Business Taxation (chapter 2) PDF

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CHAPTER 2 – GROSS ESTATEWHAT IS ESTATE TAX? NATURE – Excise tax (privilege)  WHAT IS BEING TAX? – The act of gratuitously transferring the property, rights and obligations (transfer of ownership)  WHEN? – It accrues at the time of death. Obligation to file return and pay is not immediately at the...

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CHAPTER 2 – GROSS ESTATE WHAT IS ESTATE TAX?  NATURE – Excise tax (privilege)  WHAT IS BEING TAX? – The act of gratuitously transferring the property, rights and obligations (transfer of ownership)  WHEN? – It accrues at the time of death. Obligation to file return and pay is not immediately at the time of death (1 year from the time of death)  WHAT IS THE APPLICABLE LAW? – Law in force at the time of death.  TAX RATE? – 6% of the NET ESTATE (Gross estate less deductions)

THEORETICALLY, WHY DO WE NEED TO PAY ESTATE TAX?  

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JUSTIFICATIONS

Benefit-Received Theory – Services rendered by government (the distributions of shares) are paid via estate tax Privilege or State Partnership – Inheritance is a right granted by the state (as a silent partner). Hence, the accumulation of properties by inhabitants is partly due to the State. Ability to Pay Theory – Inheritance is unearned income/wealth. Increased ability to pay results to a taxable income. Redistribution of Wealth Theory -Inheritance leads to the inequality in wealth in income. Payment of estate tax will promote equitable wealth in society.

PRACTICALLY, WHY DO WE NEED TO PAY ESTATE TAX? No filling/ payment = no transfer of registrable properties 

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SECTION 90, NIRC. In all cases of transfers subject to the tax imposed herein (estate tax), or regardless of the gross 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 Bureau of Internal Revenue is required as a condition precedent for the transfer of the ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return. File BIR Form No. 1801 by the Executor or the Administrator 1

RELEVANT TO FILING AND PAYMENT OF ESTATE TAX

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FILING

GENERAL RULE: Estate tax shall be filed within one year from the date of the death. No surcharges applicable within one year period from the date of death. EXCEPTION: SECTION 90 – Commissioner of Revenue officer duly authorized shall have the authority to grant a reasonable extension of not more than 30 days for filing the return.

WHEN IT IS REQUIRED TO FILE ESTATE TAX RETURNS? 1. If it includes registrable properties 2. If the transfer subject to estate tax 3. If the gross value of the estate exceeds P5,000,000 (it shall be supported with documents as being duly certified by a CPA)

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PAYMENT OF ESTATE TAX

IF ALLOWED BY THE CIR:  Commissioner/Authorized representatives may require executor/administrator/beneficiary (s the case may be) to furnish/post a bond not exceeding double of the amount of the tax  Bond must be secured from the sureties as deemed necessary by the Commissioner

PAYMENT OF ESTATE TAX – INSTALLMENT Will only be allowed if there are insufficient funds or the disposition is made partially 1. CASH INSTALLMENT 2. PARTIAL DISPOSITION

 CASH INSTALLMENT 1. Estate tax return is filed within 1 year from the date of the death 2. Estate tax return shall indicate frequency of payment per installment, subject to approval of Commissioner/BIR 2

3. Cash installments shall be made within 2 years from the date of filling the estate tax return a. If not made within 2 years, tax shall be due and demandable and may be subjected to penalties and interest from the date of the deadline of filing ad payment b. If payment made within 2 years, no civil penalties or interest is imposed

 PARTIAL DISPOSITION OF ESTATE AND APPLICATION OF ITS PROCEEDS 1. Conveyance of property is made in installments 2. Estate tax return is filed within 1 year from death 3. Written request for partial disposition of estate with a notarized undertaking that proceeds shall be exclusively used for the payment of the total estate tax due 4. Approved by the BIR 5. Issuance of electronic Certificate Authorizing registration (eCAR) for each property intended to be disposed 6. Tax shall be due and demandable and may be subjected to penalties and interest from the date of deadline of filing and payment. eCARS may be withheld until payment of tax due and interest and penalties

WHERE DO WE FILE ESTATE TAX RETURNS AND PAY ESTATE TAX?  RESIDENT DECEDENT WHERE: Revenue District Officer (RDO) where decedent was domiciled o Administrator/Executor shall register and secure a TIN for the estate o Filing of tax return is with the RDO o Payment may either be with the RDO, Revenue Collection Officer, Accredit Agent Bank, or the Treasures of the city or municipality wherein the decedent was domiciled.  NON-RESIDENT DECEDENT WHERE: o In the case that executor/administrator are registered with BIR – Revenue District Officer where decedent was registered. o In the case that executor/administrator are not registered with BIR – RDO having jurisdiction over their residences 3

o In case that the administrator/executor are not in the Philippines – Office of the Commissioner through RDO No. 39 South QC

WHO PAYS ESTATE TAX? THEORETICALLY, ESTATE TAX IS PAID FROM THE ESTATE However, since the decedent has already passed on, the liability is paid by the following: 1. PRIMARILY LIABLE – Executor or Administrator 2. SECONDARY LIABLE – Beneficiary/Heir or any person having actual or constructive possession of the property

WHO ARE SUBJECT TO ESTATE TAX AND WHICH PROPERTIES? TAXPAYER AND HIS PROPERTIES   

WHO: Decedent (Estate of Decedent) WHICH PROPERTIES: Depends on the type of taxpayer and where the properties are situated WHAT IS THE TAX BASE: Fair market value (OR zonal valuation for real properties, whichever is higher) of properties AT THE TIME OF DEATH

GENERALLY, WHAT IS THE GROSS ESTATE COMPOSED OF? GROSS ESTATE 

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Properties owned by the decedent at the time of death o Ownership may be in the form of equity or interest o May be exclusive, conjugal, communal or co-owned Properties already transferred but still owned by the decedent o Recoverable transfers, in contemplation of death, insufficient consideration, general power of appointment and proceed of life insurance to revocable beneficiaries Accrued interests – at the time of his death o Income or Usufruct

WHAT ARE THE DIFFERENT TYPES OF TAXPAYERS? TAXPAYERS BASED ON CITIZENSHIP AND RESIDENCY 

Filipino Citizens 4

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Resident Aliens TAXPAYER

PROPERTIES REAL PERSONAL

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Filipino Citizen or Resident Alien WITHIN YES

Tangible YES Intangibl e YES Non-resident Aliens (NRAs)

Non-resident Aliens

WITHOUT YES

WITHIN YES

WITHOU T NO

YES

YES

NO

YES

DEPENDS*

NO

SITUS OF PROPERTIES IN GROSS ESTATE

NON-RESIDENT ALIENS (NRA)  

In the case of NRAs, the Tax Code provides that INTANGIBLE ASSETS shall be excluded if there is reciprocity. RECIPROCITY CONDITIONS: o The NRA decedent as aa resident of a foreign country at the time of his death; and o Either  Foreign country does not impose estate tax on the intangible property of a Filipino citizens not residing therein  Foreign country allows an estate tax exemption on intangible personal property owned by Filipino citizens residing therein

NON-RESIDENT ALIENS (NRA) WITHOUT RECIPROCITY EXAMPLES OF INTANGIBLE PERSONAL PROPERTY (SECTION 104, NIRC)  

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Franchise exercised in the Philippines Share, obligations or bonds issued by o A corporation or Sociedad Anonima in the Philippines o Foreign corporation, 855 of the business of which is located in the Philippines o Acquired a business situs in the Philippines Shares or rights in any partnership, business or industry established in the Philippines

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STEPS: 1. Determine the type of taxpayer a. If resident or citizen – include everything (subject to exclusions or estate tax exempt transfers) b. If NRA – exclude all properties located or have a situs outside the Philippines 2. For NRAs we next look at the intangible properties, determine if there is reciprocity a. If there is NO RECIPROCITY – include all intangible personal properties within the gross estate b. If there is RECIPROCITY – exclude all intangible personal properties within the Philippines from the gross estate GENERAL VALUATION OF GROSS ESTATE

PROPERTY REAL PROPERTY PERSONAL PROPERTY

VALUATION FMV as determined by CIR or FMV as shown in the schedule of values fixed by the Provincial and City Assessors, whichever is higher Fair market Value

SHARES OF STOCKS

UNLISTED COMMON SHARES – Book Value UNLISTED PREFERRED SHARES – Par Value per Share LISTED SHARES (whether COMMON or PREFERRED) – closing price at the date of death (2008) or arithmetic mean (average) between the highest and lowest quotation at a date of death (if stock market was closed)

Units of participation in any association, recreation or amusement club

Bid price nearest the date of death (as published in any newspaper)

Right to Usufruct

Basic Standard Mortality Table (BSMT), taking into account the probable life of the beneficiary. Approved by Secretary of Finance upon recommendation of Insurance Commissioner.

Real Property Examples 1. 2. 3. 4.

House Buildings Improvements on the Land Equipment attached to the soil 6

5. Parcel of land

REAL PROPERTY VALUATION 1. Look at the Fair Market Value issued by the BIR a. For purposes of real property values, the Commissioner is authorized to divide the areas of the Philippines upon consultation with appraisers to determine the fair market value 2. Look at City/Province assessors’ assessed value of the real property 3. Determine which is higher of the two

GENERAL RULE ON PERSONAL PROPERTY VALUATION 1. Determine the date of death 2. Ascertain the fair value on that date a. For brand new or recently purchased real property – Current market price b. For previously used or used personal property – Second-hand market price (for used property) c. Pawned/loaned property – price given by pawnshops d. For interest-bearing property – Fair value of principal plus accrued interest e. For non-interest-bearing property – Discounted value f. Currency – Philippine Peso equivalent SPECIFIC PERSONAL PROPERTY VALUATION Stocks, Bonds, and Other Securities  STOCKS – equity securities (ownership over a corporation)  BONDS – fixed income/debt securities (receivable from a corporation/entity)

 LISTED in the Philippine Stock Exchange 1. Applies to both common and preferred shares of stock 2. Closing price (2008) 3. Arithmetic mean between the highest and lowest quotation at a date nearest the date of the death (RR 12-2018) a. The arithmetic mean is calculated by adding up all the values and dividing the sum by the total number of values. b. Highest value + Lowest values / 2

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 NOT LISTED in the Philippine Stock Exchange 1. Common shares and preferred shares have different valuations 2. COMMON SHARES – Book value per share Book Value per = share

Total Shareholder’s Equity - Preferred Equity

Total Outstanding Share 3. PREFERRED SHARES – Par value per share

OTHER INCLUSIONS IN THE GROSS ESTATE INCLUSIONS   

Properties owned by the decedent at the time of death. Properties already transferred but still owned by the decedent Accrued Interest – at the time of his death.

PROPERTIES ALREADY TRANSFERRED BUT STILL OWNED BY THE DECEDENT  TRANSFER IN CONTEMPLATION OF DEATH  The imminent death of the decedent is the motive for the disposition of the decedent. o More often than not, this was used to avoid taxes (under the preTRAIN regime).  Scenarios: o Transfer of property in favor of another person, but the transfer was intended to take effect only upon the transferor’s death o Transfer by gift intended to take effect at death or after death o Income from the thing belongs to the owner until after he/she dies o When the donation was made due to decedent’s old age or known serious illness at the time of donation o Where donation was made concurrently with execution of will  REVOCABLE TRANSFERS  Revocable = Can be cancelled at will o Amendment, alteration, revocation, or termination at will 8

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No need for the decedent to exercise the power to revoke, it is sufficient that the power was expressly stipulated. There are conditions in place for the donation to be cancelled o If conditions are made to be extinguished/fulfilled subject to the donor’s death

 TRANSFERS UNDER GENERAL POWER OF APPOINTMENT GENERAL POWER OF APPOINTMENT Decedent had a power exercisable in favor of himself, the estate or creditors of his estate.

SPECIAL POWER OF APPOINTMENT Expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate, or the decedent appointed only among a restricted or designated class of persons other than the foregoing. Included in Gross Estate of Donee Excluded from the Gross Estate of Donee In substance, the decedent still The decedent has already owns the property; despite being released interest over the donated to donee. property.

 TRANSFERS FOR INSUFFICIENT CONSIDERATION  Bring back to the estate the difference between the FMV and the insufficient consideration received by the decedent  Basic rules: o Transfer was in the nature of bona fide sale for adequate and full amount = considered as sale o If consideration received was less than the adequate and full consideration, the value shall be the excess of the FMV > consideration received o No consideration received o If consideration less than FMV or there is no consideration, but transferred not in contemplation of death – donor’s tax

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Transfers for insufficient consideration 1. Compare the consideration received vs. the fair market value at the date of transfer a. If consideration > or = to FMV then it is a bona fide sale (not part of Gross Estate)

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b. If consideration is < FMV, it is a transfer for insufficient consideration 2. Compare the consideration received vs. the fair market value at the date of death a. If consideration > or = to FMV, then nothing is added back to the Gross Estate b. If consideration is < FMV, check #3 3. Was it made in contemplation of death? a. If yes, go to #4 b. If no, subject to donor’s tax 4. If scenario 2(b) is present, deduct the consideration from the FMV at the time of death and include in the Gross Estate

 CLAIMS AGAINST INSOLVENT PERSONS  Who is the insolvent person? = Debtor of the Estate o Hence the creditor is the decedent  No need for judicial declaration of Insolvency o Capacity of Insolvent Debtor must be proved  Why do we need to include this in the gross estate? o We will deduct the unrecoverable amount 

Claims against Insolvent persons 1. Amount to be included in the Gross Estate = Total Debt 2. Amount RECOVERABLE = (Total Assets/Total Liabilities) x Total Debt 3. Amount of Deductions/Unrecoverable = Total debt – Amount recoverable  PROCEEDS OF LIFE INSURANCE WITH REOVERABLE BENEFICIARY  Requisites o Life insurance must be taken out by the decedent on his own life o Beneficiary is either:  His estate, executor/administrator (does not matter if revocable or non-revocable) *NOTE: If silent designation = REVOCABLE  Proceeds which are not included in Gross Estate o Irrevocable beneficiary o Benefits from the SSS (Republic Act [RA] 1792) and GSIS (RA 728) are also not subject to estate tax o Under a group insurance taken by the employer are not subject to estate tax. STEPS: 10

1. Did the decedent take the insurance on his own life? a. If YES, proceed to ask question 2. b. If NO, exclude from the Gross Estate. 2. Who are the beneficiaries? a. If the estate, executor/administrator – Form part of the Gross Estate. b. If third person, proceed to question 3. 3. What is the designation of the beneficiaries? a. If Irrevocable – exclude from Gross Estate b. If revocable – proceed to question 4 4. Is it from GSIS, SSS, Group Insurance from employer or from the USVA? a. If yes, exclude from the Gross Estate. b. If no, include in Gross Estate.

ACCRUED INTERESTS – AT THE TIME OF HIS DEATH ACCRUED INTERESTS INCLUDE:  Accrued interest or accrued income at the time of death o Rent income, interest income, dividends declared before death but received after, partnership profit o Just remember, accrual or existence of income must be at the time of death.  Usufructuary and rights o Legal right to use and enjoy the benefits and profits of a property belonging to another.

USUFRUCT VALUE AND BARE DOMINIUM VALUE 

Usufruct value shall be included in the Gross Estate of decedent (usufructuary) o Prevailing rate of interest x Value of the Property x Present Value of 1 over n years

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n = Number of years left to exercise the usufruct after death of usufructuary  i = interest  C = cash flow per period (Value of Property x interest rate) Bare Dominium value 11

o The part of the property which is owned by naked owner/who owns the property.

EXCLUSIONS FROM GROSS ESTATE  ALL ASSETS, INCOME, INTEREST ACQUIRED AFTER DEATH 1.Interest on Loans receivable/Accounts receivable after death 2.Share in profits of a partnership after the time of death 3.Dividend declared after death  PROCEEDS FROM LIFE INSURANCE OR BENEFITS Scenarios: 1. Proceeds of life insurance and benefits form SSS (RA 1792) or GSIS (RA 728) 2. When the decedent takes a policy upon his life and the beneficiary is a 3rd person and is irrevocable. 3. Group insurance by employer to employees whether or not revocable or irrevocable  PAYMENTS FOR WAR DAMAGES OR MILITARY COMPENSATION All payments from: 1. The Philippines or US due to damages from the last war (RA 227) 2. Those given to heirs of deceased WWII Veterans and civilians (RA 136); or 3. The US Veterans Association.

 RETIREMENT BENEFIT Amount received by the heirs from employers as a consequence of employee’s death (RA 4917)

Section 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firm, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy, seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action 12

REQUISITES: 1. That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement 2. That the benefits granted under this act shall be availed of by an official or employee only once: 3. That in case of separation of an official and employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided OTHER EXCLUDED ITEMS IN GROSS ESTATE   

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Bona fide sale Properties held in trust by the decedent Acquisition or transfer expressly declared as not taxable under estate tax o Transfers covered by legitimate sales and donations Personal Equity and Retirement Account (PERA) assets of the decedentcontributor (RA 9505)

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