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Gordon notes that, since 2000, 11 countries and two tax jurisdictions, including Singapore, Hong Kong, and Norway, have repealed their estate or inheritance tax laws and policies.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.
As published in BusinessWorld 01 November, 2016