Lecture Notes - Taxation

ACC 407 – Management Accounting Refresher Course with Comprehensive Examination

Transfer Taxes. or if there is a will, the same is void or lost its
validity or nobody succeeds in the will
Transfer taxes are taxes imposed upon the gratuitous
3. Mixed – effected partly by will or by operation of
disposition of private properties or rights.
law.
Gratuitous transfer is one that neither imposes burden nor
Will - an act whereby a person is permitted with
requires consideration from transferee or recipient.
formalities prescribed by law, to control to a certain
Effectivi Type Tax Object of Natu degree the disposition of his estate, to take effect after
Donati ty Taxation re his death from the moment the death of the decedent,
on the rights to the succession are transmitted and the
possession of hereditary property is deemed
Upon Moti Estate transmitted to the heir.
death of s- tax
the caus Privilege Excis Kinds of Wills
donor a to e tax
During Inter- Donor transfer 1. Notarial/Ordinary/Attested will- a will that is
the vivos ’s tax gratuitou created for the testator by a third party, usually
lifetime sly his lawyer, follows proper for, signed and
of the dated in front of the required number of
donor witness and acknowledged by the presence of
and the notary public.
donee 2. Holographic will – a written will which must
Estate tax- tax imposed on the privilege that a person is be entirely written, dated and signed by the
given in controlling to a certain extent, the disposition of hand of the testator himself, without the
his property to take effect upon death. necessity of any witness.
Filing of Estate Tax Return Elements of Succession
 Decedent died before 2018: within 6 months after a. Decedent – person whose property is transmitted
death through succession, whether or not he left a will.
 Decedent died on or after Jan. 1, 2018: within one b. Heir – the person called to the succession either by
year from the date of death the provision of a will or by operation of law.
 Law to be applied: The law/statute in force as of c. Estate (inheritance) – refers to all the property,
the date of death of the decedent. rights and obligations of a person for which are
Taxpayer: The estate of the decedent as a juridical person not extinguished by his death.
Personal obligation to file and pay the applicable taxes: Decedent’s Estate
Primarily liable: administrator or executor
Secondarily liable: any of the heirs 1. Legitime - portion of the testator’s property which
could not be disposed of freely because the law
Succession – a mode of acquisition by virtue of which the has reserved if for compulsory heirs.
property, rights and obligations to the extent of the value 2. Free portion – part of the whole estate which the
of the inheritance, of a person are transmitted through his testator could dispose of freely through written
death to another or others either by will or by operation of will irrespective of his relationship to the
law. recipient.
Types of Succession Kind of Heirs
1. Testamentary -results from the designation of an a. Compulsory heirs – inherit with or without a will
heir, made in a will executed in the form of b. Voluntary heirs – inherit only if they are in the
prescribe by law. will
2. Legal or intestate – effected by operation of law or c. Intestate heirs – compulsory hweirs in
transmission of properties where there is no will testamentary succession.
 Computation of Estate Tax on any property physically existing and present in
Unmarried Decedent the gross estate, whether or not in his possession,
control or dominion.

Intangible Properties considered located in the

Philippines:
 Franchise which must be exercised in the
Philippines
 Shares, obligations or bonds issued by any
corporation organized and constituted in
the Philippines
 Shares obligations or bonds issued by any
foreign corporation at least 85% of the
business of which is located in the
Philippines
Married Decedent
 Shares, obligations or bonds issued by any
foreign corporation if such have acquired
a business situs in the Philippines
 Shares or rights in partnership, business or
industry established in the Philippines
c. Properties transferred gratuitously during lifetime,
but in substance, transferred upon death
 Transfer in contemplation of death
 Transfer with retention or reservation of
certain right
 Revocable transfer
 Property passing under General Power of
Conjugal Absolute
Partnership of community of appointment (GPA)
Gains properties  Transfer for insufficient consideration
Exclusive Included Included  Proceeds from life insurance (on
properties of the insurance under policies taken out by the
decedent decedent upon his own life)
Exclusive Excluded Excluded
Exemptions and Exclusions from Gross Estate
properties of the
surviving spouse a) Under Section 85 and 104 of the Tax Code
Common Included Included  Capital or exclusive property of the
properties surviving spouse
 Properties outside the Philippines of non-
Estate Tax Rate: beginning January 1, 2018 or upon the resident alien decedent
effectivity of RA 10963 (TRAIN LAW) is 6% based on  Intangible personal property in the
the value of the net estate. Philippines of a non-resident alien when
the rule of reciprocity applies
Gross Estate – consists of all properties and interests in b) Under Section 87 of the Tax Code
properties of the decedent at the time of his death as well  The merger of the usufruct in the owner of
as properties transferred during the lifetime but in naked title
substance was only transferred at the time of death.  Transmission from the first heir, legatee or
Components of Gross Estate done in favor of another beneficiary in
accordance with will of the predecessor
a. Real property and other tangible personal property  The transmission or delivery of the
b. Decedent’s interest and tangibles inheritance or legacy of the fiduciary heir
Decedent’s interest – refers to the extent of or legatee to the fideicommissary
equity or ownership participation of the decedent
  All bequests, devices, legacies or transfers 1. Losses, indebtedness, Taxes
to social welfare, cultural and charitable 2. Transfer for public use
institutions 3. Vanishing deduction
c) Under Special Laws Special deductions
1) Standard deduction
Decedent Gross estate 2) Family Home Allowance
 Citizen or 1. Property (real
3) Amount received by heirs under R.A 4917
resident alien or personal)
wherever Tax credit for estate tax paid to a foreign country
situated
2. Intangible  Only resident or citizen decedents can claim tax
personal credit
property  The lower between the actual estate tax paid
wherever abroad and the limit
situated
 Nonresident 1. Real property Donor’s Tax
alien situated in the
Donor’s tax – a tax levied, assessed, collected and paid
Philippines
2. Tangible upon the transfer by any person, resident or nonresident,
personal of the property by gift. It is a tax imposed on the exercise
property of the donor’s right during the lifetime to transfer property
located to others in the form of gift.
situated in the
Purposes of Donor’s Tax
Philippines
3. Intangible 1. To supplement the estate tax
personal 2. To prevent the avoidance of income tax
property with
situs in the Elements of Taxable Donation
Philippines,
unless 1. Capacity of the donor to transfer property
excluded on 2. Donative intent
the basis of 3. Delivery
reciprocity 4. Acceptance of the gift by the done
Classification of Donors
Valuation of Gross Estate
1. Citizen or resident (RC/NRC/RA)
In general – fair market value upon death
2. Non-resident alien (NRA)
Personal Properties – Fair market Value a. With reciprocity
b. Without reciprocity
Real Property – the higher amount between
Format for Computation
 FMV
 Zonal Value First Donation of the Year
Shares of stocks Gross gift Pxxx
Less : Exemptions/Deductions xxx
a.) Traded in the Local Stock Exchange (LSE) –
Pxxx
mean value between the highest and lowest
quotations nearest the date of death if none is Less : Tax Exempt gift (under TRAIN -
LAW) 250,000
available on the date of death itself.
Net taxable gift Pxxx
b.) Not traded in the local stock exchange
Multiply by donor's tax rate 6%
1. Common (ordinary) shares -book value
2. Preferred (preference) shares – par value Donor's tax Pxxx
c.) Usufruct – based on latest Basic Mortality Table to Less: tax credit (if applicable) xxx
be approved by the Secretary of Finance, upon Donor's tax payable Pxxx
recommendation of the Insurance commissioner Subsequent Donations (within the year)

Ordinary deductions Gross gift, current Pxxx

 Less: Exemptions/Deductions xxx gift of an undivided property in favor of two or more
Pxxx donees.
Add: Prior gifts (within the year) xxx
General rule: a co-ownership is not subject to income tax.
Total Pxxx The income of the co-ownership will be taxable (basic
Less: Tax Exempt gift (under TRAIN - income tax) to the co-owners in their respective capacities.
LAW) 250,000
Net taxable gift (cumulative) Pxxx Exception: when the co-ownerships become an
Multiply by donor's tax rate 6% unregistered general co-partnership and therefore
Donor's tax (cumulative) Pxxx becomes a taxable corporation.
Less: tax credit (if applicable) xxx
Estates and Trusts
tax paid -prior gifts xxx
Donor's tax payable Pxxx The taxable income of an estate or trust shall be computed
in the same manner and on the same basis as in the case of
individual taxpayers.
Donor’s Tax Rate – single tax rate of 6% based on the
value of the net taxable gift (in excess of P 250,000) Additional deductions allowed:

Gross Gift 1. The amount of the income of the estate or trust for
the taxable year which is to be distributed
 Transfers subject to donor’s tax: currently by the fiduciary to the beneficiaries
1. Direct gift 2. The amount of the income collected by a guardian
2. Gift through creation of a trust of an infant which is to be held or distributed as
3. Condonation of debt the court may direct.
4. Repudiation of inheritance
5. Renunciation of the surviving spouse of his/her Estates
share in conjugal partnership or absolute
Judicial Extrajudicial
community after the dissolution of the marriage in
Taxable as a separate Not taxable as separate
favor of the heirs of the deceased spouse or any entity entity
other person The income of the estate is
6. Transfer for insufficient consideration to be declared by the
beneficiaries
Exemptions and/or Deductions from Gross Gift
Fiduciary/trustee files the Heirs and beneficiaries file
1. Encumbrances on the property donated assumed ITR and pays the tax the ITR of the estate and
by the done thereon pay the tax due thereon.
2. Diminution of gift provide by the donor
3. Gifts to the government Taxable Income of the Estate
4. Gifts to educational, charitable, religious
corporations Gross income of the estate Pxxx
5. Exemptions under Special/Other Laws Less: Deductions
Expenses Pxxx
Tax credit for Donor’s Tax Paid to A Foreign Country
Special deductions
 Only resident or citizen can claim tax credit distribution of year's income xxx Pxxx
 Amount deductible is lower between actual tax to the beneficiaries
paid abroad or the limit Taxable income of the estate Pxxx
Tax due (Sec 24(A), as amended) Pxxx
Filing and Payment of Return
The donor’s tax return shall be filed within 30 days Taxable Income of the Beneficiary
after the gift is made or completed and the tax due thereon
shall be paid at the same time the return is filed. Compensation income, if any Pxxx
Gross income from business or practice of xxx
Co- OWNERSHIP, ESTATES and TRUSTS
profession
Co-ownership -occurs when two or more heirs inherit an Add:
undivided property from a decedent or a donor makes a Amount received from the estate's income xxx
during the year
 Less: Business expenses Pxxx Excise tax -a tax imposed on specific goods or services
Taxable income of the beneficiary Pxxx such as tobacco, fuel and alcohol. It is also known as tax
Tax due (Sec 24(A), as amended) Pxxx on production, sale or consumption of a commodity in a
country, including certain services.

TRUSTS Excise tax is imposed on:

Kinds Taxation  Certain goods manufactured or produced in the

Irrevocable trust Taxable as separate entity Philippines for domestic sale or consumption of or
Revocable trust – a trust Not taxable as a separate for any other disposition
where the title can revert entity  Certain good imported
back to the grantor  Certain services performed in the Philippines
anytime
Trust in which income is The income of the trust is Types of Excise Tax
for the benefit of the to be declared and taxed to 1. Specific Tax – tax imposed which is based on
grantor the grantor.
weight or volume capacity or any other physical
unit of measurement.
Taxable income of the Trust 2. Ad Valorem Tax – tax imposed which is based on
selling price or other specified value of the
Gross income of the Trust Pxxx goods/articles
Less: Deductions
Business Expenses Pxxx Determination of Gross Selling Price of Goods (GSP)
Special deductions Subject to Ad Valorem Tax
Distribution of year's xxx Pxxx -the price, excluding value-added tax at which the goods
income to the beneficiaries are sold at wholesale in the place of production or through
Taxable Income of the Trust Pxxx their sales agent to the public shall constitute the gross
Tax due (Sec 24(A), as amended) Pxxx selling price.
Persons Liable to Excise Tax
Taxable income of the Beneficiary
 In general,
Compensation income, if any Pxxx a. On domestic or Local Articles
 Manufacturer or producer
Gross income from business or practice of xxx
 Owner or person having possession of
profession
articles remove from the place of
Add: production without the payment of tax
b. On Importer articles
Amount received from the trust’s income xxx  Importer
during the year  Owner
Less: Business expenses Pxxx  Person who is found in possession of
articles which are exempt from excise
Taxable income of the beneficiary Pxxx taxes other than those legally entitled
to exemption
Tax due (Sec 24(A), as amended) Pxxx
c. On indigenous petroleum, natural gas or
liquefier gas
 Local sale, barter or transfer
Consolidation of Two or More Trusts  Exportation
Requisites: Filing of Return and Payment of Excise Tax on Domestic
1. There are two or more trusts which derive income Products
2. The creator of the trust in each instance is the  Every person liable to pay excise tax shall file a
same person separate return for each place of production
3. The beneficiary in each instance is the same  In General, the excise tax return shall be filed and
EXCISE TAX paid by the manufacturer or producer before
 removal of domestic products from place of
production
 Except as the commissioner otherwise permits, the
return shall be file with and the tax paid to any
authorized agent bank or Revenue Collection
Officer, or duly authorized City or Municipal
Treasurer in the Philippines.

Major Classifications of Excisable Articles

1. Alcohol products
 Distilled spirits – Sec 141
 Wines – Sec 142
 Fermented Liquors – Sec 143
2. Tobacco products
 Tobacco products – Sec 144
 Cigars and cigarettes – Sec 145
 Inspection fee – Sec 146
3. Petroleum products (Sec 148)
4. Miscellaneous articles
 Automobiles – Sec 149
 Non-essential goods – Sec 150
 Non-essential services – Sec
150A
 Sweetened beverages -Sec 150B
5. Mineral products (Sec 151)
6. Sweetened beverages (TRAIN LAW)
7. Invasive cosmetic surgery (TRAIN LAW)

References:
Tabag, Enrico D. (2022). CPA Reviewer in Taxation. EDT
Book Publishing