Introduction

In the Philippine tax system, the computation of the gross estate is a fundamental step in determining estate tax liability upon the death of an individual. Governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963 (TRAIN Law) effective January 1, 2018, and further refined by subsequent revenue regulations, the gross estate represents the total value of all properties and interests owned by the decedent at the time of death. This valuation serves as the basis for calculating the taxable estate after allowable deductions, with the estate tax imposed at a flat rate of 6% on the net estate exceeding PHP 5 million (as per the TRAIN Law amendments).

The concept of gross estate ensures that the transfer of wealth from the deceased to heirs or beneficiaries is subject to taxation, aligning with the principle of equity in the Philippine fiscal framework. It encompasses both resident and non-resident decedents, though the scope differs based on citizenship and residency status. For Filipino citizens and resident aliens, the gross estate includes worldwide assets. For non-resident aliens, it is limited to properties situated in the Philippines. This article provides a comprehensive overview of the components, valuation methods, inclusions, exclusions, and procedural aspects involved in computing the gross estate, drawing from statutory provisions, Bureau of Internal Revenue (BIR) regulations, and judicial interpretations.

Legal Framework and Definitions

The gross estate is defined under Section 85 of the NIRC as the value of all property, real or personal, tangible or intangible, wherever situated, to the extent of the interest therein of the decedent at the time of death. This broad definition captures the decedent's economic interests, ensuring that taxation applies to the transmission of property rights.

Key distinctions based on decedent's status:

Citizens and Residents: The gross estate includes all properties worldwide, reflecting the Philippines' adherence to the nationality and residence principles in international taxation.
Non-Resident Aliens: Only properties with Philippine situs are included, such as real property in the Philippines, tangible personal property located here, and certain intangibles like shares in domestic corporations.

The time of death is crucial, as it fixes the valuation date and determines ownership. Any post-death changes, such as appreciation or depreciation, do not affect the gross estate computation.

Components and Inclusions in the Gross Estate

The gross estate comprises various categories of property and interests, as enumerated in Section 85(A) to (H) of the NIRC. Each category is valued at fair market value (FMV) at the time of death, unless otherwise specified.

1. Real Property

Real properties, including land, buildings, and improvements, are included regardless of location for residents and citizens, but only Philippine-located for non-residents. Valuation is based on the higher of:

The zonal value as determined by the BIR (per Department of Finance orders).
The current fair market value as shown in the schedule of values of the provincial or city assessor.

If the property is subject to a mortgage, the full FMV is included, with the mortgage deductible separately if qualifying under allowable deductions.

2. Tangible Personal Property

This includes movable assets like vehicles, jewelry, furniture, and artworks. For residents, worldwide tangibles are included; for non-residents, only those physically in the Philippines. Valuation is at FMV, often requiring appraisals from qualified experts.

3. Intangible Personal Property

Intangibles encompass rights or interests without physical form, such as:

Shares of stock: Listed shares are valued at the mean between the highest and lowest quotations on the valuation date (or nearest trading day). Unlisted shares use book value per latest audited financial statements, adjusted for appraisals if necessary.
Bonds, notes, and other receivables.
Bank deposits, including foreign currency deposits (subject to final withholding tax exemptions in some cases).
Intellectual property rights, franchises, patents, and copyrights.
Usufruct or other rights over property.

For non-residents, situs rules apply: Shares in Philippine corporations are considered Philippine-situs, regardless of certificate location.

4. Decedent's Interest

Any interest in property, even if not fully owned, is included to the extent of the decedent's beneficial ownership. This covers partnerships, trusts, and joint properties. For community property regimes (common in marriages under the Family Code), only the decedent's share (typically 50%) is included, unless proven otherwise.

5. Transfers in Contemplation of Death

Under Section 85(B), properties transferred gratuitously where the decedent retained possession, enjoyment, or income, or the right to designate beneficiaries, are included. This anti-avoidance provision targets donations made within three years prior to death if deemed in contemplation of death (presumption applies, rebuttable by evidence). The full value at death is included, not the transfer value.

6. Revocable Transfers

Section 85(C) includes properties where the decedent retained the power to revoke the transfer or alter enjoyment, even if not exercised. This ensures that illusory transfers are taxed.

7. Property Passing Under General Power of Appointment

As per Section 85(D), if the decedent held a general power of appointment (allowing appointment to oneself, estate, or creditors), the property is included in the gross estate.

8. Proceeds of Life Insurance

Section 85(E) includes life insurance proceeds if:

The decedent is the insured, and proceeds are payable to the estate, executor, or administrator.
The beneficiary is revocably designated.
For irrevocable designations to heirs or third parties, proceeds are excluded unless the policy was transferred in contemplation of death.

Group life insurance and accident insurance proceeds are generally excluded.

9. Prior Interests

Section 85(F) aggregates prior taxed properties or transfers to prevent double taxation, but includes them if not previously deducted.

10. Other Inclusions

Retirement benefits, pensions, and gratuities receivable by heirs.
Claims against insolvent persons (valued at recoverable amount).
Properties held in trust where the decedent was the grantor and retained income or reversionary interests.

Exclusions from the Gross Estate

Certain items are explicitly excluded under Section 85 and related provisions:

Separate property of the surviving spouse under absolute community or conjugal partnership regimes.
Proceeds of life insurance under irrevocable designations to non-estate beneficiaries.
Benefits from GSIS, SSS, or under RA 4917 (retirement benefits).
War damage payments and US Veterans Administration benefits.
Properties already taxed as gifts if the donor's tax was paid and not in contemplation of death.
Intangible properties of non-resident aliens without Philippine situs (e.g., foreign shares).
Bequests to government or charitable institutions (though these may qualify as deductions rather than exclusions).

Valuation Principles and Methods

Valuation is at FMV at the time of death, defined as the price a willing buyer would pay a willing seller, neither being compelled. BIR Revenue Regulations No. 12-2018 provide detailed guidelines:

Real Property: Higher of BIR zonal value or local assessor value. Agricultural lands may use productivity-based valuation.
Shares of Stock:
- Listed: Arithmetic mean of high and low prices.
- Unlisted common: Adjusted book value.
- Unlisted preferred: Par value if fixed, else book value.
Foreign Currency: Converted to PHP using Bangko Sentral ng Pilipinas (BSP) reference rate on death date.
Usufruct and Annuities: Actuarial valuation using BIR-approved tables based on life expectancy.
Uncollectible Receivables: Included at face value, but bad debts may be deducted if proven uncollectible.

If valuation is contested, the BIR may require appraisals, and taxpayers can challenge via administrative or judicial remedies.

Computation Process

To compute the gross estate:

Identify the decedent's status (resident/citizen vs. non-resident alien).
List all properties and interests at death.
Apply situs rules for non-residents.
Value each item at FMV.
Include special transfers (e.g., in contemplation of death).
Sum all values to arrive at the gross estate.

Example: For a resident decedent with PHP 10 million real property (zonal value), PHP 5 million shares (book value), and PHP 2 million bank deposits, gross estate = PHP 17 million.

From the gross estate, subtract allowable deductions (e.g., funeral expenses up to PHP 200,000, medical expenses up to PHP 500,000, family home up to PHP 10 million, standard deduction of PHP 5 million) to get the net estate. Tax = 6% of net estate over PHP 5 million (TRAIN Law threshold; note: Pre-TRAIN was progressive up to 20%).

For non-resident aliens, reciprocity rules may exempt certain intangibles if the foreign country grants similar exemptions to Filipinos.

Procedural Aspects and Compliance

The estate tax return (BIR Form 1801) must be filed within one year from death, extendable under certain conditions. The executor, administrator, or heirs are responsible. Payment is required upon filing, with installments possible if the estate lacks liquidity.

Non-compliance incurs penalties: 25% surcharge for late filing, 20% interest per annum, and possible compromise penalties. The BIR may issue deficiency assessments, appealable to the Court of Tax Appeals.

Judicial precedents, such as in CIR v. Estate of Benigno Toda Jr. (G.R. No. 147188, 2004), emphasize strict adherence to valuation rules and the inclusion of revocable trusts.

Special Considerations

Community Property vs. Separate Property: Under the Family Code, assets acquired during marriage are community, with half excluded from the decedent's gross estate.
Trusts and Estates: Irrevocable trusts may exclude assets if control is fully relinquished.
Foreign Assets: For residents, foreign real property is included, but foreign taxes paid may be credited.
COVID-19 and Recent Amendments: Revenue Regulations No. 13-2020 provided relief for deadlines during the pandemic, but core computations remain unchanged.
Digital Assets: Emerging issues include cryptocurrencies and NFTs, valued at FMV, treated as intangible personal property.

Conclusion

Computing the gross estate is a meticulous process integral to Philippine estate taxation, designed to capture the full economic value transferred at death while allowing for equitable deductions. Proper understanding and compliance mitigate tax burdens and avoid penalties. Taxpayers are advised to consult certified public accountants or lawyers specializing in estate planning to navigate complexities, ensuring alignment with evolving BIR interpretations and amendments. This framework not only generates revenue but also encourages prudent wealth management and distribution.