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TRANSFER AND BUSINESS TAXATION
Accountancy (BSA2)
Quezon City University
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Transfer Taxation
Transfer refers to any transmission of property from one person to another.
A person maybe natural (individuals) or a juridical person created by law (corporation, partnership or joint venture)
BILATERAL TRANSFERS
- involve transmission of property for a consideration. referred to as onerous transactions or exchanges.
Examples: Sale - exchange of property for money Barter - exchange of property for another property
UNILATERAL TRANSFERS -involve the transmission of property by a person without consideration. referred to as gratuitous or simply transfers.
The right or privilege to transfer is subject to transfer tax.
Types of Unilateral Transfers a) Donation b) Succession
DONATION - gratuitous transfer of property from living donor to a donee (donation inter vivos)
SUCCESSIONS - transfer of property of a deceased person upon his death to his heirs.
The decedent’s properties transfer to his successors either by operation of the law or by virtue of a written will.
Transfer is caused by the death of the original owners, hence, this is called donation mortis causa.
COMPLEX TRANSFERS
- transfers for less than full and adequate consideration.
These are sales made at prices which are significantly lower than the Fair Value of the property sold.
Tax rules:
a. Adequate consideration: Deemed pure exchanges and are subject to income tax, not to transfer tax b. Less than full and adequate consideration: transaction is split into two components, transfer element and exchange element
The transfer element is generally considered as an inter vivos donation, but it is a donation mortis causa if:
a. sale is made in contemplation of death of the seller b. the title to the property is agreed to be transferred upon the death of the seller
BUSINESS AND TRANSFER TAXATION
Types of transfers:
- Bilateral transfers
- Unilateral transfers
- Complex transfers
SUCCESSION AND TRANSFER
TAXES
GRATUITOUS TRANSFER
- refers to the voluntary transfer of
assets, property, or rights without
receiving any valuable
consideration in return.
In other words, it's a transfer
made out of generosity or without
expecting compensation.
This could include gifts, donations,
or transfers made for no or
minimal cost.
Tax authorities often have specific
rules and regulations governing
the taxation of such gratuitous
dispositions, as they can be
subject to gift taxes or other
related taxes.
SUCCESSION
- refers to the transfer of assets or
rights from one individual to
another upon their death.
It involves the passing of
property or rights according to
legal or inheritance rules, often
involving heirs or beneficiaries.
Succession is a broader concept
that encompasses not only gifts
or voluntary transfers but also
the transfer of assets due to legal
mandates, such as inheritance
laws or wills.
TYPES OF TRANSFER TAXES
- Estate Tax
- Donors Tax
Estate tax and donor's tax are both types of taxes related to the transfer of wealth, but they apply in different situations.
Estate tax is levied on the transfer of the assets of a deceased person to their heirs or beneficiaries.
Donor's tax, on the other hand, is imposed on the transfer of property by a living person to another as a gift or donation.
The main distinction lies in whether the transfer occurs due to the death of the owner (estate tax) or as a voluntary gift during their lifetime (donor's tax). The specific rules and rates for these taxes may vary depending on the jurisdiction and local laws.
INTER
VIVOS
MORTIS
CAUSA
Transferor Living donor
Decedent
Nature Voluntary Involuntary Reason Gratuity Death
Scope of transfer of property
Only properties selected by donor
All properties of the decedent at death Property given
Gift Estate
Transferee Donee Heir Transfer Tax
DONORS
TAX
ESTATE
TAX
Timing of valuation of donation
Date of Donation
Date of Death
3. Mixed Succession
This category involves a
combination of testamentary and
legal succession. It occurs when a
will exists, but it doesn't cover all
assets or isn't legally acceptable
for some portions. The assets not
covered by the will are distributed
according to legal succession
principles.
ELEMENTS OF SUCCESSION
Decedent - The person who has passed away, whose assets are distributed through succession.
Inheritance (Estate) - The property, assets, and debts owned by the decedent that are distributed among successors.
Successors are the individuals who inherit the decedents property and assets.
Successors inherit based on their relationship with the decedent:
a. Compulsory Heirs: Close family members with a legal right to inherit.
- Primary Compulsory Heirs Closest family members like spouse and children, with higher inheritance priority.
- Secondary Compulsory Heirs Inherit if no primary heirs exist, including parents and sometimes siblings.
- Concurring Compulsory Heirs Heirs within the same category who inherit equally, without primary or secondary status distinction.
b. Voluntary Heir: Named beneficiaries in the decedent's will. c. Legal or Intestate Heirs: Inherit when there's no valid will, following local laws.
COMPOSITION OF GROSS ESTATES
Decedent’s Estate
To be inherited by:
LEGITIME (i. 75% of the estate)
Compulsory Heirs:
This portion of the estate is reserved by law specifically to compulsory heirs, regardless of whether or not a last will and testament was prepared
FREE PORTION (i. 75% of the estate)
Compulsory Heirs and/or Voluntary Heirs:
As provided in the last will and testament
In the absence of a will, this portion of the estate shall be distributed to “intestate heirs” based in the
Legitime – part of the testator’s
property which he cannot dispose
of because the law has reserved it
for certain heirs who are,
therefore, called compulsory heirs
Free Portion – portion of the
estate which the testator can
freely dispose of. Hence, anyone
may inherit from free portion.
Nonetheless, voluntary heirs may
inherit only if mentioned in the will.
COLLATERAL RELATIVES
Consanguinity refers to the
relationship between individuals
who share a common ancestry or
come from the same family
lineage. People who are blood
relatives are considered to have
consanguinity, meaning they're
connected by their shared
biological heritage.
There are two main types of
consanguinity: lineal and
collateral.
1. Lineal Consanguinity: This
type of relationship exists
between individuals who are
directly descended from each
other, either in an upward or
downward line. For example, a
parent and child, or a grandparent
and grandchild, have lineal
consanguinity.
2. Collateral Consanguinity:
This type of relationship exists
between individuals who share
the same ancestors but are not
directly descended from each
other. In other words, they're not
in a direct parent-child or
grandparent grandchild
relationship. Instead, they're
relatives who are connected
through a common family line, like
siblings, cousins, aunts, uncles,
etc.
The closeness of the relationship
is determined by the number of
generations that separate the
individuals. Each generation
forms a "degree." The fewer
degrees of separation, the closer
the relationship.
For example, a parent and child
are one degree apart, while
siblings are two degrees apart.
WILLS
A will is a legal document that
outlines a person's wishes
regarding the distribution of their
property, assets, and possessions
after their death.
It allows individuals to specify how
they want their belongings to be
distributed among their loved
ones or other beneficiaries. Wills
can also cover other important
matters, such as naming
guardians for minor children or
appointing an executor to oversee
the distribution process
1. Notarial / Ordinary / Attested
Will: This is a formal type of will
that is typically prepared by a
legal professional and witnessed
by witnesses. It follows specific
legal requirements and is often
typed or printed. The person
creating the will (testator) signs it
in the presence of witnesses, who
also sign the will.
DISINHERITANCE
A testamentary disposition by
which a compulsory heir is
deprived of/ excluded him from
the inheritance to which he has a
right
Requisites:
Effected only through a valid
will
For a cause expressly stated
by the law
Cause must be stated by the
will itself
Cause must be certain and
true
Unconditional
Total (no partial
disinheritance)
The heir disinherited must be
designated in such a manner
that there can be no doubt as
to his identity
RIGHT OF REPRESENTATION
A right created by fiction of law
where the representative is raised
to the place and degree of the
person represented and acquired
the rights which the latter would
have if he were living or could
have inherited
May arise because:
Death
Incapacity
Disinheritance
They shall not inherit more than
what the person represented
would inherit
ESTATE TAX
is a tax imposed on the privilege that a person is given in
controlling to a certain extent, the disposition of his property to take
effect upon death
Justification for the Imposition of Tax
1. Benefit-Received Theory – the state collects tax.
2. Privilege or State Partnership Theory – state is a passive silent
partner in the accumulation of the property.
3. Ability to Pay Theory – people who receives unearned wealth
have the ability to pay tax.
4. Redistribution of Wealth Theory – promotes equitable
distribution of wealth in society.
Classification of Decedents and Composition of Gross Estate
RECIPROCITY
is an that agreement between two states allows residents of one
state to request exemption from tax withholding in the other
(reciprocal) state.
Decedent Gross Estate
1. Resident Citizen
3. Resident Alien
ALL REAL properties, wherever situated;
INTANGIBLE PERSONAL
properties, wherever situated.
4. Nonresident
Alien
ALL REAL properties, situated in the PH;
TANGIBLE PERSONAL properties,
situated in the PH; and
INTANGIBLE PERSONAL properties,
situated in the PH EXCEPT when
reciprocity clause applies.
GROSS ESTATE
EXCLUSIONS UNDER SECTION 87 OF THE TAX CODE
1. The merger of usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy by the
fiduciary heir (1st heir) or legatee to the fideicommissary (2nd heir).
3. The transmission from the 1st heir, legatee or done in favor of
another beneficiary, in accordance with the desire of the
predecessor. (Special Power of Appointment)
4. All bequests, devises, legacies or transfer to social welfare,
cultural, and charitable institutions, 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
EXCLUSIONS UNDER SPECIAL LAWS
1. Proceeds of GSIS policy or benefits from GSIS.
2. Accruals and benefits received by members from the SSS by
reason of death.
3. Proceeds of irrevocable life insurance policy payable to
beneficiary other than estate, executor or administrator.
4. Proceeds of group insurance taken out by a company for its
employees.
5. War damage payments.
6. United States Veterans Administration (USVA) benefits.
7. Transfer by way of bona fide sales.
8. Properties held in trust by the decedent.
9. Nontaxable acquisition or transfers
10. Personal Equity and Retirement Account (PERA) assets of the
decedent-contributor.
Beneficiary Revocable Irrevocable
Estate, executor, administrator Included Included
Other parties Included Excluded
COMPOSITION OF GROSS ESTATE
A. Property Owned by the Decedent Actually and Physically
Present in His Estate at the Time of His Death
Examples include:
Land or Real Estate
Buildings
Shares of Stock in companies
Vehicles
Bank Deposits
B. Decedent’s Interest
This refers to the value of any rights the decedent had in property
they owned at the time of their death. Examples include:
Dividends declared before their death but received after death
A share in profits of a partnership that was earned before their
death
Rights to use or receive income from certain property, like a
lifetime lease
C. Property Not Physically in the Estate but Still Subject to
Payment of Estate Tax
This category involves certain transfers of property or rights that
may not be physically present at the time of death but are still
considered for estate tax. Examples include:
Property transferred when the person knew they might pass
away soon (transfer in contemplation of death)
Property transferred during their lifetime while they still retained
the ability to enjoy it (revocable transfer)
Property transferred with the power to decide who gets it
(general power of appointment)
Property transferred for less than its true value (insufficient
consideration)
Money owed by someone who can't pay their debts (claims
against insolvent persons)
Money from life insurance policies
2. Partial disposition of estate & application of its proceeds to the
estate tax due
disposition shall refer to the conveyance of property with
equivalent cash consideration
written request must be approved by BIR.
the computed tax due shall be allocated to the
value of each property and shall be paid to BIR
eCAR shall issue as many as the properties to be disposed
if not fulfilled, the balance is demandable and subject to
applicable penalties and interests
CIVIL PENALTIES AND INTERESTS
1. Any amount paid after due date but within extension period, shall
be subject to interest but not surcharge
12% of the unpaid tax (under TRAIN Law)
20% of the unpaid tax (prior TRAIN Law)
2. For no false or fraudulent intent of taxpayer, penalties of 25%
3. For false or fraudulent intent of taxpayer, penalties of 25%
TRANSFER AND BUSINESS TAXATION
Course: Accountancy (BSA2)
University: Quezon City University
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