The topic of death is usually best avoided, except on All Saints’ and All Souls’ Day when we remember our loved ones who have departed from this world. We must accept that however, even during times of death, we still need to pay taxes. The estate tax is often paid late, and sometimes not at all, for various reasons — the emotional unpreparedness of those left behind, insufficient liquid assets, and ignorance of the requirements, among others. As a result, collections from the estate tax are among the government’s weakest sources of revenue.
In February 2017, House Bill No. 4814 or the “Estate Tax Amnesty Law” was approved by the House of Representatives and transmitted to the Senate. After a series of public hearings and consultations, the Senate Committee on Ways and Means reported out Senate Bill No. 2059, the “Tax Amnesty Act of 2018,” which is now pending on second reading. This bill was recommended in substitution to other Senate bills on tax amnesty and was meant to serve as the counterpart to House Bill No. 4814. The Senate bill actually includes a general tax amnesty on all unpaid internal revenue taxes imposed by the national government for the taxable year 2017 and prior years with respect to the estate tax, other internal revenue taxes, and tax on delinquencies, and measures addressing cross-border tax evasion.
Since many people are waiting for the approval of the law, it would be interesting to know the differences between House Bill No. 4814 and Senate Bill No. 2059 with respect to the estate tax amnesty to get an idea of the possible direction taken by the final version.
The House version covers estate taxes only for the taxable year 2016 and prior years, while the Senate version covers the estate of taxpayers who died on or before Dec. 31, 2017. The expanded coverage is beneficial especially for those who died within the taxable year 2017 since their estate may still apply for the estate tax amnesty once legislated. This cut off is most reasonable as it coincides with the implementation of the lower estate tax under the Tax Reform for Acceleration and Inclusion (TRAIN) law and has the effect of retroacting the reduced estate tax rate to all prior years.
The 6% rate for the estate tax amnesty is most likely the final rate that will be approved. Though the rate is the same as the reduced rate under the TRAIN law, the base will be different. While the amnesty base is also net estate, it shall be computed based on the law applicable at the time of death. This means that the deductions would only include the P1 million standard deduction and P1 million maximum for the family home. Under the TRAIN law, these have been increased to P5 million and P10 million, respectively.
As to the manner of computation of estate tax to be paid, under the House version, the computation prescribed is 6% of the decedent’s net estate. However, under the Senate version, the computation prescribed is 6% based on decedent’s 1. total net estate at the time of death, if no estate tax return was filed, or 2. net undeclared estate, if an estate tax return was previously filed with the BIR. The Senate version clearly addresses instances where an estate tax return has already been filed but which is under-declared, either intentionally or because of incomplete information at the time of filing. The Senate version also provides more flexibility when it expressly stated that the provisions of the NIRC on valuation, manner of computation, and other related matters shall apply suppletory, at the time of entitlement.
In the Senate version, the BIR was tasked in coordination with the applicable regulatory agencies to set up a system enabling the transfer of title over properties to heirs and/or beneficiaries, including cash withdrawals of the heirs on the bank account of the decedent, when applicable. Secondary to the settlement of the taxes, the updating of the records of ownership of properties should also be a priority of the government. The backlogs have many unfavorable repercussions including difficulties in the implementation of real property taxes and the failure of sellers to maximize property values because of unsettled title and ownership.
Based on previous rules, the bank account of the deceased is to remain frozen pending the settlement of the estate tax. Currently, however, the TRAIN Law has opened a window where the estate tax return will not be a prerequisite to withdraw funds from the bank account of the deceased. The BIR requisites before the heirs could demand the release of the funds have been clarified in Revenue Memorandum Circular (RMC) No. 62-2018. As such, the establishment of the system will really benefit the families of the deceased.
On another note, the immunities under the former such as the inadmissibility as evidence of the taxpayer’s estate tax amnesty returns in estate settlement and the non-examination of taxpayer’s books of account and other records of the taxpayer, are no longer included in the latter.
As to who may avail of the estate tax amnesty, under the House version, any person may avail of the estate tax amnesty by filing an Estate Tax Amnesty Return, whereas in the Senate version, only the legal heirs, transferees or beneficiaries, or the authorized executor/s, administrator/s may avail. So, if the person is not a legal heir, transferee or beneficiary, or an authorized executor, or administrator, he or she cannot file the estate tax amnesty.
In addition to the two bills, there is a House Bill No. 7105 which also proposes a general tax amnesty covering all internal revenue taxes including estate taxes. This bill requires those individuals who will avail, to pay an amnesty tax of 8% of the net worth or P10,000, whichever is higher. Under this bill, any person who wishes to avail of the amnesty should file to the BIR a notice and Tax Amnesty return accompanied by Audited Financial Statement or a Statement of Assets, Liabilities and Net worth (SALN) as of Dec. 31, 2017. It should be noted though, that the individual’s availment of the general tax amnesty will not cover the unpaid estate tax on the assets, even if the assets from the inheritance are included in the net assets on which the amnesty tax will be imposed.
Finance Undersecretary Karl Kendrick T. Chua has been reported as saying, “Once legislated, there will no longer be any tax amnesty for the next 25 years.” Therefore, both Houses, and the President who is the final approver of the law, should carefully consider all the various factors in approving whichever provisions will result in maximum benefit to both the public and the government. After all, a death tax amnesty can happen only once in a lifetime.
Joseph Eric Pocholo Briones is a senior of the Tax Advisory and Compliance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.
As published in BusinessWorld, dated 30 October 2018