No, no, no – this is not about the death penalty; rather, this is about death tax and the government’s plan to for-give those who have not paid the estate tax on the transfer of estate of the decedent to the heir/s at the time of death.
The estate tax is a tax imposed on the right of the deceased to transfer his estates to his successors. While it serves the purpose of reducing inequality in wealth and income, it is widely believed that the tax has not been ef-fective in doing so and, instead, has been seen by taxpayers as a nuisance.
No study has been conducted on the estate tax gap, but it is widely known that the level of non-compliance on the payment of estate tax is high, perhaps even higher than most other taxes judging from the number of tax returns and amount of estate tax collected by the Bureau of Internal Revenue (BIR).
According to the National Tax Research Center (NTRC), the average ratio of estate tax returns filed to the number of deaths is only 6.95 percent from 2006 to 2015. Collections from estate taxes are persistently low, with the ratio of estate tax collections to the total BIR collections in the years 2013, 2014, and 2015 averaging only 0.14 percent, 0.24 percent and 0.17 percent, respectively.
The estate tax has to be paid before the heirs can take ownership of the property of the deceased. If the heirs do not have the money to pay the estate tax, it is common practice to have them divide the estate among themselves without paying the estate tax, or in case the deceased owns numerous properties, the heirs usually end up selling some properties of the deceased to pay for the estate tax. It may sound ludicrous, but parents would do well to ensure that they leave enough money to pay not only for their funeral expenses but for the estate tax as well.
The division of properties without payment of tax is prevalent, especially when we talk about bequeathed proper-ties in the rural areas, often involving a piece of land – say, farmland tilled by the deceased – which is the only property being transmitted to the heirs. The heirs, who continued the tillage of the land after the death of the de-ceased and rely on the same land as a source of livelihood, may not even be aware of the need to pay the estate tax, and therefore, transferring ownership of the property and settling the estate tax may be the least of their concerns.
Many estates are also entangled in disputes. The case of siblings wrangling over inheritance is very common and may result in delays in the filing of estate tax return and/or in non-settlement of estate tax.
The estate may also include untitled properties that have been passed on from generation to generation, and the land registration/titling issue has prejudiced the levying of the estate tax on these properties. Moreover, the amount of deficiency estate tax that is computed based on the laws in force at the time of death and the accrued penalties become, over time, too burdensome to pay. Given that historically, the BIR does not prioritize assessing the estate of the deceased, the heirs just take hold of the property without the title transferring to them.
No buyer would be interested in purchasing property from persons who do not have ownership of the property. Banks, as well, may not be willing to extend a loan to persons who offer as collateral properties that are not under their name. This shows that the level of compliance with the estate tax significantly affects growth of the land market and access to credit, which are important engines of economic growth, especially in rural areas.
To encourage payment of outstanding estate taxes and to release properties that have been idle due to unsettled estate taxes, the House of Representatives recently passed on third and final reading House Bill (HB) No. 4814, which grants an amnesty in the payment of estate tax.
Under the proposed bill, those who avail of the estate tax amnesty will just have to pay 6 percent tax on the dece-dent’s net estate, sans penalties, within two years from the issuance of the implementing rules and regulations of the proposed law. The same bill is currently undergoing public hearing/s by the Senate Committee on Ways and Means.
This initiative is meant to encourage people with inherited property/ies to secure formal property rights (land ti-tles), paving the way for greater security of land ownership, which would help invigorate the land market.
Now, the question is: would the granting of estate tax amnesty be enough to induce people with inherited proper-ties to avail of it?
An important consideration is the local transfer tax that beneficiaries have to pay to the local government units (LGUs), an additional cost to transferring the property. Like the estate tax, this accrues over time and given the amount of penalties that have to be paid, this could be a major consideration in the decision to partake of the es-tate tax amnesty. In this regard, there should be parallel initiatives/moves on the part of LGUs to grant similar tax reprieve/amnesty to estate beneficiaries if only to realize the objective of the bill.
With proper design and cooperation with LGUs, the amnesty on estate tax has the potential to provide considera-ble revenue to the government, and serve as a means toward achieving the greater objective of promoting land tenure security and attaining the government’s economic development goals.
Improving people’s awareness of the benefits of the amnesty through a vigorous information campaign program, especially in the provinces, would also go a long way toward attaining the objective of the bill. And in this effort, the government should not rely on the BIR alone; when it comes to land, the Civil Registrar may be a more effec-tive advocate.
The author is a senior with the Tax & 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.