or cities where the same is located.

Such estate shall be for the benefit of public schools, and public charitable
institutions and center, in such municipalities or cities. The court shall distribute the estate As
the respective needs of each beneficiary may warrant.

The court, at the instance of an interested party, or on its own motion, may order the
establishment of a permanent trust, so that only the income from the property shall be used.

DEDUCTIONS FROM GROSS ESTATE

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Deductions are the amounts or items that the law allows to be deducted from gross
estate to arrive at net estate.

The burden of proof to establish the validity of claimed deductions is on the taxpayer.
He must point to some specified provisions of the statute in which the deduction is
authorized, and must be able to prove that he is entitled to the deduction which the law
allows.

The deductions from gross estate should be grouped into:

1. Those allowed if the decedent was a resident or citizen
2. Those allowed if the decedent was a nonresident alien

On deaths that occurred January 1, 2018 (effectivity of TRAIN Law) onward the
following items shall be allowed as deductions from the gross estate:

a. DEDUCTIONS OF RESIDENTS OR CITIZENS

In the case of a citizen or resident of the Philippines, the value of the net estate shall
be determined by deducting from the value of the gross estate the following:

I. ORDINARY DEDUCTIONS
a. CUCUL
1. Claims against the estate
2. Unpaid mortgages
3. Claims of the decedent against insolvent persons
4. Unpaid taxes
5. Losses
b. Transfers for public use
c. Vanishing deductions (Property Previously Taxed)

II. SPECIAL DEDUCTIONS

a. Family home
b. Standard deduction of P5,000,000
c. Amount received by heirs under RA 4917

III. SHARE OF SURVIVING SPOUSE IN THE CONJUGAL/COMMUNITY

PROPERTIES

Claims against the estate

The word “claims” is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the decedent during his lifetime and could
have been reduced to simple money judgments.

These are debts which are properly chargeable and enforceable against the estate.
Claims against the estate or indebtedness in respect of property may arise out of:
1. contract
2. tort, or

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3. operation of law

To be deductible, the following requisites must be complied, viz:

a. The liability represents a personal obligation of the deceased existing at the
time of his death
b. That the liability was contracted in good faith and for an adequate and full
consideration in money or money’s worth
c. The claim must be a debt or claim which is valid in law and enforceable in
court
d. The indebtedness must not have been condoned by the creditor, or the action
to collect from the decedent must not have been prescribed.

Substantiation Requirements
- In case of simple loans including advances
o A duly notarized certification from the creditor as to the unpaid balance of
the debt including interest as the date of death. The sworn certification
shall be signed by:

Creditor Signatory
Corporation The President, or
The Vice President, or
Other Principal Officer of the Corporation
Partnership Any of the general partners
Bank/Financial Branch manager of the Bank or Financial
Institution Institution which monitors and manages the loan
of the decedent-debtor

o If said loan is contracted within 3 years prior to the death of the decedent:
a statement under Oath executed by the administrator or executor of the
estate reflecting the disposition of the proceeds of the loan

- If the unpaid obligation arose from purchase of goods or services

o Pertinent documents evidencing the purchase of goods or services, such
as sales invoice, delivery receipts, official receipts
o A duly notarized certification from the creditor as to the unpaid balance of
the debt including interest as the date of death. The sworn certification
shall be signed by:

Creditor Signatory
Corporation The President, or
The Vice President, or
Other Principal Officer of the Corporation
Partnership Any of the general partners
Bank/Financial Branch manager of the Bank or Financial

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Institution Institution which monitors and manages the loan

of the decedent-debtor

The amount deductible is the amount of debt that will qualify in the above
requirements.

Claims against insolvent persons

Insolvency is the state of not being able to pay the money owed because of
insufficient assets to pay all debts.

Those in the state of insolvency are said to be insolvent.

One important requisite for its deductibility is that the value of the decedent’s interest
therein in included in the value of the gross estate and that the debtors are incapable of
paying their indebtedness.

Declaration of insolvency maybe either by:

1. Voluntary insolvency – an insolvent debtor may apply to be
discharged from his debts and liabilities by filing a petition with court of
competent jurisdiction
2. Involuntary insolvency – a court petition filed by three or more
creditors, against a debtor, whose credits accrued in the Philippines

Claims against the estate are distinguished from claims against insolvent persons as
follows: in the first, the decedent was the debtor, while in claims against insolvent persons,
the decedent was the creditor at the time of his death.

Claims against insolvent persons are otherwise known as “bad debts”. The amount of
deduction is the value of indebtedness which cannot be collected anymore because the
debtor has been declared insolvent.

It may be either exclusive or conjugal/community property deduction. In case the

claim is an exclusive property of the decedent, then it is an exclusive property deduction and
the same should not be considered in the computation of the share of the surviving spouse.

A claim against an insolvent person must be included in the gross estate.

Unpaid mortgages
A mortgage is an accessory contract whereby one party called the mortgagor
constitutes his property as security for the fulfillment of a principal obligation.

The object of mortgage may be either personal property (chattel mortgage) or

immovables and/or alienable real rights imposed on immovables (real mortgage).

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Unpaid mortgages which are deductible from gross estate refer to obligations
secured by mortgage which remained unpaid until the death of the debtor.

If the unpaid debt is not secured by mortgage, then it can be more appropriately
classified as “claims against the estate”.

Unpaid mortgage indebtedness is deductible if the following conditions are complied

with, namely:
a. The value of the decedent’s interest therein, undiminished by such mortgage
indebtedness, is included in the value of gross estate
Therefore, if the debt of the decedent is secured by a mortgage of property owned by
a third person, the debt can be deducted from gross estate as a claim against the
estate instead of unpaid mortgage.

b. That they were contracted bona fide and for an adequate and full consideration in
money or money’s worth

Unpaid mortgages are conjugal/community property deductions if the proceeds of

mortgage indebtedness had been beneficial to the conjugal partnership or absolute
community of property even if the property mortgaged is an exclusive property.

The rules on whether the unpaid mortgage is chargeable against the exclusive
property of the decedent or from the common property of the spouses is summarized below:

a. Contracted before marriage

For the benefit of Chargeable against
Donor/prior decedent Exclusive
Exclusive property Exclusive
Conjugal/Community property Conjugal/Community
Family Conjugal/Community

b. Contracted during marriage

For the benefit of Chargeable against
Conjugal/Community property Conjugal/community
Exclusive property of one spouse Exclusive
Property of donor/prior decedent Exclusive

An unpaid mortgage attached to the inherited property And in which the death of prior
decedent took place while the present decedent was still unmarried is undoubtedly a
deduction from his exclusive properties if said mortgage still exists at the time of death of
present decedent.

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If the decedent was a resident or citizen, unpaid mortgages on properties located

outside the Philippines are nevertheless deductible because the properties mortgaged are
subject also to estate tax.

However, if the decedent was a nonresident alien, indebtedness secured by

mortgage of real property situated outside the Philippines may not be deducted where such
property is not includible in the gross estate.

Where the decedent owned only ½ of the property mortgaged so that ½ of its value
was included in his estate, only ½ of the mortgage debt was deductible, even though the
executor paid the entire debt, the liability of the decedent being solidary, inasmuch as the
executor would be subrogated to the rights of the mortgagee as against the co-owner and
co-mortgagor.

In case of an accommodation loan where the loan proceeds went to another person,
its value must be included as receivable of estate. If there is a legal impediment to recognize
it as a receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed
as a deduction from the gross estate.

Thus if Ms. Mabait mortgaged her house to Mr. Bombay for P100,000 just to lend the
money to her brother, Mr. Ticapo, and thereafter she died, the P100,000 is considered as an
accommodation loan.
Therefore, the P100,000 which was loaned to Mr. Ticapo should be included in her
gross estate as a receivable while the same amount should be deducted as unpaid
mortgage.

In all instances, the mortgaged property, to the extent of the decedent’s interest
therein, should always form part of the taxable gross estate.

Unpaid taxes
To be deductible, the taxes must have accrued and unpaid as of the death of the
decedent.

The following are the taxes which are not deductible from the gross estate:
a. Income taxes on income received after the death
b. Property taxes which have not accrued prior to the death of the decedent
c. Estate tax due from the transmission of his estate

Taxes which have accrued after death are not deductible because they are properly
chargeable against the income of the estate.

Unpaid real property taxes at the time of death are deductible even if payable after
death because real property taxes accrue on January 1st of every year.

Casualty losses
Losses are deductible if the following requisites are compiled:
a. The value of the property lost must have been included in the gross estate

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b. The loss must arise from fire, storms, shipwreck, or other casualties, or from
robbery, theft, or embezzlement
c. Such losses were incurred after the death but not later than the last day for
the payment of the estate tax
d. It must not have been compensated by insurance or otherwise, and
e. At the time of filing of return such losses have not been claimed as a
deduction in an income tax return

If the loss occurred before the decedent’s death, or after the last day for payment of
estate tax, the same is not deductible, even if the tax was paid beyond the prescribed period
for payment.

Relation to income tax

A casualty loss to estate property during the period of administration gives rise not
only to a deduction from the gross estate for estate tax purposes but also a deduction from
gross income in determining the taxable income of the estate which is under judicial
settlement.

However, the estate cannot claim the deduction for both purposes. It can either
choose to deduct such losses from the gross income or from the gross estate for purposes
of the estate tax.

Transfer for public purpose

The amount deductible shall be the entire amount of all bequests, legacies, devises,
or transfers to or for the use of the government of the Republic of the Philippines, or any
political subdivision thereof, for exclusively public purposes.

Needless to say, donations of property to foreign governments are not deductible.

Moreover, mortis causa donations of properties situated abroad are deductible if the
donee is the Philippine Government or any of its political subdivisions.

Bequest or legacy is the act of giving personal property by will. The person whom
gifts of personal property are given by virtue of a will known as legatee.

Devise is the transmission of real property by virtue of a will. Devisee is a person to

whom gifts of a particular real property are given by virtue of a will.

To be deductible, therefore, the transfer must be testamentary in character. Oral

transfers are not deductible.

Vanishing deductions
The vanishing deduction which is otherwise known as “property previously taxed” is
an allowed deduction from the gross estate situated in the Philippines of a person who died
within 5 years from the acquisition of the property by gift or inheritance.

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The purpose of vanishing deduction is to ease the harshness of successive taxation

on the same property within a relatively short period of time.

Vanishing deduction is allowed on the second transmission of the property, the first
transfer must be either by succession or donation inter vivos, but the second transfer must
be by succession only.

To be allowed as deduction, the following conditions must be satisfied:

a. The property must be situated in the Philippines
b. That the donor’s tax or estate tax imposed on the first transfer was finally determined
and paid
c. The property can be identified as the one received from such prior decedent by gift,
devise, or inheritance or from the donor by gift, or which can be identified as having
been acquired in exchange for property so received, and
d. The property must have formed part of the gross estate of the prior decedent, or
have been included in the total amount of gifts of the donor made within 5 years prior
to the death of the present decedent.

The following are the steps involved in computing the vanishing deduction:
1. Identify the property subject to vanishing deduction and give the proper value (at the
time previously taxed and/or the present value, whichever is lower)
2. Deduct mortgage or lien paid by the present decedent on the property, if any. The
result is the Initial Basis.
3. From the initial basis, deduct the proportionate share of the initial basis over the
gross estate multiplied by all the deductions, except family home, standard
deductions, amount received under RA 4917, and the net share of the surviving
spouse in the conjugal or community property. The result is the actual basis.
The amount deductible from the Initial Basis shall be computed by applying the
following formula:

Initial Basis
x Deductions
Gross Estate

4. Multiply the actual basis by the appropriate rate, based on the length of time the
property has been acquired by the present decedent, as follows:

More than Not more than Rate

- 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%

ILLUSTRATION

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Gina Dan, died on October 21, 2019, leaving a parcel of land which she inherited from her
mother, Pina GA Dan who died May 20, 2016. The value of the property at the time of death
of her mother was P3,500,000 but it has appreciated to P4,750,000 in 2019.

The gross estate deductions and other data consisted of the following:
Community property 9,500,000
Exclusive properties of the decedent 6,500,000
Bequest to the government for public purpose 100,000
Claims against the estate 150,000

At the time of death of Pina, the land had an unpaid mortgage of P500,000 of which
P200,000 was paid by Gina.

Required: Compute for the vanishing deduction.

ANSWER:

Value in estate of prior decedent 3,500,000

Value in estate of present decedent 4,750,000
Whichever is lower 3,500,000
Less: Mortgage paid 200,000
Initial basis 3,300,000
Less: Deductions (pro-rated)
Transfer for public purpose 100,000
Claims against the estate 150,000
Unpaid mortgage (500k – 200k) 300,000
Total 550,000
Deductible (3.3M/16M x 550,000) 113,437.50
Actual Basis 3,186,562.50
Rate (3 years to 4 years) 40%
Vanishing deduction 1,274,625.00

1. The denominator of P16M represents gross estate which is the total of the
community and exclusive property.
2. The holding period of the property is computed as follows:
Year Mont Day
h
Death of present decedent 2019 10 21

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Death of prior decedent 2016 5 20

Net 3 5 1

In case an improvement on the inherited property was made by the present decedent
prior to this death, or an accretion took place while the property was in his possession, the
value of such improvement or accretion shall be disregarded in determining the amount of
vanishing deduction.

Classification of vanishing deduction

The vanishing deduction is always chargeable against the exclusive (separate)
property of the decedent if the spouses were under conjugal partnership of gains. Thus, it is
always classified as separate deduction.

However, if they were under the absolute community of property regime, the
vanishing deduction may be either chargeable against the community property of the
spouses, or from the exclusive property of the decedent, depending upon the classification
of the subject property. It may therefore, be classified either as an exclusive or community
property deduction.

Family home
The family home pertains to the dwelling house where the spouses and their family
reside, and the land on which it is situated. It is the place to which whenever absent for
business or pleasure one still intends to return.

Actual occupancy of the house or house and lot as the family residence shall not be
considered interrupted or abandoned in such cases as the temporary absence from the
constituted family home due to travel or studies or work abroad, etc.

The family home may also be constituted by an unmarried head of the family on his
or her own property.

It does not include the movables found therein because it is limited only to the house
and lot on which the house is situated.

For purposes of gross estate of the decedent, the basis shall be the current fair
market value or zonal value of the family home whichever is higher.

The following are the conditions for allowance of family home as deduction:
1. The total value of the family home must be included as part of the gross estate
2. It must be the actual residential home of the decedent and his family at the time of
death, as certified by the Barangay Captain of the locality where the family home is
situated
3. The amount deductible is the actual value as declared or included in the gross
estate, but not exceeding P10,000,000.

For purposes of availing of a family home deduction to the extent allowable, a person
may constitute only one family home.

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Standard deduction
This is a fixed amount equivalent to P5,000,000 which is automatically deducted and
not subject to any substantiation.

This is a separate and distinct item of deduction which is independent from other
items.

The entire amount of P5,000,000 is deductible from the net estate.

Like family home and amounts received by heirs under RA 4917, the standard
deduction is not a multiplier deduction for purposes of allocating the expenses in the
computation of vanishing deduction.

Amount received by heirs under RA 4917

This is pertaining to benefits granted and received by the heirs of the decedent from
his employer, as a consequence of separation from service, due to death of the decedent.
Provided however, that such amount is included in the gross estate of the decedent.

Share of surviving spouse in the conjugal/community property

The share of the surviving spouse in the conjugal or community property as
diminished by the obligations properly chargeable to such property shall be deducted from
the gross estate.

ILLUSTRATION
The following data pertains to a married decedent:
Conjugal property 5,000,000
Exclusive property 2,200,000
Charges against conjugal property 850,000
Charges against exclusive property 600,000

Required: How much is the deductible share of the surviving spouse?

ANSWER:
The amount deductible is computed as follows:
Conjugal property 5,000,000
Less: Conjugal deductions 850,000
Net conjugal 4,150,000
Multiply by share of decedent 1/2
Deductible share of surviving spouse 2,075,000
The conjugal deductions shall not include the standard deductions in computing the
share of the surviving spouse.

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b. DEDUCTIONS OF NONRESIDENT ALIENS

No deduction shall be allowed in the case of a nonresident alien unless the executor,
administrator or anyone of the heirs, as the case may be, includes in the return the value at
the time of his death of that part of his gross estate not situated in the Philippines.

The deductions allowed are the same items which are deductible from the gross
estate of residents or citizens, except the special deductions such as the family home and
the amount received by heirs under RA 4917.

Vanishing deductions and transfers for public use are allowed as deductions,
provided that the property must be situated in the Philippines and in the case of the latter,
the donation must be given to the Philippine Government.

Ordinary deductions (CUCUL) are allowed as deductions but shall be limited to the
amount computed by the application of the following formula:
Philippine Gross Estate Ordinary
X
Total World Gross Estate Deductions

The following table summarizes the rule on deductibility or non-deductibility of

various items depending upon the residence and citizenship of the decedent:

Items of deduction Resident or Nonresident alien decedent

citizen decedent
1. Funeral expenses Not deductible Not deductible
2. Judicial expenses Not deductible Not deductible
3. CUCUL Deductible Phil Gross Estate
Ordinary
World Gross X
Deductions
Estate
4. Vanishing deductions Deductible Deductible
5. Transfers for public use Deductible Deductible
6. Medical expenses Not deductible Not deductible
7. RA 4917 Deductible Not deductible
8. Share of surviving spouse Deductible Deductible
9. Family home Deductible Not deductible
10. Standard deduction Deductible Deductible
P5,000,000 P500,000

TAX BASE and TAX RATE

There shall be levied, assessed, collected, and paid upon the transfer of the net
estate of every decedent, whether resident or nonresident of the Philippines, a tax of six
percent (6%) based on the net taxable estate.

Net distributable estate

The net estate subject to tax (net taxable estate) should not be confused with the net
distributable estate. While the net taxable estate is the result of applying the law on estate
taxation such as computing the gross estate and applying the allowable deductions provided

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in the tax code, a net distributable estate refers to the gross estate reduced by the actual
diminution of the estate.

The net taxable estate is computed for purposes of estate taxation, while the net
distributable estate is determined for purposes of succession.

Concept of tax credit

Tax credit generally refers to an amount that is subtracted directly from one’s total tax
liability, an allowance against the tax itself, or a deduction from what is owed.

It is distinguished from tax deduction in the sense that the tax deduction is subtracted
from gross estate for tax purposes, or an amount that is allowed by law to reduce the gross
estate prior to the application of the tax rate to compute the amount of tax which is due.

A tax credit reduces the tax due, including – whenever applicable – the estate tax
that is determined after applying the corresponding tax rates to net taxable estate. A tax
deduction reduces the estate that is subject to tax in order to arrive at taxable estate.

Tax credit for estate taxes paid to a foreign country

A tax imposed upon the decedent who was a citizen or a resident at the time of death
shall be credited with the amount of any estate tax of any character and description imposed
by the authority of a foreign country.

However, the amount of tax credit shall be subject to each of the following limitations:
a. The amount of the credit in respect to the tax paid to any country shall not exceed
the same proportion of the tax against which such credit is taken, which the
decedent’s net estate situated within such country taxable in Title III of the Tax
Code bears to his entire net estate.
b. The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken which the decedent’s net estate situated
outside the Philippines taxable in the Philippines bears to his entire net estate.

The limitations imposed on tax credits are expressed in the following formulas:

Formula 1: Single foreign country

Net estate in foreign
Philippine Tax
country X =
estate tax Credit
Entire net estate

Formula 2: Multiple foreign country (whichever is lower is the tax credit)

Net estate per foreign
Philippine
countries X
estate tax
Entire net estate

OR

Net estate all foreign X Philippine

countries estate tax

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Entire net estate

ILLUSTRATION
Decedent, Filipino, married, resident of Manila has the following data:
Net estate, Philippines 2,000,000
Net estate, United States 3,000,000
Share of surviving spouse in the conjugal estate 1,000,000
Estate tax paid in the United States 100,000

The estate tax due is computed as follows:

Net estate, Philippines 2,000,000
Net estate, United States 3,000,000
Total net estate 5,000,000
Less: Share of surviving spouse 1,000,000
Net taxable estate 4,000,000
Rate of tax 6%
Estate tax 240,000
Less: Foreign estate tax paid
US tax paid 100,000
Limit (3M/5M x 240,000) 144,000
Whichever is lower 100,000
Estate tax payable 140,000

ILLUSTRATION
Decedent, single, has these data:
Net estate, Philippines 2,500,000
Net estate, United States 2,000,000
Net estate, Hong Kong 3,500,000
US Tax paid 150,000
Hong Kong tax paid 60,000
The estate tax payable is computed as follows:
Net estate, Philippines 2,500,000
Net estate, United States 2,000,000
Net estate, Hong Kong 3,500,000 5,500,000
Total net estate 8,000,000
Rate of tax 6%
Estate tax 480,000
Less: Foreign estate tax paid
US tax paid 150,000
Limit (2M/8M x 480,000) 120,000
Whichever is lower 120,000
Hong Kong tax paid 60,000
Limit (3.5M/8M x 480,000) 210,000
Whichever is lower 60,000
Total credits 1st limitation 180,000

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2nd limitation (5.5M/8M x 480,000) 330,000

Credit allowed (lower) 180,000
Estate tax payable 300,000

FILING OF RETURN AND PAYMENT OF ESTATE TAX

Valuation of property
1) Properties
a) Personal – FMV at time of death
b) Real – whichever is higher of the zonal value or FMV as shown in the schedule of
values fixed by the Provincial and City Assessors

2) Usufruct – the probable life of the beneficiary in accordance with the latest Basic
Standard Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner

3) If the case of stocks, bonds, or other securities, the following rules shall apply:
a) If listed in stock exchange, the FMV shall be the mean between the highest and
lowest quotation at a date nearest the date of death, if none is available at date of
death
b) If not listed in stock exchange, common shares shall be valued based on their book
value while preferred shares are valued at par value. In determining book value of
common shares, share premium shall not be considered as well as the value ssigned
to preferred shares, if there is any.

4) The FMV of units in participation in any association, recreation of amusement clubs

(such as golf, polo or similar clubs), shall be the bid price nearest the date of death
published in any newspaper of publication of general newspaper.

Estate tax returns

The executor, or the administrator, or any of the legal heirs, as the case may be,
shall file an estate tax return in any of the following instances:
1. The transfer is subject to estate tax, or
2. Regardless of the value of the estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle, shares of stock or other similar
property for which a clearance from the BIR is required as a condition precedent for the
transfer thereof in the name of the transferee.

Contents of an estate tax return (BIR Form 1801)

An estate tax return shall be filed in duplicate, setting forth the following:
1. The value of the gross estate of the decedent at the time of his death, or in
case of a nonresident alien, of that part of his gross estate situated in the
Philippines
2. The deduction allowed from gross estate in determining the estate tax
3. Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes

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4. Attached in the form are certifications and proof of ownership of properties of

the decedent included in the computation of the gross estate, and other
additional requirements as provided in the BIR form

Certification by a CPA
When the estate tax return shows a gross value exceeding P5,000,000, it shall be
supported with a statement duly certified by a CPA containing the following:
1. Itemized assets of the decedent with their corresponding gross value at the
time of his death, or in the case of a nonresident alien, of that part of his gross
estate situated in the Philippines
2. Itemized deductions from gross estate, and
3. The amount of tax due whether paid or still due and outstanding

Filing of return
1. Time for filing – the estate tax return shall be filed within one year from the
decedent’s death
2. Extension of time – the Commissioner or any Revenue Officer authorized by him
shall have authority to grant, in meritorious case, a reasonable extension not
exceeding 30 days for filing the return
3. Place for filing the return and payment of the tax
a. In case of resident decedent, the administrator or executor shall register the
estate of the decedent where the decedent was domiciled at the time of his
death and shall file the estate tax return and pay the corresponding estate tax
with Accredited Agent Bank (AAB), Revenue District Officer, Collection
Officer, or duly authorized Treasurer of the city or municipality in which the
decedent was domiciled at the time of his death
b. In case of a nonresident decedent, with executor or administrator in the
Philippines, the estate tax return shall be filed with the Revenue District
Officer where such executor or administrator is registered. In case the
executor or administrator is not registered, the return shall be filed with the
Revenue District Office having jurisdiction over the executor or administrator’s
legal residence.
In case the nonresident decedent does not have an executor or administrator
in the Philippines, the estate tax return shall be filed with the Office of the
Commissioner in Quezon City.

Payment of estate tax

Estate tax shall be paid at the time the return is filed.

When the Commissioner finds that the payment 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 as follows:
1. Extra judicial settlement – 2 years
2. Judicial settlement – 5 years

The application for extension for extension shall be filed with the RDO where the
estate is required to secure its TIN and file the estate tax return. This application shall be
approved by the Commissioner or his duly authorized representative. Where the request for

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extension is by reason of negligence, intentional disregard of rules and regulations, or fraud,

no extension shall be granted. If an extension is granted, the Commissioner shall 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 the tax and with such sureties as the
Commissioner deems necessary, conditioned upon the payment of the said tax in
accordance with the terms of the extension.

Insufficiency of cash for the payment of estate tax

In case of insufficiency of cash for the immediate payment of the total estate tax due,
the estate may be allowed to pay the estate tax due through the following options, including
corresponding terms and conditions (RR 12-2018):
1. Cash installment
a. Shall be made within 2 years from the date of filing the estate tax
return
b. The frequency (monthly, quarterly, semi-annually, annually) deadline
and the amount of each installment shall be indicated in the estate tax
return, subject to approval of the BIR
c. In case of lapse of 2 years without the payment of entire tax due, the
remaining balance thereof shall be due and demandable subject to
applicable penalties and interest reckoned from the prescribed
deadline for filing the return and payment of estate tax, and
d. No civil penalties or interest may be imposed on the estates permitted
to pay the estate tax due by installments.
2. Partial disposition of estate and application of proceeds to the estate tax due

Liability for payment

The estate tax shall be paid by the executor or administrator before the delivery of
the distributive share in the inheritance to any heir or beneficiary.

Where there are two or more executors or administrators, all of them are severally
liable for the payment of the tax. The electronic certificate authorizing registration (eCAR)
pertaining to such estate issued by the Commissioner or the Revenue District Officer having
jurisdiction over the estate, will serve as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary.

The executor or administrator of an estate has the primary obligation to pay the
estate tax but the heir or beneficiary has subsidiarily liability for payment of that portion of the
estate which his distributive share bears to the value of the total net estate.

The extent of his liability, however, shall in no case exceed the value of his share in
the inheritance.

Payment of tax antecedent to the transfer of shares, bonds or rights and bank deposit
withdrawals
There shall not be transferred to any new owner unless an eCAR is issued by the
Commissioner or his duly authorized representative.

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If a bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall allow the withdrawal from the said deposit
account, subject to a 6% final withholding tax of the amount to be withdrawn, provided that
the withdrawal shall only be made within one year from the death pf the decedent.

The bank is required to file the prescribed quarterly return on the final tax withheld on
or before the last day of the month following the close of the quarter during which the
withholding was made. The bank shall issue the corresponding BIR Form 2306 certifying
such withholding.

In all cases, the final tax withheld shall not be refunded, or credited on the tax due on
the net taxable estate of the decedent.

The executor, administrator or any of the legal heirs, withdrawing from the deposit
account shall provide the bank where such withdrawal shall be made, with the TIN of the
estate of the decedent.

For this purpose, the bank shall require prior to such withdrawal, the presentation of
BIR Form 1904 of the estate, duly stamped received by the BIR. Further, all withdrawal slips
shall contain the following terms and conditions:
1. A sworn statement by any one of the joint depositors to the effect that all of
the joint depositors are still living at the time of withdrawal, and
2. A statement that the withdrawal is subject to the final withholding tax of 6%.

In instances where the bank deposit accounts have been duly included in the gross
estate of the decedent and the estate tax due thereon paid, the executor, administrator or
any legal heirs shall present the eCAR issued for the said estate prior to withdrawing from
the bank deposit account. Such withdrawal shall no longer be subject to the withholding tax.

Civil penalties
In addition to the tax is required to be paid, the following penalties shall be imposed:
1. 25% surcharge in case of failure to:
a. File the return and pay the tax or installment due on or before the due
date
b. File a return with a person or office other than those with whom it is
required to be filed, unless authorized by the Commissioner
c. Pay on time the full or part of the amount of tax shown on the return,
or the full amount of tax due for which no return is required to be filed
on or before the due date
d. Pay the deficiency tax within the time prescribed for its payment in the
notice of assessment

2. 50% penalty in case of

a. Willful neglect to file the return in time
b. False or fraudulent return is willfully filed

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 Tax 102 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

3. Interest of 12% from the due date until paid. In no case shall the deficiency
and delinquency interest under Section 249 (B and C) of the NIRC, as
amended, be imposed simultaneously.

4. Compromise penalty as provided under applicable rules and regulations.

Reference:

Ampongan, O. E. G. (2020), Transfer, Business & Local Taxation (with Practice Set) 12/e

Tabag, E.D., Garcia, E.J. (2019) Transfer and Business Taxation

Bureau of Internal Revenue, Estate Tax,

https://www.bir.gov.ph/index.php/tax-information/estate-tax.html

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