TRAIN upon death

For individual taxpayers, the offshoot of the approval (and line item veto) of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN Law) is uncertain.

Some employed individual taxpayers have been tapping on their mobile phone calculators to forecast the increase in their net pay, whereas those employed in Regional Operating Headquarters are now scratching their heads on whether they can still avail of the 15% preferential tax rate on gross income in view of President Rodrigo R. Duterte’s veto. On the other hand, self-employed individual taxpayers are now drowning their bookkeepers with questions on whether they should avail of the optional 8% tax on gross sales or gross receipts and other non-operating income in excess of P250,000, instead of the graduated income tax rates.

To tweak their curiosity further, the timing of the implementation of the provisions of the TRAIN Law has become an issue. It is a doctrine, however, that laws should be applied prospectively, unless otherwise stated. Indeed, in a new law, varying interpretations abound. Yet, in the midst of all the fuss, lies the proverbial saying that “nothing can be said to be certain, except death and taxes.”

Both death and taxes are present in one of the tax reforms which was just casually received by individual taxpayers — the estate tax. Perhaps this apathy was caused by Filipino culture, which dictates that the topic of death be met with a sullen disposition. For sure, most individual taxpayers are concerned about whether these tax reforms significantly enhance their wealth or not. Will it financially uplift their lives and those of their families? They prefer to think of events unfolding while they are breathing, rather than when the angel of death comes knocking.

With this mindset, the estate tax or the tax imposed on one’s right to transfer properties to other persons or heirs upon their death, paradoxically, has almost seen its death. In 2016, Senate Bill Nos. 1053 and 107 proposed to abolish the estate tax.

The TRAIN Act, however, guaranteed that estate tax will survive, with certain amendments as follows:

On top of the policy to reduce estate tax, the procedures for settling estate tax have been streamlined, namely: (i) collating documents to comply with Revenue Regulation 2-2003 for funeral, judicial, and medical expenses is unnecessary, as these expenses were removed; (ii) filing of estate tax return can be done within one year, instead of six months, from death; (iii) filing of notice of death is no longer mandated; (iv) supporting the estate tax returns with a statement duly certified by a Certified Public Accountant is only required for returns with gross value exceeding P5 million instead of P2 million; (v) paying the estate tax due can be made in two years installment without civil penalty and interest; and (vi) withdrawing the deceased individual’s bank deposit is now allowed by paying a 6% final withholding tax.

With these developments, individual taxpayers may now prefer to transfer their properties upon their death. However, the donor’s tax or the tax imposed on one’s right to gratuitously transfer properties to other persons during the life of the donor was also reduced to a flat rate of 6% computed on the bases of the total gifts in excess of P250,000 exempt gift made during the calendar year. This means that estate tax and donor’s tax rates are now at par with the capital gains tax rate on sale of real property, while the capital gains tax rate on the sale of shares not traded on the stock exchange was increased to 15%. Thus, in deciding what mode of property transfer to take, the individual taxpayer must consider the variables, particularly the tax base and the deductions.

Contemporaneous to these reforms, the government has been active in imposing estate tax. The BIR’s December 2017 media release reported that the heirs and estate administrators of a certain deceased individual were charged with tax evasion for failure to file an estate tax return and to pay the tax thereon, when the BIR noticed that the name of the deceased no longer appeared in the list of Top 100 stockholders of a publicly listed company. The BIR also filed a complaint with the Office of the Ombudsman against a local Register of Deeds for the transfer of realty subject to estate tax without the requisite Certificate Authorizing Registration. This is further bolstered by the government’s pending tax amnesty program covering estate taxes for the year 2016 and the previous years that have remained unpaid as of Dec. 31, 2016. Indeed, the fine print of the law, no matter how intricately carved in stone, has to be read with prudence and action.

Will estate taxes now be a viable source of government revenue? Again, nothing is certain except death and taxes. Suffice it to say, for now, the notion is born:  Tax Remains Alive, Interesting and New (TRAIN) upon Death.

Rhino T. Chua is an associate of the Tax Advisory and Compliance 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 16 January 2018