GENERAL PRINCIPLES OF TAXATION

Definition of Taxation
1. Taxation as a Power — refers to the inherent power of the state to demand enforced
contribution for public purpose to support the government.
2. Taxation as a Process — the legislative act of laying a tax to raise income for the
government to defray its necessary expenses.
3. Taxation as a Mode of Cost Allocation — taxation is a means of allocating government
burden to the people.

TAXATION AS A POWER OF THE GOVERNMENT

The Inherent Powers of the State
1. Power of Taxation — the power to take property for the support of the government and for
public purpose.
2. Police Power — the power to enact laws to promote the general welfare of the people. It is
wider in application because it is the general power to make laws.
3. Power of Eminent Domain — the power to take private property for public use upon
payment of just compensation.
Differences and Similarities
Point of Difference Taxation Police Power Eminent Domain
Government Government Government or
Exercising Authority
Private Entities
Delegation is not There must be There must be due
Necessity of necessary since it is delegation before local delegation before
Delegation inherent governments could local government or
exercise it private party may
exercise it
Revenue and Protection of well-being Property is taken for
Purpose support of the of the people public use
government
Persons Affected Community or class Community or class of Operates on the
of individuals individuals owner of the property
Money paid as taxes There is no transfer of There is transfer of
Effect of Transfer of becomes part of the title, at most there is right to property
Property Rights public fund restraint on the whether it be of
injurious use of ownership or lesser
property right
Unlimited Sufficient to cover the No imposition, the
Amount of costs of regulation owner is paid the fair
Imposition market value of his
property
Importance Most important of Most superior
the three
Inferior to the "Non- Superior to the "Non- Superior and may
Impairment Clause" Impairment Clause" of override the "Non-
Relationship with the of the Constitution the Constitution Impairment Clause"
Constitution because the welfare
of the state is superior
to private contracts
 Constitutionally and Public interest and the Public purpose and
Limitation inherently restricted requirement of due just compensation
process

Similarities of the Three Powers

1. All three powers are necessary attributes of sovereignty, resting upon necessity.
2. All are inherent powers of the State.
3. All are legislative in nature.
4. They are ways in which the State interferes with private rights and property.
5. They exist independently with the Constitution although the condition for their exercise may
be prescribed or limited by the Constitution.
6. They all presuppose an equivalent compensation received by the persons affected by the
exercise of the power, whether directly, indirectly or remote.
7. The exercise of these powers by the local government units may be limited by national
legislature.

STAGES OF TAXATION

How Exercised?
− Legislation of laws by Congress and tax ordinances by the Local Sanggunian.
− Tax collection by the administrative branch of the government.
Discretion of the Taxing Power
 this extends to:
1. Amount or rate of the tax situs of taxation.
2. Kinds of tax to be collected method of collection.
3. Apportionment of the tax purposes for its levy, provided for public purpose.
4. The person, property and excises to be taxed, provided within its jurisdiction.

TAXATION AS A MODE OF COST ALLOCATION

The Life Blood Doctrine
− Taxes are indispensable to the existence of the state. Without taxation the state cannot raise
revenue to support is operations.
Nature or Characteristics of the Power of Taxation
1. For public purpose exaction payable in money.
2. Inherently legislative in nature territorial.
3. Subject to international comity or treaty.
4. Not absolute being subject to constitutional and inherent limitations.
Purpose of Taxation
1. Primary Purpose — to raise revenue.
2. Secondary Purposes
a. Regulatory
 To regulate the conduct of businesses or professions.
 To achieve economic and social stability.
  To protect local industries.
b. Compensatory
 Key Instrument of Social Control — check inflations.
 Reduces Inequities in Wealth Distributions — tools on international bargains.
 Strengthens Anemic Enterprises — promotes science and inventions.
 Provides incentives.
 Uses as implement in the exercise of police power to promote general welfare.

TAXATION AS A MODE OF GOVERNMENT COST ALLOCATION

Modes of Cost Allocation
1. Benefit Received Theory
− Tax payment should be based on benefits received.
− Everyone is conclusively presumed receiving benefits from the government.
2. Ability to Pay Theory
− Tax payments should be based relative to the ability of taxpayers to pay.
− Assessments of ability to pay:
a. Vertical Equity
b. Horizontal Equity
The Theory and Basis of Taxation
1. Theory — the existence of the government is a necessity and it cannot continue without
means to support itself.
2. Basis — the government and the people have the reciprocal and mutual duties of support
and protection.

THE SCOPE AND LIMITATIONS OF TAXATION

The Scope of Taxation
 taxation is supreme, comprehensive, unlimited and plenary.
 It includes the power to destroy current objects of taxation:
1. Businesses
2. Interests
3. Transactions
4. Rights
5. Acts
6. Persons
7. Properties
8. Privileges

LIMITATIONS OF TAXATION POWER

Constitutional Limitation
1. Observance of due process of law.
2. Equal protection of the law.
3. Uniformity in taxation.
4. Progressive scheme of taxation.
5. Non-Imprisonment for non-payment debt or poll tax.
 6. Non-Impairment of obligation and contract.
7. Free worship rule.
8. Non-Appropriation of public funds or property for the benefit of any church, sect or system of
religion.
9. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and
mosque from property taxes.
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions including grants, endowments, donations or contributions for educational
purposes.
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption.
12. Non-Diversification of tax collections.
13. Non-Delegation of the power of taxation.
Exception:
a. power to tax was delegated to the President under the Flexibility Clause of the Tariff
and Customs Code
b. power to tax was delegated to the local government units under the Local Government
Code
c. matters involving the expedient and effective administration and implementations of
assessment and taxing process that are not legislative in character
14. Non-Impairment of the jurisdiction of the Supreme Court to review tax cases.
15. Appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
16. Each local government unit shall exercise the power to create its own sources of revenue
and shall have a just share in the national taxes.

Inherent Limitation (TIEPD)

1. Territoriality of taxation
2. Subject to International comity or treaty
3. Tax Exemption of the government
4. tax is for Public purpose
5. Non-Delegation of the power of taxation

Constitutional Limitations (PD)

1. Tax is for Public purpose
2. Non-Delegation of the power of taxation

TERRITORIALITY AND THE CONCEPT OF SITUS

Situs of Taxation
 The place of taxation.
Factors that Determine the Situs of Taxation
1. Nature, kind or classification of the tax
2. Subject matter of the tax
3. Citizenship of the taxpayer
4. Residence of the taxpayer
5. Sources of income
6. Place of exercise, business or occupation being taxed
 7. Place where income-producing activity was held or done
Applications
1. Persons — residence of the taxpayer.
2. Community Development Tax — residence or domicile of the taxpayer.
3. Business Taxes — where the business was conducted or place where the transaction took
place.
4. Privilege or Occupation Tax — where the privilege is exercised.
5. Real Property Tax — where the property is located.
6. Personal Property Taxes
a. Tangible — where they are physically located.
b. Intangible — domicile of the owner unless the property has acquired a situs
elsewhere.
7. Income — place where the income is earned or residence or citizenship of the taxpayer.
8. Transfer Taxes — residence or citizenship of the taxpayer or location of the property.
9. Franchise Taxes — State that grants the franchise.
10. Corporate Taxes — depend on the law of incorporation.

DOUBLE TAXATION
 Taxing the object or subject within the territorial jurisdiction twice, for the same period,
involving the same kind of tax by the same taxing authority.
Kinds
1. Direct Double Taxation — this objectionable and prohibited because it violates the
constitutional provision on uniformity and equality.
2. Indirect Double Taxation — no constitutional violation.
Example: taxing the same property by two different taxing authority.
3. International Double Taxation — a double taxation caused by two different taxing
authorities, one domestic and one foreign.
Remedies to Double Taxation
1. Provision for tax exemption
2. Allowance for tax credit
3. Allowance for principle of reciprocity
4. Enter into treaties with and agreement with foreign government

FORMS OF ESCAPES FROM TAXATION

A. Those that will Not Result in Loss of Revenue to the Government
1. Shifting — the process of transferring the tax burden from the statutory taxpayer to
another without violating the law.
2. Capitalization — the seller is willing to lower the price of the commodity provided the
taxes will be shouldered by the buyers.
3. Transformation — the manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of lost of his
market.
 Instead, it increases quantity of production, thereby turning their
units of production at a lower cost resulting to the transformation
of the tax into a gain through the medium of productions.
 B. Those that will Result to Loss of Revenue to the Government
1. Tax Evasion (Tax Dodging) — resorting to acts and devices that illegally reduces or
totally escape the payment of taxes that are due to
the taxpayer. They are prohibited and are therefore
are not subject to penalties.
2. Tax Avoidance (Tax Minimization Scheme) — the reduction or totally escaping
payment of taxes through legally
permissible means that are not
prohibited and therefore are not
subject to penalties.
3. Tax Exemption — an immunity, privilege or freedom from payment of a charge or
burden to which others are obliged to pay.
Kinds of Exemptions
1. Express — granted by the constitution, statute, treaties, ordinance, contracts or franchise.
a. Constitutional
b. Statutory
c. Contractual
2. Implied — exempted by accidental or intentional omission.
3. Total — exemption from all taxes (OFWs)
4. Partial — exemption from certain taxes, partially or totally
Grounds for Exemption
1. It may be based on a contract.
2. It may be based on grounds of public policy.
Example: granting of exemptions to rural banks, and sweepstakes or lotto winnings.
3. It may be based on some grounds to foster charitable and other benevolent institutions.
4. It may be created under a treaty on grounds of reciprocity.
5. It may be created to lessen the rigors of international double or multiple taxation.
Distinction between Tax Evasion and Tax Avoidance
Tax Evasion Tax Avoidance
 It is a scheme used outside of those lawful  It is a tax saving device within the means
means and when availed of, it usually sanctioned by law
subjects the taxpayer to penalties
 It is accomplished by breaking the law  Accomplished by legal procedures and do
not violate the law
 It connotes fraud, deceit and malice  No fraud is involved

Tax Exemptions
 Is not automatic.
 Is non-transferable.
 Is revocable by the government (except when granted under a valid contract or by the
Constitution).
 Rule shall be uniform.
 Does not contravene the Lifeblood Doctrine.
 Is always disfavored.
  Is allowed only under a clear and unequivocal provision of the law.
 On real property tax will be based on the Doctrine of Usage and not Doctrine of
Ownership, except for real properties owned by the government which is absolutely exempt
from taxation.
 On real property tax cannot be granted by local governments but can condone real property
tax liabilities in special cases.
 On local taxes can be granted by local governments but they cannot condone existing
liabilities on local taxes.
Fundamental Doctrine in Taxation
1. No court may enjoin the collection of taxes.
2. Claim for exemptions shall be interpreted strictly against the taxpayer.
3. A law that permit deduction from the tax base is strictly construed against the taxpayer.
4. Tax assessment are presumed to be correct and done in good faith.
5. Tax laws are generally prospective in application.
6. Tax are not subject to compensation or set-off.
7. Refund of taxes do not earn interest because interest do not run against the government.
Tax Amnesty vs. Tax Condonation vs. Tax Exemption
 Tax Amnesty — a general pardon or intentional overlooking by the state of its authority to
impose penalties on persons otherwise guilty of tax evasion or violation of
tax laws. The purpose is to give the erring taxpayer a chance to reform and
become part of the society with a clean slate.
 Tax Condonation — means to remit or to desist or refrain from exacting or imposing a tax.
− it cannot extend to refund of taxes already paid when obtaining
condonation.
Tax Amnesty Tax Exemption
 Connotes condonation from  There is no tax liability at all
payment of existing tax liability
 The grantee pays a portion  The grantee need not pay anything
 Not always available  Can be availed of by any qualified
taxpayer

GROSS INCOME SUBJECT TO RIT

Scope
Regular Income Tax covers:
1. Active income.
2. All other passive income not subjected or exempted to final tax or capital gains tax.
Nature
1. It is a general and a residual tax
2. It is imposed on net income.
3. It is self-assessed tax by the taxpayer.
4. It employs creditable withholding system.
Taxable Income — means the pertinent items of gross income subject to regular tax less the
deductions, if any, authorized for such types of income under the NIRC or other
special laws:
Gross Income P XXX,XXX
Less: Deductions (XXX,XXX)
Taxable Income P XXX,XXX
Gross Income Includes All Income Other Than:
1. Exclusions in gross income.
2. Income exempted under special laws, treaties, or the Constitution.
3. Income subjected to or exempted to final tax or capital gains tax.
Special Items of Gross Income:
1. Fringe Benefits
a. Managerial or Supervisory Employees — exclusion in gross income being to final
tax.
b. Rank and File — inclusion in gross income.
2. Gains in Dealings in Properties
a. Capital Gains on Stocks and Real Property — exclusion in gross income being
subject to CGT.
b. Other Gains in Dealings in Properties — inclusion in gross income.
 Deductions consists of all businesses expenses or expenses of the exercises of a profession.
Classification of Individual Taxpayers
1. Pure compensation income earner.
2. Pure business or professional income earner.
3. Mixed income earner
Determination of Individual Taxable Income
1. Classification Rule — Income is classified into:
a. Compensation Income — income under employer-employee relationship.
b. Business Income — includes business or profession.
c. Others — added to business income, if no business income it is added to
compensation income.
2. Globalization Rule
a. Deductions are against income from business only.
b. A negative business income is not deductible against compensation income.
Individual Taxpayers Corporate Taxpayers
Quarterly Returns Form 1701Q Form 1702Q
Due: 45 days from end of quarter Due: 60 days from end of quarter
Annual Returns Forms 1700 /1701 / 1701A Forms 1702RT / 1702EX /
1702MX
Due: April 15, next year Due: 15th day of 4th month from
end of year

Types of Regular Income Tax

1. Personal Income Tax — also called Progressive Income Tax or Individual Income Tax.
2. Corporate Income Tax
Progressive Income Tax

YEAR 2018 TO 2022

Taxable Income Per Year Income Tax Rate
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

Corporate Income Tax

− 30% on taxable income.
− This is applicable to corporations and partnerships.
INCLUSIONS IN GROSS INCOME
− Gross income includes gains, profits, and income derived from whatever sources, whether
legal or illegal not covered by either final taxation or capital gains taxation.
EXCLUSIONS FROM GROSS INCOME
1. Proceed of a Life Insurance Policy — received, whether in lump sum or otherwise, by the
heirs or beneficiary upon the death of the insured is
tax exempt.
− However, if the proceed are retained by the insurer
under an agreement to pay interest, the interest is
included in gross income.
2. Amount Received by the Insured as a Return of Premium — under a life insurance,
endowment, or annuity contracts paid during the term or at the maturity
of the term mentioned in the contract or upon surrender of the contract.
3. Gifts, Bequests, and Devises or Descent — the value of property acquired by way of these
are taxable under Donor's Taxation.
− However, incomes from such property, as
well as, gift, bequest, devise, or descent of
income from any property, in case of transfer
of a divided interest, are included in gross
income.
4. Compensation for Injuries and Sickness — amounts received under Accident or Health
Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries plus the amount of damages
received whether by suit or agreement on account of such injuries
or sickness.
5. Income Exempt under Treaty — income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc. — Retirement benefit under RA 764
Requisites of Exemption:
a. The employer maintains a reasonable private benefit plan.
b. The retiring official or employee has been in the services of the same employer for at
least ten (10) years.
 c. The retiring employee is at least fifty (50) years of age at the time of retirement.
d. This is the first time availment of the exemptio
 Reasonable Private Benefit Plan
− a reasonable private benefit plan is a pension, gratuity, stock bonus or profit-
sharing plan maintained by the employer for the benefit of its employees
covered (plan members), wherein contributions are made by the employer,
employees or both, for the purpose of distributing the corpus (principal) or
earnings thus accumulated to plan members;
− provided that in no time shall any part of the corpus or income of the fund be
used for, or diverted to, any purpose other than the exclusive benefit of said
plan members.
7. Separation or Termination — Requisite of Exemption:
a. Due to sickness, death or other physical disability;
b. Any cause beyond the control of the employee or official (i.e.: redundancy and
closure of business).
8. Retirement Gratuities, Social Security Benefits and Other Similar Benefits from
Foreign Government Agencies and Other Institutions — private or public, by resident or
non-resident citizens or aliens who come to
settle permanently in the Philippines.
9. United States Veterans Administrations — administered benefits under the laws of the
United States received by any person residing in the Philippines.
10. SSS Benefits — under RA 8282 received or enjoyed.
11. GSIS Benefits — under RA 8291 and including retirement gratuity received by government
officials and employees.
12. Investment Income in the Philippines in Loans, Stocks, Bonds, or Other Domestic
Securities, or Form Interest on Deposits in Banks in the Philippines by:
a. Foreign Governments.
b. Financing Institutions owned, controlled, or enjoying refinancing from foreign
government.
c. International or Regional Financial Institutions established by foreign governments.
13. Income of the Government and its Political Subdivisions from:
a. Any public utility or
b. Exercise of essential government function.
14. Prizes and Awards in Recognition of Religious, Charitable, Scientific, Educational,
Artistic, Literary, or Civic Achievements but only if:
a. The recipient was selected without any action on his part to enter the contest or
proceeding; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
15. Prizes and Awards in Sports Competitions Granted to Athletes:
a. In local or international competitions and tournaments.
b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports associations
16. 13th Month Pay and Other Benefits — provided not to exceed the P82,000 ceiling.
 − Any amount in excess is included in gross income.
This was adjusted to P90,000 effective January 1,
2018 (non-adjustable to inflation).
17. Contributions for GSIS, SSS, Medicare, Pag-Ibig and Union Dues - these are deducted
from the relevant income to which they relate; for example, they
are netted with the compensation income of employees.
18. Gains from Sale of Bonds, Debentures or Other Certificate of Indebtedness with a
Maturity of More Than 5 Years.
19. Gains Realized from Redemption of Shares in Mutual Fund by the Investor.
20. Certain Benefits of Minimum Wage Earners (HHON).
NOTE to Candidates:
1. Exclusion is different with Deductions.
− When an item of income is exempted under the above paragraph, or under special
laws, it is deducted from gross income if it was initially included therein.
− It is not shown as a deduction from gross income rather it is "excluded" in gross
income amounts.
2. Interest from government securities are already excluded from the list of exemptions.

SOURCES OF GROSS INCOME

A. Compensation for Services — in whatever form paid, including but not limited to fees,
salaries, wages, commissions, and similar items:
 If Received in Promissory Notes, the taxable portion at the time of receipt is the fair
value of the note (i.e.: its discounted value). The interest portion will be recognized as
income over the related period.
 Fringe Benefits are Not Compensation. Please refer to your handouts on Fringe
Benefits Taxation.
B. Trade, Business or Exercise of a Profession — except self-employed and or professionals
opting to the 8% optional tax under TRAIN law.
C. Gains Derived from Dealings in Property (Please read separate handout)
D. Interests — these refers to interest other than those subject to final taxes, except:
1. Interest income under the land reform earned by the landowner to which the tenant-
purchaser pays him.
2. Imputed interest.
E. Rents
Special Considerations:
1. Obligations of the lessor that are assumed by the lessee is additional rental
consideration.
2. Advance Rentals:
a. If Unrestricted — the entire amount is income at the time of receipt.
b. If it constitutes a Loan — not rent income.
c. As Security Deposit to Guarantee Payment or Rent — income only when
the event or condition which makes it the property
of the lessor occurs (i.e.: when there is default).
d. If it is To Be Applied at the Termination of the Lease — it is income at the
time of receipt.
 e. Improvements Made by the Lessee on the Property — to be recognized as
income by the lessor in two ways:
1. Outright Method — the fair value of the property that will remain
and be turn-over to the lessor upon
termination of the lease (the real book value
of the property at termination, i.e.: not the
lessee's book value) is recognized as
income at the point of completion of the
improvement NOT the fair market value of
the improvement upon completion.
NOTE:
− Although the latter is the wordings of the law,
apparently, the whole fair value is, by common
sense, not income.
2. Spread-Out Method — recognize the book value of the property
at the termination of the lease as income
over the period of the related lease.
F. Royalties
G. Dividends — are subject to regular income tax when it is declared by foreign operations.
 Dividends can either be:
1. Cash Dividend
2. Property Dividend — when taxable, taxable at the fair market value of the
property received as dividend.
NOTE:
 Property Dividend includes stock of another corporation declared by
the distributing corporation.
3. Stock Dividend — generally not taxable except when the declaration
confers to the recipient a different interest or right after
the declaration.
 When taxable, the measure of taxable amount is the fair
market value of the stock dividend received.
4. Liquidating Dividends — this is considered an exchange or sale of
property. Gain or loss is fully taxable or deductible.
 Dividends Received from Resident Corporations are subject to the
Dominance Test.
H. Annuities
I. Prizes and Winnings
J. Pensions; and
K. Partner's Distributable Share in the Net Income of the General Professional
Partnership and Exempt Joint Venture

OTHER SOURCES OF GROSS INCOME

A. Farming
 taxation of farming gross income requires classification of the following:
1. Livestock and Farm Products Raised and Sold — the selling price of the livestock
or farm products is considered gross income.
2. Livestock and Farm Purchased and Sold — only the accounting gross income
(Sales Less Cost of Sales) is included in gross income.
 Taxation Rules:
1. Taxpayer may follow accrual or cash basis in accounting for inventories.
2. Expenses in raising the livestock and farm products are deductions from the computed
gross income.
3. The Proceeds of Crop Insurance or Livestock Insurance constitute gross income
because it represents recovery of lost profits rather than lost capital.
B. Tax Benefits
 when a taxpayer gains an advantage by an income tax deduction claimed in the past
but were subsequently recovered, the tax benefit should be included in income in the
year recovered as item of gross income.
 Examples:
1. Bad Debt Recovery
 General Rule: The recovery of bad debts previously written off
constitute a receipt of taxable income.
2. Tax Refund
 General Rule: Refund of taxes that entered the determination of
taxable income should be reverted back to gross income.
 Hence, refunds of the following taxes that will not enter the
determination of taxable income will not be included in gross
income:
a. Philippine income tax, except the fringe benefit tax.
b. Estate or donor's tax.
c. Special assessment.
d. Income tax paid or incurred to a foreign country, if the
taxpayer claimed a credit for such tax in the year it was
paid or incurred.
e. Stock transaction tax
NOTE:
 the above items are not deductible against gross
income in any case hence they could not give rise to a
tax benefit to the taxpayer.
3. Unamortized Cost of Property Abandoned and Written Off but was
subsequently Re-Entered into Use
 General Rule: The cost previously expensed should be reverted back
into gross income in the year extraction operation is resumed.
 Exception to Recoveries of Losses and Expenses:
Tax Benefit Rule
 when the write-off or tax expense is did not cause a reduction
in the income tax liability in the period it is claimed, the
recovery or refund is exempt because of absence of tax
benefit.
C. Cancellation of Indebtedness
a. In Consideration of Service — treated as compensation income.
b. As an Act of Gratuity — not an income but a gift taxable under Donor's Taxation.
 c. As Capital Transaction such as Forfeiting the Right to Receive Dividend in
Exchange of the Debt — treated as dividends and is subject to dividend taxation
rules.
D. Damage Recovery
a. Compensatory Damages — this constitute return of capital and hence, not taxable.
For Example: Moral Damages from Personal Action such as:
 Libel,
 Slander; and
 Breach of Promise to Marry.
b. Recovered Damages — this constitute taxable income since they are recoveries of
lost profit.
For Example: Damages Recovered from Patent Infringement Suit

TRANSFER TAXATION: ESTATE TAX

Estate Taxation
− taxation of mortis causa transfer or succession.
 Succession — a mode of transmission of the ownership, rights, interests and
obligations over property by reason of death of the owner in favor of
certain persons designated by the owner himself or by operation of law.
Elements
a. Decedent — the person who died whose properties, rights and obligations are transmitted.
b. Successor — the person to whom the property, rights and obligations of the decedent will
pass.
c. Estate — the properties, rights and obligations of the decedent (inheritance)

Kinds of Succession
1. Testate (Voluntary) — succession is carried out according to the wishes of the testator
expressed in a will executed in the form prescribed by law.
2. Intestate (Involuntary) — succession without a will or with one invalid, succession will took
effect by operation of law
Estate Tax
− tax on the privilege of the decedent to transmit his estate at death to his lawful heirs or
beneficiaries.

GROSS ESTATE
General Principles
1. The properties of citizens and resident aliens located within or outside the Philippines shall
be included in gross estate.
2. The properties of non-resident alien located within the Philippines shall be included in gross
estate; however, Intangible Properties within the Philippines shall be subject to reciprocity.
 There is exemption reciprocity only when:
1. The foreign country of the non-resident alien do not impose estate tax.
2. The foreign country of the non-resident alien to which he or she is a resident allows
the same exemption for intangible properties for non-residents.
Gross Estate Computation
Properties Existing At The Point Of Death XXX
Taxable Transfers XXX
Exempt Transfers (XXX)
Exclusion by Law (XXX)
Gross Estate XXX
Taxable Transfers
− transfers with insufficient considerations.
1. Transfer in contemplation of death as distinguished from motives associated with life.
2. Revocable transfers.
3. Properties passing under a general power of appointment
Exclusion in the Gross Estate of a Citizen or Resident Alien Decedent by Law
1. Not Owned by the Decedent:
a. The merger of usufruct in the owner of the naked title.
b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicomissary.
c. The transmission from the first heir, legatee, or donee in favor of another beneficiary,
in accordance with the desire of the predecessor (special power of appointment).
d. Separate property of the surviving spouse.
e. Proceed of irrevocable life insurance policy payable to beneficiary other than the
estate, executor or administrator.
NOTE:
− Revocable Designation becomes irrevocable upon the death of the decedent.
See Section 11, Insurance Code.
2. Exempted Properties
a. All bequest, devises, legacies or transfers to social welfare, cultural and charitable
institution, no part of net income of which inures to the benefit of any individual;
Provided, however, that not more than 30% of the said bequest, devises, legacies or
transfers shall be used by such institutions for administration purposes.
b. Proceeds of group insurance taken out by a company for its employees.
c. Proceed of GSIS policy or benefits from GSIS.
d. Benefit received from SSS.
e. Personal Equity Retirement Account
Valuation of the Estate
1. Usufruct — consider into account the probable life of the beneficiary in accordance with the
latest Basic Standard Mortality Table. (same rule apply with annuity).
2. Properties — the estate shall be appraised at its fair value as at the time of death. However,
the appraised value of the property as of the time of death shall be whichever
is higher of:
a. Fair market value as determined by Commissioner.
b. Fair market value as shown in the schedule of values fixed by the Provincial or City
Assessors.
  Fair Value — the price at which property would change hands between a willing seller
and a willing buyer, neither of whom is under compulsion to sell or to buy.
MARRIED DECEDENTS
A. Absolute Community Of Property
 Exclusive Property
1. Property acquired before the marriage by either spouse who has legitimate
descendants by a former marriage, and the fruit of such property.
2. Property acquired during the marriage by gratuitous title by either spouse or the
fruits thereof; unless, it is expressly provided by the donor or testator that they
shall form part of the community property.
3. Property for personal and exclusive use of either spouse, except jewelry.
 Community Property — all other properties owned by the spouses after
marriage or acquired thereafter.
B. Conjugal Partnership of Gains
 Exclusive Property
1. That which one already owns before his or her marriage, except fruit of such
property.
2. That which one acquired after the marriage by gratuitous title (e.g. donation or
inheritance) or by exchange with an exclusive property, except the fruits of such
property.
 Conjugal Property — all other properties are presumed to be conjugal
(gains from labor and fruits of exclusive property).

DEDUCTIONS FROM GROSS ESTATE

1. Losses, Indebtedness and Taxes (LIT)
a. Citizen or Resident Alien — deductible fully.
b. Non-Resident Alien — the deductible amount shall be the prorated total world LIT by
which the Philippine gross estate bears with the total world
gross estate.
2. Transfer for Public Purpose — government or any political subdivisions.
3. Deductions for Properties Previously Taxed — vanishing deductions.
4. Family Home with Maximum Value Deductible Not To Exceed P10,000,000
5. Standard Deduction for Citizen or Resident Alien Decedent Only of P5,000,000
6. Retirement Benefit Received by Employees of Private Firms form Private Pension Plan
Approved by the BIR under RA 4917
7. Net Share of the Surviving Spouse in the Conjugal Partnership Property or Community
Property — as diminished by the expenses properly chargeable to such property shall be
deducted from the estate.
Deductible Amount of Losses, Indebtedness, and Taxes
1. Losses due to fire, storm, shipwreck or other casualty.
2. Losses due to theft, robbery, or embezzlement
 Requisites for Deductibility of Losses:
a. The loss is not compensated by insurance or otherwise.
b. The loss is not claimed as a deduction in the estate income tax return.
 c. The loss must occur not later than the last day for payment of the estate tax (1
year from the decedent's death).
3. Claims of the decedent against insolvent person, where the value of the decedent's interest
therein is included in gross estate.
4. Claims against the estate:
 Debt Instrument — notarization at the time of incurrence; if contracted within three
(3) years before the death of the decedent, a statement showing
the disposition of the proceed must accompany the estate tax return.

5. Unpaid mortgage, where the value of the decedent's interest, undiminished by the mortgage,
is included in the gross estate.
6. Income tax on income prior to the death of the decedent.
7. Property taxes which have accrued prior to death of decedent
Vanishing Deduction Requisites
1. Property is part of the gross estate of the present decedent situated in the Philippines.
2. The present decedent acquired the property by inheritance or donation within 5 years prior
to his death;
3. The property subject to vanishing deduction can be identified as the one received from the
prior decedent, or from the donor, or can be identified as having been acquired in exchange
for the property so received;
4. The property acquired form part of the gross estate of the prior decedent, or of the taxable
gift of the donor;
5. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
6. The estate of the prior decedent has not previously availed of the vanishing deductions.
Percentage of Vanishing Deduction
− based on the interval of the death of the present decedent and the time of death of the prior
decedent or the date of gift whichever is relevant.
More Than Not More Than Percentage
— 1 Year 100%
1 Year 2 Year 80%
2 Year 3 Year 60%
3 Year 4 Year 40%
4 Year 5 Year 20%
5 Year — 0%

How to Compute Vanishing Deductions?

1. Determine the initial value which is whichever is lower between the fair market value of the
property used in computing the first transfer tax paid (estate or donor's tax) and the fair market
value of the property in the present decedent.
2. Compute initial basis by deducting from initial value any encumbrances or liens on the
property that are paid by the present decedent where such lien or encumbrances are
deductions on the prior decedents gross estate or on the donor's taxable gift.
3. Compute the final basis by reducing the initial basis by an amount representing what the
initial basis bears with the gross estate to the Expenses, Losses, Indebtedness and Taxes
(ELIT) and Transfer for Public Purpose.
 To illustrate:
Initial Basis
Gross Estate ELIT plus Transfer for Public = Prorated deduction to Initial Basis

4. Determine the vanishing deduction by multiplying the final basis by the corresponding rate
that apply for the time period from the point the property was transferred by the prior decedent
(i.e.: point of death) or by the donor (i.e.: date of gift).
Family Home
− composed of the land and the dwelling house to which the decedent and his family resides
− shall be included in gross estate at whichever is higher between its zonal value and assessed
value at the point of death of the decedent.
Requisites:
1. death of the decedent shall be after July 28, 1992.
2. total value of the family home must be included in gross income.
3. the family home must be the actual residence 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.
4. deduction cannot exceed whichever is higher between the zonal or assessed value at the
time of death and P10,000,000.00.
5. it is a deduction from either common or personal property or separate properties of the
decedent.
NET TAXABLE ESTATE Unmarried Decedent
Real Properties P xx,xxx,xxx
Personal Properties xx,xxx,xxx__
Gross Estate P xx,xxx,xxx
Ordinary Deductions: xx,xxx,xxx (xx,xxx,xxx)
Other Deductions
Special Deductions:
Family Home P xx,xxx,xxx
Standard Deductions xx,xxx,xxx__ xx,xxx,xxx__
Net Taxable Estate P xx,xxx,xxx

NET TAXABLE ESTATE Married Decedent

Separate Common Total
Real Property P xx,xxx,xxx P xx,xxx,xxx P xx,xxx,xxx
Personal Property xx,xxx,xxx__ xx,xxx,xxx__ xx,xxx,xxx__
Gross Estate P xx,xxx,xxx P xx,xxx,xxx P xx,xxx,xxx
Ordinary Deductions:
Other Deductions (xx,xxx,xxx)_ (xx,xxx,xxx)_ (xx,xxx,xxx)_
Net Estate after OD P xx,xxx,xxx P xx,xxx,xxx P xx,xxx,xxx
Special Deductions:
Family Home (xx,xxx,xxx)
Standard Deductions (xx,xxx,xxx)_
Net Estate P xx,xxx,xxx
Less: Share of Surviving Spouse x 1/2 (xx,xxx,xxx)_
Taxable Net Estate P xx,xxx,xxx
6% ESTATE TAX RATE
− claimable only by individual whose taxable estate comprise of properties within and outside
the Philippines (citizens and resident alien).
− the deductible tax credit shall be whichever is lower of the amounts as computed by the
following limits (A and B) similar to deductible tax credit in income taxation:
A. Total Tax Credit for Estate Tax Paid to a Foreign Country
− The deductible amount per foreign country shall be whichever is lower between the
actual estate tax paid to the foreign country and the amount representing what the
net foreign estate on that country bears to the total net estate multiplied by the
Philippine Estate Tax.
To illustrate:
Net Estate on a Foreign Country
Net World Estate X Philippine Estate Tax VS Actual Amount
Due Paid
B. Total Prorated Tax Credit For All Foreign Country
Total Foreign Net Estate
X Philippine Estate Tax
Net World Estate
Where to file?
1. Authorized Agent Bank
2. Revenue District Office
3. Collection Agent
4. Duly authorized Treasurer of the City/Municipality with which the decedent was domiciled at
the time of death
5. Office of the Commissioner, if there is no legal residence in the Philippines
 Filing of an Estate Tax Return is now required regardless of the value of the estate:
Registrable Properties includes, but is not limited, to:
1. Real Property
2. Motor Vehicle
3. Shares of Stock
 CPA Certification is required only when the value of the gross estate exceeds P5,000,000.00.
Such certification to include:
1. Itemized asset of the decedent with valuation.
2. Itemized deductions
3. Tax due and payable
Extension of Filing
− The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension
not exceeding thirty (30) days for filing the return.
− The estate tax return may be paid in installment over two years.
− Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.
− If an extension is granted, the Commissioner may require the executor, or administrator, or
beneficiary, as the case maybe, 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.
 Beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the
payment of such portion of the estate tax as his distributive share bears to the value of the total
net estate.
 Banks with knowledge of the decedent's death shall subject withdrawal from the
decedent's account to a 6% final withholding tax. The requirement does not apply if the
properly is included in the gross estate and the estate tax have been paid.