TRAIN Law on gratuitous transfers



In 2013, the Financial Executives Institute of the Philippines (FINEX) noted that there were 531,280 reported deaths in the country, and yet only 40,325 estate returns were filed. It’s no surprise, then, that from that year until 2017, estate tax and donor’s tax, which are meant to provide revenue to the government, reduce income inequality, and distribute wealth, contributed only roughly 1 percent to the total annual tax revenue.

To address this shortfall, legislators passed Republic Act (RA) No. 10963, more commonly known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on the first day of 2018. TRAIN introduced a simplified system for estate tax and donor’s tax.

Estate tax
From a graduated tax rate of 5 percent to 20 percent, a flat tax rate of 6 percent will now be applied to the value of the net estate upon transfer of the decedent, whether the decedent is a resident or non-resident of the Philippines. The TRAIN Law revised pertinent provisions of Section 86 of the Tax Code, relating the allowed deductions to the estate of a citizen or a resident. It removed the allowable deduction for funeral expenses, judicial expenses and medical expenses incurred by the decedent.

In lieu of the aforementioned deductions, the law increased the standard deduction — from P1 million to P5 million, and the exemption on family home — from P1 million to P10 million. Also, the provision requiring the certification of a barangay captain for a decedent’s home to be considered a family home for the purposes of estate tax has been removed.

Furthermore, RA No. 10963 introduced the standard deduction of P500,000 against the gross estate of non-residents. It also removed the provision allowing only deductions in the gross estate of a nonresident alien when the executor, administrator, or heir(s), as the case may be, includes in the estate tax return the gross estate not situated in the Philippines.

In addition, the TRAIN Law eradicated the provision requiring the filing of an estate tax return for gross estate exceeding P200,000, which is exempt from estate tax. Further, the threshold value of an estate has been increased from P2 million to P5 million, where the estate tax return to be filed should be supported by a statement duly certified by a certified public accountant (CPA).

The last day for filing the estate tax return was further amended by extending the period from six months to one year from the decedent’s death. The said law added a provision allowing the payment of estate tax by installment should the estate have insufficient cash to pay the total tax due. Payment by installment will be allowed within two years from the statutory date for its payment without civil penalty and interest. The law also allowed the withdrawal of bank deposits of the deceased, which will be subjected to 6 percent final withholding tax, and eased the rule on the amount that can be withdrawn from the said bank deposits.

Donor’s tax
The TRAIN Law also amended the taxation of donations by imposing a uniform tax rate of 6 percent based on the value of the total gift in excess of P250,000 made during a calendar year, regardless of the relation of the donor to the donee. Previously, the donations were subjected to a graduated tax rate of 2 percent to 15 percent on donations to relatives, and 30 percent on donations to strangers.

Furthermore, the TRAIN Law added a provision on Section 100 of the Tax Code relative to the transfer for less than adequate and full consideration. The sale, exchange, or other transfer of property made in the ordinary course of business (bona fide transaction and at arm’s length) will now be considered made for adequate and full consideration in money and money’s worth; therefore, not subject to donor’s tax. It also erased the exemption to donor’s tax of the first P10,000 of dowries or gifts made on account of marriage.

Lastly, donations of real property are now subject to documentary stamp tax (DST) at the same rate as deeds of sale and conveyances of real property, i.e., P15 for each P1,000. However, donations or transfers of real property under Section 101 (A) and (B), such as gifts made to the national government and to qualified non-stock, non-profit organizations, which are exempt from donor’s tax, will also not be subjected to DST.

Having lowered the tax rate and imposed uniform taxation on the gratuitous transfer of properties, the government expects to incur a loss of revenue. But the goal is to offset this with a more efficient land market and improved compliance among taxpayers. By lowering the estate tax rates and relaxing the payment of estate tax, the government hopes to encourage heirs to update the documentation of land ownership, paving the way for the development of idle lands, which, in turn, should unlock their value through more efficient use that can help foster investments and create jobs. Moreover, these changes are expected to alleviate some of the burden that comes with losing a loved one, whereas abridging donor’s tax will give the government an equal share of the kindness of Filipinos.

With the hope that this new law will help fuel the many development projects of the Philippine government, taxpayers are expected to observe keenly and work hand in hand with the tax authorities in implementing and conforming with the said law.

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.


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