Estate Tax in the Philippines in General
In this article, we shall discuss Estate Tax in the Philippines, an overview thereof. The concept of birth and death plays a vital role in our society. From a cultural perspective, birth is the opportunity to experience and to live, while death is the simple end thereof and a signifier for new life.
From a literary perspective, birth and death are connected to form an unending cycle of life – one birth is equivalent to a single death. Nonetheless, legal and political perspectives might offer another standpoint, in which, death for one could be one of the millions of sustenance that help the state to sustain life, and of course, to let the people to still give birth.
Quite metaphorical it is; however, the state revolves around the intricacies of human life – the connection of birth and death to keep the flow of the nation.
Generally, the taxes are being used to support the lifeblood of the state, its infrastructure projects, and its habitants – these being collected from living persons or entities arising from the death of another.
Sources of Taxes
Specifically, amongst other sources of taxes, the state is likewise levying taxes from the properties left by a dead person. While it is a death of a person to another, it is meanwhile a birth of a tax against an estate called Estate Tax.
On one hand, from a layman’s viewpoint, an estate is a collection of all the properties, rights, and obligations left by a dead person. On the part of the dead person’s heir or heirs in the appropriate cases, these are the things that the heirs will inherit following the formalities of law.
Legally, the heirs will acquire an “inheritance that includes all the property, rights, and obligations of a person which are not extinguished by his death.”1
On the other hand, tax is the contribution from the resident of the state. The government is utilizing the taxes to fund infrastructure projects, disseminate sustenance for the people, pay the manpower of the government, and improve similar aspects for the common good.
Power of the State
The Supreme Court clarified that taxes are being levied or collected via the destructive power of the state which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.2
Since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation, and statutes granting tax exemptions are, thus, construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.3
In a simplified explanation, an estate tax is a tax imposed by the government, not on the natural persons as taxpayers, but the properties, as a juridical entity, left by a dead person called the estate. The case law explained that estate tax is, in reality, an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift, to become operative at or after death.4
The same case offered a rationale on the above definition, explaining that death is the generating source from which the power of the state to impose inheritance taxes,5 its being, and if, upon the death of the decedent, succession takes place and the right of the state to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent’s death, regardless of any subsequent contingency affecting value or any subsequent increase or decrease in value.6
From a technical view, the payment of estate tax only takes place upon the death of a person (decedent). As supported by law, the rights to the succession are “transmitted from the moment of the death of the decedent.”7
Amongst other requisites for the imposition of estate taxes are that the successor is alive at the time of the decedent’s death, and the successor is qualified for inheriting the said properties above.
The imposition of the estate taxes is grounded on the symbiotic relationship theory, making the two parties do each of their respective obligations – the payment of taxes on the part of its citizens and the advancement of the people’s welfare on the part of the state.
As per the Court, despite the natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every person can contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.
This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.8 Of the same importance, such imposition must lead to redistributing the acquired wealth by the successors.
In a study, it appears that inheritance leads to the increase of wealth inequality, in the sense that heirs with higher amounts of inheritance pay less than heirs that inherited smaller estates. On a good point, the imposition of estate taxes acts as an equalizer to achieve equilibrium in the above colliding worlds.9
From the collective perspectives of birth and death, including its legal role, down to the importance of taxes and the obligations of the successors to pay the same, estate taxes are one of the facets of the law of succession that needs to be discussed. From a quick overview, the present article will elucidate the common topics and questions about estate taxes.
As such, the current work will tackle the basic discussion on the computation of estate taxes, the impact of Train Law, estate tax amnesty, estate tax planning, and other relevant matters that will help, not just the law students and young legal practitioners, but also the public in general.
The effect of new TRAIN Law: Estate Taxes
Prior to 01 January 2018, Republic Act [RA] No. 842410 or the National Internal Revenue Code governs the imposition of estate taxes on a decedent’s property in the Philippines. In accordance with R.A. 8424 the estate tax should be imposed on a decedent’s estate as follows, to viz:
“Section 84. Rates of Estate Tax. There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following schedule:
If the net estate is:
|OVER||BUT NOT OVER||TAX||PLUS||OF THE EXCESS OVER|
These rates shall be applicable to the estate of decedents who die before 01 January 2018.
On 01 January 2018, Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Law (TRAIN law), was in effect, which amended the Tax law, including the imposition of estate taxes. The TRAIN Law imposed a new Tax Rate of 6% based on the value of the Net Estate of the decedent.
As discussed by the National Tax Research Center [NTRC], TRAIN Law11 further imposed changes on the computation of estate tax as follows, to viz:
“ON THE COMPUTATION OF ESTATE TAX:
Removes the deductions from gross estate pertaining to the actual funeral expenses of 5% of the gross estate, whichever is lower; judicial expenses; and medical expenses but increased the amount of standard deduction from P1 Million to P5 Million;
Increases the amount of deduction for family home from up to P1 Million to up to P10 Million and removed the sine qua non condition for the exemption or deduction, that the family home must have been the decedent’s family home as certified by the barangay captain of the locality;
Removes the deductions for nonresident estates pertaining to expenses, losses, indebtedness, and taxes but provides for a standard deduction amounting to P500,000.;
Deletes the provision that requires executor, administrator, or anyone of the heirs to include in the estate tax return that part of the nonresident alien’s gross estate not situated in the Philippines to be able to claim deductions;
Increases the amount of gross value of estate provided in estate tax returns that requires to be supported with a statement duly certified by a Certified Public Accountant (CPA) from P2 million to P5 million.”
Computation of the Estate Tax under the new TRAIN Law
In order to compute the real estate tax under the Train Law, the six percent (6%) rate shall be multiplied with the Net Estate, regardless whether resident or nonresident of the Philippines.
Before, Section 84 of Republic Act No. 8424 or also known as “An Act Amending the National Internal Revenue Code, as Amended, and for other Purposes”, the Rates of Estate Tax shall be computed based on its estate value, if its exceed Two Hundred Thousand Pesos (P200,000.00) it will be taxed ranging from 5% to 20% rate.
However, such rule is amended by Section 22 of the Republic Act [RA] No. 1096312 or “Tax Reform for Acceleration and Inclusion or as it is most commonly referred to as TRAIN Law, to wit:
“Sec. 22. Section 84 of the NIRC, as amended, is hereby further amended to read as follows:13
“Sec. 84. Rates of Estate Tax- There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Section 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax at a rate of six percent (6%) based on the value of such net estate.”14
The above-captioned provision aims to simplify the computation of the estate tax from 5% to 20% rate into fixed rate 6% regardless of its net estate.
For citizens of the Philippines, the gross estate includes all of the decedent’s assets at the time of his death, whether they were tangible or intangible, wherever they were located, with the exception of bank deposits that had already been withdrawn and were subject to a final withholding tax of 6%.
However, it does not include the exclusive assets of the surviving spouse. Both resident aliens and non-resident aliens should have access to the property or properties that are situated in the Philippines.
Additionally, even if any properties owned by resident and non-resident alien decedents that are located outside the Philippines are not taxable, they must nevertheless be disclosed in the return under the Schedule Section in order to compute the precise amount of allowed deductions.
This restriction should be lifted if the estate has no claims. A certification from the closest Philippine Consular Office should be gotten if there is a claim of missing property outside of the Philippines.
Objects of value will fall under Philippine Estate Tax
Under Section 85 of the National Internal Revenue Code (NIRC), the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.15
Based on the abovementioned provision, the following are included in the gross estate of a deceased resident citizen or resident alien: (a) real or immovable property; (b) tangible personal property, such as cars, jewelries, paintings, etc.; and (c) intangible personal property, i.e., franchise or shares of stock. All of these properties are included in the gross estate wherever those are located.
On the other hand, included in the gross estate of a non-resident alien or non-citizens of the Philippines are:
(a) real or immovable property located in the Philippines;
(b) tangible personal property located in the Philippines; and
(c) intangible property with a situs in the Philippines. i.e., franchise exercised in the Philippines or shares, rights in any partnership, business or industry established in the Philippines.
In contrast, the law provides that there are also properties16 which are excluded from the gross estate, such as transfers through bonafide sale; proceeds of life insurance wherein the beneficiary is irrevocably appointed;17 or exclusive property of the surviving spouse.18
Further, Section 87 of the NIRC19 also provides that the following shall not be taxed:
(a) merger of usufruct in the owner of the naked title;20
(b) transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;21
(c) transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and22
(d) all bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, that not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.23
The 4W’s of Estate Tax: Who, When, Where and What
People who acquire properties through inheritance have some boggling questions in their minds which need to be clarified to prevent potential difficulties in the future as the term estate tax in itself is an unfamiliar or a technical term for many of us. This article provides clarifications to some of these primary estate tax queries.
|4W's [Estate Tax]||People Required to File and Pay Estate Tax Return|
|WHO||The executor, administrator or any of the legal heirs are required to file estate tax return as a condition precedent for transfer of ownership in the name of transferee.|
It covers all cases of transfers subject to estate tax or regardless of the gross value of the estate, estate consisting of registered or registrable property such as real property, motor vehicle, shares or stock or other similar property, which necessitate the clearance from the Bureau of Internal Revenue.24
This is required for either resident or non-resident of the Philippines. In the absence of an appointed, qualified or acting executor or administrator, the law allows any person in actual or constructive possession of any property of the decedent.25
Before distribution and delivery of any shares to any of the beneficiaries, the estate tax shall be paid by the executor or administrator. Where there are two or more executors, all of them are severely liable for the payment of the estate tax. The inheritance tax, although charged against the account of each beneficiary, should be paid by the executor or administrator.26
|4W's [Estate Tax]||Time of Filing and Payment|
|WHEN||As a mandatory requirement, estate tax return shall be filed within one (1) year from the decedent’s death. However, in meritorious cases, the BIR Commissioner was given authority by the law to give extension not exceeding thirty (30) days for filing the return.27|
The estate tax must be paid at the time the return is filed by the executor, administrator or the heirs.28 Aside from filing of return, extension may also be granted by the Commissioner in terms of payment if the due date would impose undue hardship on the estate or any of the heirs.
The extension should not exceed five (5) years for judicially settled estate and two (2) years for those settled outside court. No extension will be granted where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer.29
|4W's [Estate Tax]||Location of Filing and Payment|
|WHERE||The law provides that as a general rule the estate tax return shall be filed with an Authorized Agent Bank (AAB), or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.30|
Leeway may be allowed in cases where the Commissioner otherwise permits.
Upon filing of the designated BIR form for Estate Tax Return, payment shall be paid to AAB where the return was filed. Direct payment to the Revenue Collection Officer or duly authorized City or Municipal Treasurer may be allowed in the absence of AAB on certain localities where there are no AABs.
|4W's [Estate Tax]||The Process|
|WHAT||Triplicate copy of the designated BIR form for Estate Tax Return shall be filled up completely, under oath and filed by the people (executor, administrator or any of the legal heirs) within the time (except in meritorious cases) and place prescribed by law.|
A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance (1) when the return is made in good faith and is not false or fraudulent; (2) when it covers the entire period involved; and (3) when it contains information as to the various items of income, deduction and credit with such definiteness as to permit the computation and assessment of the tax.31
The Commissioner shall be furnished by a certified copy of the schedule of the partition and order of the court approving the same within thirty (30) days after the promulgation of the Order.32
The return shall be filed with the AAB of the Revenue District Office that has jurisdiction on the decedent’s place of domicile at the time of his death. In places where there are no AABs, the law provides other alternatives.
Payment should also be made on the same AAB which will also stamp and machine-validate the return. Official receipt, bank debit advice or credit document may also be issued as an additional proof of payment.
For the documents necessary for the establishment of correct estate tax, the list is provided in the designated form (BIR Form No. 1801) which can now be easily accessible online through the BIR Official Website.
The Requirements for Estate Tax Returns
The filing of Estate Tax Return is done in the Bureau of Internal Revenue (BIR). BIR is very particular with the submission of complete documentary requirements before the commencement of the transaction. Therefore, it is important to be familiarized with the said requirements if one wishes to file his or her Estate Tax Return.
I] Mandatory Requirements – applicable to either taxable or non-taxable (exempt) estates:
A] Tax Identification Number (TIN) of the Estate – this can be requested by using BIR Form No, 1901.
B] Photocopy of the Death Certificate – submission of this requirement must be accompanied by the original copy for purposes of authentication.
C] Any of the following:
1] Affidavit of Self Adjudication – this is a legal document declaring the person named therein as the sole heir and beneficiary of the estate;
2] Deed of Extrajudicial Settlement of the Estate – this is only cases where the estate had been settles extrajudicially;
3] Court order if settled judicially; or
4] Sworn declaration of all properties of the Estate.
D] Official receipt/Deposit Slip and duly validated return as proof of payment.
II] For Real Properties, if any:
A] Certified True Copy of the latest Tax Declaration of real properties at the time of death, if any.
B] Certified True Copy of Transfer Certificate of Title/Original/Condominium – this must be the owner’s copy; however, it is for authentication purposes only.
C] Certificate of No Improvement or Sworn Declaration by at least one (1) of the transferees.
III] For Personal Properties, if any:
A] Certificate of Deposit/Investment/Indebtedness owned by the decedent and the surviving spouse.
B] Certificate of Registration of vehicles and other proof of acquisition – this is for the purpose of identifying the applicability of the 20% depreciation rate.
C] Proof of valuation of the shares of stocks at the time of death, if any:
1] For listed stocks – Stock Exchange issued certificate of the price index; and
2] For unlisted stocks – latest audited financial statement of the issuing corporation of the book value per share.
D] Other requirements which may be required by law/rulings/ regulations/other issuances, such as but not limited to:
1] Proof of valuation of other types of personal property if not included in those enumerated above;
2] Any proof of claimed tax credit;
3] Duly notarized Promissory Note for claims against the Estate that may have arise from any contract of loan;
4] Liquidation of the proceeds of loan entered into by the decedent for the past three (3) years reckoned from the time of death;
5] Proof of any previous property already been taxed;
6] Proof of any property that have previously been transferred for public use; and/or
7] Copy of any Tax Debit Memo, if applicable, etc.
These are the documentary requirements specified on the BIR website at the time this article was written. The person filing the above-mentioned requirements must prepare a duplicate copy of the documents and ensure that the Checklist of Documentary Requirements (CDR), which can be downloaded from the BIR website, is duly signed by the One-Time Transaction (ONETT) Head. The original copies will be attached to the docket, with a duplicate given to the taxpayer.
Preparation of Estate Tax Return
Succession became effective when the deceased passed away, and from this point forward, estate tax is imposed on the right to transfer the property, not on the actual property. It is also set forth in the Revenue Regulations issued by the Bureau of Internal Revenue which provides that “upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death.”35
Once the estate tax has been determined, an estate tax return must be submitted. Accordingly, the National Internal Revenue Code (NIRC) clearly provides that “the estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs.”36
The executor, administrator or the heirs must know the process in filing the estate tax return. This article will go through the procedures and things you must know while preparing an estate tax return.
First, know the requirements. The executor, administrator or the heirs must comply with the requirements laid down in Section 90 of the NIRC. However, it should be emphasized the additional requirement provided in the aforementioned section wherein “the estate tax returns showing a gross value exceeding Five million pesos (P5,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant.”37
Second, prepare the required form. The executors, administrator, or the heirs must accomplished the BIR Form 1801 – Estate Tax Return. The form must be completely filled out with all necessary information including the Taxpayer Identification Number (TIN) as one of the required information.
Third, know the place of filing. When submitting the estate tax return, there is a distinct place for it. This implies that it cannot be filed by the executor, administrator or the heirs wherever it is convenient or desirable to him. It is laid down in Section 90 (D) of the NIRC which provides:
(D) Place of Filing. – Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.38
Fourth, be aware of the time for filing. The executors, administrator, or the heirs should timely submit the estate tax return. Consequently, they should be mindful of the deadline of submission. In connection thereto, Section 90 (B) of the NIRC provides:
(B) Time for Filing. – For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within one (1) year from the decedent’s death.
A certified copy of the schedule of partition and the order of the court approving the same shall be furnished to the Commissioner within thirty (30) days after the promulgation of such order.39
Additionally, it is set forth as an alternative or option for the executor, administrator or the heirs to extend the time for filing the estate tax return in some reasonable and meritorious circumstances. This extension is given so that the executor, administrator, or heirs can still submit the estate tax return and avoid any ensuing penalties. The extension of time for filing is provided under paragraph C of the aforementioned section, thus:
(C) Extension of Time. – The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return.40
Lastly, be responsible. Timely filing of the estate tax return by the executor, administrator or the heirs shows a person being responsible. Being responsible will avoid any liability and penalties in the case of non-filing or late filing. After completing the required documents in the estate tax report, the estate tax can now be paid.
Effects of Failure to Pay the Estate Taxes
In general, the estate tax is a charge for the right to pass one’s inheritance to his or her heirs at the time of death. Either a will or intestate succession may result in this succession.
Section 84 of the National Internal Revenue Code (NIRC) states that:
Section. 84. Rates of Estate Tax.—There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax rate of six percent (6%) based on the value of such net estate.41
What happens if the administrator fails to pay the estate tax of their inheritance?
Failure to pay estate tax deprives inheritors of access and benefits from properties left by the deceased, said Abrea, a certified public accountant and tax consultant. The assets that make up the decedents’ estates are difficult to sell or otherwise dispose of.
If the estate taxes are not paid, the properties cannot be transferred to or registered in the names of new owners. There are also penalties given if there are late payments of estate tax. Under Section 248 of the National Internal Revenue Code of the Philippines,42 it states that:
SEC. 248. Civil Penalties. –43
(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:44
(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or45
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or46
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or47
(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.48
(B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial under-declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial under-declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.49
The late payment of estate tax will lead to the imposition of 25% to 50% surcharge, 20% interest per year, and a compromise penalty.
Any person who willfully attempts in any manner to evade or defeat any tax imposed under the National Internal Revenue Code of the Philippines or the payment thereof shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine not less than Five hundred thousand pesos (P500,000) but not more than Ten million pesos (P10,000,000) and suffer imprisonment of not less than six (6) years but not more than Ten (10) years50: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.51 To avoid further complications, do not avoid paying your tax.
Strategies for Ordinary Citizens in Dealing with the Estate Tax
Many people are afraid of paying taxes because it will cost them a lot of money, but what exactly is estate tax? The estate tax is a tax paid when property is transferred to heirs. Estate tax must be paid within one year of the decedents’ deaths, and if this period is exceeded, penalties and surcharges will apply.
Many heirs simply sell the property at a low price and let the buyer pay the appropriate taxes. It is unquestionably not a good idea. Here are some ideas for ordinary citizens like us on how to deal with the estate tax.
First is by “gifting”. In this, you are directly putting the property under the name of your heir when buying a property. Yet, under the law, you cannot name your property under the name of your child when they are still under legal age because a child or a minor doesn’t have the capacity to purchase or to buy a property.
The Bureau of Internal Revenue (BIR) will definitely know about this and therefore if you do this strategy it will fall under a donation, and you will need to pay the “donor’s tax”. It is a tax imposed on a donation or gift between two or more persons who are living at the time of the transfer.
It simply means that you can give pieces of your properties to your children while you are still alive. The tax rate of the donor’s tax is 6%, the same as the estate tax but the strategy in donating the property and paying the donor’s tax is that the value of the property is lesser because the value of the property will accumulate in the future.
The second is liquidating your assets. Asset liquidation refers to the process of converting non-liquid assets into liquid assets by selling them on the open market. An individual can liquidate assets voluntarily or be forced to liquidate assets through the bankruptcy process.
Lastly is the so-called “Estate preservations insurance plans”. It is best to have this kind of insurance because they can project how much money you will be needing to cover your estate tax in the future so better get insured and protect your children from the hassle of paying the estate tax. Having this kind of strategy will relieve your loved one from further pain after your death.
The Government Extends Help through Estate Tax Amnesty
There could be various reasons why taxpayers end up being delinquent in settling estate taxes; one year of failure to settle tax obligations led to another year and to another year. And voila! The estate tax dues have accumulated.
The government recognized the very predicament of taxpayers. It is strongly encouraged that the taxpayers should avail of the opportunity to ‘to wipe the slate clean’, in accordance with Republic Act No. 11213 or the Tax Amnesty Act.52
The Estate Tax Amnesty primarily gives taxpayers a chance to settle overdue tax liabilities without fear of any civil and criminal prosecutions for failure to pay taxes. Section 4 of R.A. No. 11213 provides that the amnesty covers the estate of descendants who died on or before December 31, 2017, with or without assessments duly issued, and whose estate taxes have remained unpaid up to that date.53
Those who will avail the tax amnesty are only to pay the rate of six percent (6%) based on the decedent’s total net estate at the time of death or the minimum amnesty tax of 5,000Php if the net estate is negative.
However, for the estate tax return previously filed with the Bureau of Internal Revenue (BIR), the estate tax rate of six percent (6%) shall be based on net undeclared estate.54 This estate amnesty act, nonetheless, is primarily not applicable to any delinquent tax liabilities which have become final and executory.
And if this good news is still not enough for the taxpayers, the government has extended the period for availing the Tax Amnesty Act until June 14, 2023, through the passage of Republic Act No. 11569 or the law Extending the Estate Tax Amnesty.55
Former President Duterte contemplates on the Estate Tax Amnesty Act that, with the estate tax amnesty, long unsettled estates can now be transferred. The heirs can focus on making idle properties productive thereby bringing economic benefit to their families without the burden of tax liabilities.56
This is the government’s offer— an opportunity for citizens to disclose past failings and for the government to forgive them with the expectation of better compliance in the future.57 The choice to avail of these benefits is now left with the executors or administrators, or legal heirs, or transferees, or beneficiaries.
Who is the Delinquent Taxpayer?
The Supreme Court explained that:
In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable.58
When faced with a similar situation, the delinquent taxpayer in cases of notices of levy issued to satisfy the delinquent estate tax is always the decedent’s estate, not the heirs.
Who is Liable to Pay for the Estate Tax?
However, as to the matter of who shall pay the estate tax, it is not the estate that is liable to pay for the estate tax. Section 91D of the National Internal Revenue Code of 1997 provides:
The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. Such 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. x x x.59
Heavy Estate Tax: Common Problem in Paying Estate Tax
Nothing is certain, except death and taxes,60 as has been stated numerous times. These words are still running true until now. Regrettably, you will still be pursued with taxes even after your death. However, it is your surviving family who will have to deal with them; this is what we call the estate tax.
The payment of estate tax, also known before as inheritance tax, seems to be a highly complicated obligation on the part of a departed loved one. Talking about a parent’s estate can be a touchy subject, especially given that the majority of Filipinos do not make a will.
It is well understood that paying estate tax is more than just a piece of paper. It has many layers of process that can occasionally result in a mountain of payment-related issues, one of which is a hefty estate tax. It is common to hear about people struggling to pay estate taxes, which can be extremely high. Tax rates were not uniform back then. That meant you might be able to legally reduce your estate tax.
You can sell your assets or give them to your projected recipients while you are still alive to make them appear as a donation. But be careful, this may have a nominal effect. This is mainly because capital gains tax and donor’s tax now have the same rate as estate tax at 6% because of TRAIN Law.61 With the present six percent estate tax in the Philippines, estate taxes can be of a hefty sum.
As mentioned earlier, assets will not be divided appropriately until the estate tax is paid. It is essential that the Estate Tax Return be paid and filed within six months of the decedent’s passing. If not, the tax due shall be subjected to additional interests and fees. As a result, the assets cannot be given to the heirs or other parties without evidence that the estate taxes have been paid.
Consider purchasing life insurance and naming your heirs as policy beneficiaries. They will inherit your assets in the event of your death. The policy proceeds can be used to pay the estate tax.
When you die, your insurance proceeds are fully transferred to your beneficiaries. Beneficiaries who have been designated as irrevocable are also exempt from estate tax. If the estate tax remains too high for you, you may wish to consider applying for an estate amnesty program.
Insufficient Funds In Paying Estate Tax: An Estate Tax Dilemma
It is truly effervescent to be trusted with or inherit a property from one of your family relatives. Also, to be called an “heir” is like an entitlement dreamed by many. It could also be a happily ever after ending kind of story for you and your family if you have been renting for the longest time and dreaming of owning a place or a business/property one day. Yet, one famous movie quote tells us that ‘with great power comes with great responsibility’, and the responsibility we are referring to here is the payment of an estate tax.
The previous subtopic has already explained what an estate tax is, and it also discusses the necessary procedure involved in paying an estate tax. But let us be honest, the payment of estate tax is not as smooth as always, problems arise.
For illustration, you were an heir to a one hectare rice field of your deceased grandfather, but before owning and fully utilizing the said rice field, you are required to pay the estate tax for it to be transferred under your name.
Nonetheless, being an average employee with an average income, you have no means of paying the said assessed estate tax and now, you are in a dilemma how would the rice field be transferred into your name given you have insufficient funds to pay for it. The question now is how to resolve this kind of problem?
The Tax Reform for Acceleration and Inclusion Law, or better known as TRAIN LAW, provides that in case the available cash of the estate is insufficient to pay the total estate tax due, payment by installment shall be allowed within two (2) years from the statutory date for its payment without civil penalty and interest upon approved by the concerned BIR Official.62
Here, in case of insufficiency of cash for the immediate payment of the total estate tax due, the estate may be allowed to pay the estate tax due through these two options. First is through cash installments and second, is partial disposition of the estate and the application of its proceeds to the estate tax due.63
Section 91 of the National Internal Revenue Code [NIRC] was recently amended to allow cash payments to be made in installments. So the property’s inheritor has nothing to worry about if he or she does not have enough money to pay the estate tax right now.
He or she has two years to pay the estate tax without fear of a civil penalty. However, it should be noted that this is not automatic; payment of estate tax installments is still subject to the approval of the concerned BIR Official.
Necessity of Estate Planning
There’s an old saying that “a person cannot carry his treasures with him once he dies.” It’s an old saying, but it’s the most common phrase you’ll hear anywhere. More often than not, a person accumulates properties throughout his lifetime.
Once he is old and nearing the end of his journey, you will begin to wonder, “Where will his properties go? “, what is certain is that he cannot take his possessions with him when he dies, which is where a will comes into play.
Under Art. 783 of the New Civil Code, a will is an act whereby a person is permitted, with the formalities prescribed by law, to control to a certain degree the disposition of this estate, to take effect after his death.64
As can be gleaned from the provision, the purpose of the will is for the testator to control the disposition of his estate, which will only take effect after his death. The word “control” here can be associated to the manner in which the estate may be disposed of, disposition of estate is crucial and may oftentimes lead to an estate planning.
One of the purposes of estate planning is to minimize the risk of incurring unnecessary loss when it comes to imposition of estate tax, as estate tax is a tax not on the property but on the privilege of transmitting the property to heirs.
One may also think that estate planning is a way to somehow ease the burden of thinking about who will inherit the estate in cases where there are no compulsory heirs. Estate planning is some sort of arrangement of someone’s estate so that the inheritance will only go to the right person.
One might think that for a person creating a will, his purpose is to have a peace of mind not only for him but also for his loved ones that he will be leaving behind. We all know that sometimes inheritance can be miserable, for it can be the root of dispute among the family members of the deceased.
Estate planning is a way to preempt that scenario. By having a plan, a person creating a will can be assured that his property will go to the person or entities he intended. We also know that before an estate is transferred to the grantee they will first have to pay its necessary estate taxes, and sometimes it can be onerous depending on the amount of estate. In order to minimize the loss by paying estate taxes an estate planning may be of great help.
As a final note, estate planning will give a person the peace of mind that he wanted not only for him but also to his loved ones. It will prevent the family disputes that may happen if the estates were disposed of unplanned.
Estate Tax Settlement Method: Modified by TRAIN LAW
On January 1, 2018, the Tax Reform for Acceleration and Inclusion (TRAIN) Law took effect. Among the significant changes it had introduced are the following modifications in the estate tax settlement procedures:
Filing of notice of death
The TRAIN law repeals the provision under Section 89 (Notice of Death to be Filed) of the Tax Code that covers the notice of death and its period of filing.
Filing of estate tax returns
The TRAIN law modifies Section 90 (Estate Tax Returns) of the Tax Code, which pertains to the estate-tax return procedural requirements.
- The threshold amount for requiring a certification from a certified public accountant (CPA) was increased. CPA certifications for estate-tax returns with a gross value of more than P5 million is now required, different from previous tax system wherein CPA certifications were only necessary for estate-tax returns with a gross value of more than P2 million.
- The time for filing of the estate tax returns was extended. From the previous period of 6 months to 1 year from the decedent’s death.
Payment of estate tax though installment
In case the available cash of the estate is insufficient to pay the total estate tax due, the option to payment by installment procedure was clarified in the TRAIN law. The law imposes an implicit two-year limit for full estate-tax obligation from the statutory date for payment, with the liabilities not subject to civil penalty and interest. This limitation was not covered by the previous tax system.
Withdrawals from the deceased’s bank account
In the previous tax system, withdrawals from a deceased person’s account were limited to P20,000. Provided that they are authorized by the commissioner, the administrator of the estate or the heirs may withdraw an amount not exceeding P20,000.
Under the TRAIN law, the P20,000 limit on withdrawals from a deceased person’s account is now removed, modifying it with any amount to be subject to a 6% final withholding. In addition, a statement under oath of all withdrawal slips that all joint depositors are still living at the time of the withdrawal.
- Art. 776, Title IV. – Successions General Provision, New Civil Code
- Paseo Realty vs. Court of Appeals, G.R. No. 119286, October 13, 2004
- Lorenzo vs. Posadas, G.R. No. 43082, June 18, 1937
- Abolished the same by P.D. No. 69, passed on November 24, 1972 due to the lack of a sound tax system
- Lorenzo vs. Posadas G.R. No. 43082. June 18, 1937
- Art. 777, Succession, General Provision, New Civil Code
- CIR vs. Algue Inc., G.R. No. L-28896 February 17, 1988
- Elinder, Erixson, Waldenström (2018). Inheritance and wealth inequality: Evidence from population registers. Journal of Public Economics.
- RA 8424
- Tax Changes You Need To Know
- RA 1063
- Section 85 of the NIRC, as amended by the TRAIN Law
- Section 85 (B) of the NIRC, as amended by TRAIN Law
- Section 85 (E) of the NIRC, as amended by TRAIN Law
- Section 85 (H) of the NIRC, as amended by TRAIN Law
- Section 87 of the NIRC, as amended by TRAIN Law
- Section 90 (A) of the NIRC, as amended by TRAIN Law
- Section 91 of the NIRC, as amended by TRAIN Law
- CIR vs. Gonzales, G.R. No. L-19495, Nov. 24, 1966
- Sec. 90 (C), supra
- Sec. 91 (A), supra
- Sec. 91 (B), supra
- Sec. 90 (D), supra
- CIR vs. Gonzales, G.R. No. L-19495, Nov. 24, 1966
- Sec. 90 (B), supra
- Tax Information, Estate Tax
- Checklist of Documentary Requirements (CD) Estate Tax
- Revenue Regulations No. 12-2018, January 25, 2018
- Section 91 (A), National Internal Revenue Code [NIRC]
- Section 90 (A), National Internal Revenue Code [NIRC]
- Section 90 (D), National Internal Revenue Code [NIRC]
- Section 90 (B), National Internal Revenue Code [NIRC]
- Section 90 (C), National Internal Revenue Code [NIRC]
- Section 84, National Internal Revenue Code of the Philippines
- Section 248, NIRC
- Section 254, NIRC as amended by TRAIN
- Republic Act. No. 11213 or the Tax Amnesty Act
- Republic Act. No. 11569
- On Tax Amnesty Act
- Marcos II vs. Court of Appeals, G.R. No. 120880. January 13, 1999
- Section 91(D), NIRC
- Franklin, B. (2011). Last Great Quote and the Constitution. Constitution Daily
- Section 84, NIRC, Supra
- Sec. 91 of NIRC as amended by Sec. 26, R. A. No. 10963
- Villaranza & Angangco, “The Unspoken Cost of Dying: A Summary of Philippine Taxes After Life”, June 29, 2020
- Art. 783 of the New Civil Code