Tax reform has been figuring prominently in the news lately as President Rodrigo Duterte pursues his campaign promise to revisit the country’s tax system.
Along with measures such as the reduction of individual and corporate income tax, the Department of Finance (DOF) also plans to lower estate tax: from a staggering rate of 20%, the DOF is looking to reduce it to 6% to ease the burden on taxpayers and to encourage voluntary compliance.
Based on the current Tax Code, estate tax ranges from 5% to 20% of the net assets of the deceased person (decedent), the highest possible payment being P1.215 million, plus 20% of the excess over P10 million.
Under the Aquino administration, the Bureau of Internal Revenue (BIR) wanted to target an average collection of P12.5 billion a year of estate taxes. But for 2013, the Bureau’s estate tax haul only averaged between P850 million to P1 billion.
The DOF cited that the steep reduction in the current tax rate would improve the tax collection efficiency as it expects that more taxpayers will be willing to pay taxes on the transfer of properties from deceased individuals to their heirs. The reduction will likewise promote the faster development of idle real estate properties, making them economically more productive assets.
One might ask what an estate tax really is and why the government is fixated on reducing it when they could just as well focus on income tax and value-added tax (VAT).
Estate tax is the tax on the right of the deceased person to transfer his or her estate to the lawful heirs at the time of his or her death. It is not a tax on the property itself, but a tax imposed on the act or the privilege of passing the ownership of the property onto another party upon the death of the owner.
Under the present regulations, the estate tax return must be filed within six months of the decedent’s death. Penalties such as surcharges and interests may be imposed if the estate taxes are not settled within the six-month period. However, the Commissioner of Internal Revenue may grant an extension not exceeding 30 days and, in special circumstances, up to five years.
Sadly, not many are aware of estate taxes. By the time the surviving heirs learn about the required payment of estate taxes, the hefty amount of tax liability due may prove too burdensome, especially in the case of late estate tax payments. As such, many inheritors resort to letting the title remain with the decedent if only to avoid paying the 20% estate tax. As a result, when people go around buying or leasing properties, particularly pieces of land, they discover that many properties are still locked up in the name of decedents, making it difficult for them to develop these properties and maximize the potential.
On the other hand, those who are aware of the law tend to avoid estate tax by donating or selling their properties to their heirs while they are still living.
It should be noted that the sale of real property considered as capital asset is subject to 6% capital gains tax and 1.5% documentary stamp tax. It is also worth mentioning that for a sale to take effect, the buyer (or heir) should have the capacity to buy, and should actually purchase, the property. In case the heir has no capacity to buy the said properties, the transferor may opt to simply donate the properties to his or her children. Such a donation is subject to a maximum of 15% donor’s tax. Clearly, these modes of transferring assets entail less tax payments compared with estate tax.
Having said the above, if the proposed reduction is enacted into law by Congress, then the new, lower estate tax rate will be at par with capital gains tax, which admittedly is seen as the preferred means of transferring assets from a property owner to his or her heirs. At best, the enactment into law will likely inspire taxpayers to pay estate taxes and to comply with the transfer of titles of land and other properties.
At the end of the day, no one can escape taxes, as even in death there are taxes. As Benjamin Franklin once said, “In this world, nothing can be said to be certain except death and taxes.”
The author is a senior with the tax and corporate services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.