Is the estate tax now a dying tax? The estate tax is a tax on the dead. It is imposed on the value of properties being passed on to the heirs from a person who has passed away. From being a tax on the dead, is it now on its way to being a dead tax? There are currently two bills at the Senate proposing to abolish the estate tax -- Senate Bill 1053 sponsored by Senator Nancy Binay and Senate Bill 107 by Senators Dick Gordon and Loren Legarda. Both bills point to the failure of the estate tax to raise revenue as is expected of a tax. The estate tax contributes less than 1% to total BIR revenue despite the 1997 reform and despite the perception that the rate is high. It cannot be a reliable source of revenue since the tax base cannot be accurately forecast. The tax would not apply to the vast majority of Filipinos who have no wealth to transfer. On the other hand, the small minority of the rich who have the property are often able to do estate planning and minimize their estate taxes Both bills also point to abolition of the tax as the trend. Sen. Gordon notes that, since 2000, 11 countries and two tax jurisdictions, including Singapore, Hong Kong, and Norway, have repealed their estate or inheritance tax laws and policies. Sen. Binay points out that the death of the estate tax should be welcomed as a paradigm shift to make the Philippines an attractive place for wealth to be invested and built up by Filipinos or foreigners, in the country’s best interest. Sen. Binay notes that the attendant revenue forgone would remain elusive if potential taxpayers do not surface because of the existing estate tax. She is positive that the revenue loss will consequently be recouped through capital gains tax upon the eventual sale or transfer of the estate to buyers or donor’s tax if passed on through donation. The estate tax is often blamed for the delays in the legal transfer of properties from parents to their descendants. We often encounter properties currently still in the name of parents, grandparents and great grandparents who have long left the world of the living. Sen. Angara has been quoted as pointing to the estate tax hurdle, the unfamiliarity of Filipinos with estate taxes and cultural avoidance to discuss death-related affairs as the factors leading families to delay settling the estate, resulting in huge penalties and surcharges while use of assets are not maximized. Is the tax then worth saving? Still many camps are of the position that there is hope in the estate tax. It is still a good policy tool and just has to be reformed. The tax is premised on the estate-partnership theory where it is viewed as the share of the State being a participant and contributor in the accumulation of wealth by providing the infrastructure and security. The State becomes a compulsory heir with priority over the legitimate heirs in the distribution of assets. The tax is also viewed as a tool to redistribution of wealth. That is, with a high tax on upon death, property owners will be encouraged to transfer their properties early on whether through sale or gift or donation. In several other Senate and House bills, there are various reforms towards reducing the rates, adjusting the deductions/exclusions, and simplification. With these reforms, the proponents foresee that the tax will not anymore be seen as a hurdle and can contribute more revenue with increased compliance. It is however critical to consider the other transfer taxes in reforming the estate tax. There is an alternative donor’s tax for in vivo transfers. Equity consideration should likewise be revisited considering that the capital gains tax on subsequent transfers are also being imposed on the same fair market value, not on the gain. In other countries, on the other hand, there is an inheritance tax, in lieu of an estate tax. DoF Secretary Dominguez was quoted saying that, after the reforms, those in the business of estate planning will be out of business soon. I personally think that, between an outright repeal and the status quo, the reforms can be given a chance. Here is a tax where taking chances is not too risky. The revenue is not big enough to pose a risk to public finance in case the projected increase coming from improved compliance does not materialize. We can let the estate tax performance speak for itself after the reform. If the objectives do not materialize, then maybe it’s really time for the tax to die. But with or without the estate tax, I think measures should be instituted to hasten the updating of property registers. The hesitation or failure of Filipinos to update the legal records for the ownership of properties should be directly addressed. It is not just the estate tax. The legal proceedings are also perceived to be complicated and costly entailing professional fees for lawyers and surveyors (as well as the middlemen), the various fees and charges, as well as the local transfer tax. Added to this is the fact that many Filipinos are averse to executing their last will, further contributing to delays in the transfers. We neither discount ignorance of these requirements as a contributory factor. Can there be government intervention in this regard? Can government initiate the required processes? Deaths and property holdings should be easily monitored in the present times with the use of technology. And instead of government threatening the heirs with taxes, fees and penalties, it can emphasize its desire to help and the need to keep property records in order. Sen. Pimentel offers an estate tax amnesty as a complementary measure. The estate tax need not be a dead tax. Well, not yet. Lina P. Figueroa is a principal of the Tax Advisory and Compliance division of Punongbayan & Araullo.
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One week from now, we commemorate All Souls Day. Many of us will visit the cemetery to remember departed loved ones. For some, this occasion is a reminder that, after all the toils and struggles in life, our physical bodies will be laid to rest in the same place. Then, what happens? Aside from the spiritual and religious aspects of death, there is another aspect which we might not be able to avoid -- tax. In particular, upon death, our estate could be subject to estate tax. Others call it the death tax. Is this applicable only to rich people?
With the Duterte government’s aggressive pursuit of reforms to bring about a simpler, more equitable and more efficient tax system that can encourage investment, job creation and poverty reduction, the Department of Finance (DoF) recently presented its proposed Tax Policy Reform Program as of Sept. 28. The proposed tax policy packages cover several areas of the tax system such as the personal income, consumption, corporate income, property and capital income taxes.
For the past months, the push for tax reform has been increasing, to rationalize our 19-year-old Tax Code in response to our changing economic environment, including the impact of ASEAN integration. Among the issues surfacing in the news are: updating the tax brackets for individual income tax, reducing corporate income tax rates, and simplifying certain tax administration procedures. Not to be left behind is the possible reform of the withholding tax system, particularly on the expanded withholding tax (EWT). This article focuses on EWT.
The Department of Finance submitted to Congress last week the first package of proposed tax reforms. The proposals include the restructuring of the personal income tax (PIT) system; expanding the value-added tax (VAT) base by reducing the coverage of its exemptions; adjusting excise taxes imposed on petroleum products; and, restructuring the excise tax on automobiles except for buses, trucks, cargo vans, jeeps, jeepney substitutes and special purpose vehicles. These proposed tax reforms, however, received varying reactions from stakeholders. For purposes of this article, I will be focusing on certain proposed amendments on value-added tax (VAT). The good news is that the proposed tax reforms do not include an increase in the VAT rate. However, the coverage of VAT-exemption and VAT zero-rating will be limited. Even the crediting of input VAT (i.e., VAT on purchases) against output VAT (i.e., VAT on sales) will be limited to the current year. Under the proposed tax reforms, any excess input VAT over output VAT for the quarter may be carried forward to the next quarter of the same year. Any input VAT at the end of the last quarter of the year shall not be carried over to the succeeding taxable year, but the excess input VAT may be refunded. This proposed amendment will put the burden on the taxpayer to file a claim for refund in order to recover the excess input VAT, on which we all know is a very long and tedious (and sometimes painful) process. Another proposed amendment is limiting the definition of export sales subject to 0% VAT to (1) direct exports; (2) sales to international shipping and air transport operations; and, (3) sales of export products to another producer or export trader. Item no. (3), however, will be deemed to be export sales subject to VAT zero-percent only when actually exported by the buyer-exporter. If this provision is passed into law, the question is how it will be implemented. Will the seller be required to issue a bond which will be subjected to liquidation upon proof of actual exportation by the buyer-exporter? Or will the sale first be subject to VAT, with a claim for refund filed upon actual exportation? On the other hand, under the proposed amendment, the following sale of goods and services that currently enjoy VAT zero-rating (i.e., subject to 0% VAT) will be subject to 12% VAT: • sale of raw materials to a nonresident buyer for delivery to a resident local export-oriented enterprise • sale of raw materials to export-oriented enterprises • those considered export sales under EO 226 • sales to entities exempt by virtue of special laws • services to entities exempt under special laws • services to entities engaged in international shipping or air transport • services to export-oriented enterprises Accordingly, purchases of PEZA-registered entities and Board of Investment registered enterprises that export 100% of their products, among others, will be subject to 12% VAT. These entities, however, still have the option to claim refunds on their unutilized input VAT related to their zero-rated sales. I do not know any taxpayer who takes pleasure in filing a refund claim with the Bureau of Internal Revenue (BIR), due to the additional time and cost to be shouldered by the taxpayer-claimant. As we all know, a significant number of taxpayers who filed claim for refund resorted to filing cases with the Court of Tax Appeals (CTA) due to BIR’s inaction on their claims. Although the Tax Code provides for a specific period in which the BIR should process the refund (i.e., 120 days), unfortunately, if such period has lapsed, the refund is deemed denied. Hence, any inaction of the BIR is detrimental to the taxpayer-claimant. If our government pursues the proposed amendments, it should ensure first that we have an effective and efficient refund process. To achieve this, there might be a need to amend Section 112 of the Tax Code (refund provisions of the Tax Code). Among the amendments it may introduce is a “deemed approved” provision in case of inaction by the BIR. Such provision is being implemented in other countries to ensure that the tax authority performs its duty within a reasonable period of time to ease the burden of a taxpayer. Another provision that may be considered is imposing interest on refunds in case they are not be processed or approved within the prescribed period. This would allow the taxpayer-claimant to recover the cost of money in case of significant delay beyond his control in processing his refund. Otherwise, if the foregoing proposed amendments are implemented without improving the refund process, our ease of doing business rankings my further drop. In the World Bank Group’s Doing Business 2016 report released last year, the Philippines’ ranking dropped six notches to 103rd in 2015, across 189 economies. According to the report, among the Association of Southeast Asian Nations (ASEAN), it would be easier doing business in Singapore, Malaysia, Thailand, Brunei Darussalam, and Vietnam than in the Philippines. Moreover, in the World Economic Forum’s (WEF) Global Competitiveness Report 2016-2017, the Philippines fell 10 notches to 57th out of the 138 economies assessed. Among the most problematic factors in doing business in the Philippines cited by WEF are inefficient government bureaucracy and taxation. Hence, if our government desires to improve our competitiveness ranking, significant reforms in business registration and taxation, among others, are necessary. Reforms that would alleviate the already cumbersome compliance requirements in doing business in our country. Reforms that would facilitate voluntary compliance to the maximum extent possible. Reforms that would give the next generation a better future. Edward L. Roguel is a partner of the Tax Advisory and Compliance Division of Punongbayan & Araullo.
Assessment and collection of taxes -- these are the two chief functions of the Bureau of Internal Revenue (BIR), which is tasked to interpret and implement the provisions of the National Internal Revenue Code of 1997, as amended. To meet the objective, the Tax Code grants broad powers to the Commissioner of Internal Revenue which includes the power to authorize the examination of any taxpayer and the assessment of the correct amount of tax through the examination of any book, paper, record, or other data which may be relevant or material to such inquiry -- commonly known as tax audits.
The legal landscape for mergers and acquisitions in the Philippines has been developing at an unprecedented pace over the last few years. In July 2015, Congress passed RA 10667 or the Philippine Competition Act, and in June 2016, the Philippine Competition Commission promulgated the Implementing Rules and Regulations of the said law. While it is inaccurate to say that antitrust laws never existed in the Philippines prior to 2015, RA 10667 is the first comprehensive competition legislation in the country. It is also the first time the Philippines created a specialized antitrust body to enforce antitrust laws and prevent anti-competitive agreements.
It is said that taxation should not restrict trade. For when it does, the flow of a progressive economy is likewise hampered. Importers have a reason to smile this time because last Aug. 31, 2016, the Commissioner of Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 56-2016. This amends the guidelines for securing importers clearance certificate (BIR-ICC) and customs brokers clearance certificate (BIR-BCC).