New Rules on Estate Tax

estate-tax

Republic Act No. 10963, otherwise known as the “Tax Reform for Acceleration and Inclusion (TRAIN) Law” took effect on January 1, 2018. One of the important changes made by the said law on revenue is the provisions on estate tax.

On January 25, 2018, the BIR issued Revenue Regulation No. 12-2018 on the subject of “Consolidated Revenue Regulations on Estate Tax and Donor’s Tax Incorporating the Amendments Introduced by Republic Act No. 10963, Otherwise Known as the “Tax Reform for Acceleration and Inclusion (TRAIN) Law.”

Below are the salient points on the new estate tax law per RR No. 12-2018.

What is the new rate of estate tax?

The new rate of estate tax is six percent (6%) of the net estate of every decedent, whether resident or non-resident of the Philippines.

Note that under the old law, the estate tax rate was 5% to 20% of the net estate, depending on the value of the estate.

What is the applicability of this new estate tax rule?

The new rule applies only to the estate of decedent who died on or after January 1, 2018. So, if the death occurred prior to January 1, 2018, the old law still applies.

What comprises the gross estate?

The gross estate of a decedent shall be comprised of the following properties and interest therein at the time of his/her death, including revocable transfers and transfers for insufficient consideration, etc.:

  1. Residents and citizens – all properties, real or personal, tangible or intangible, wherever situated
  2. Non-resident aliens – only properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC

What are excluded from the gross estate for purposes of computing the estate tax?

Amounts withdrawn from the deposit accounts of a decedent subjected to the 6% final withholding tax shall be excluded from the gross estate for purposes of computing the estate tax.

What is the basis to get the valuation of the gross estate?

The gross estate shall be valued based on fair market value of the properties as of the time of the decedent’s death, as determined by the Commissioner or as shown in the schedule of values fixed by the provincial and city assessors, whichever is higher.

For unlisted common shares, the fair market value is based on their book value while unlisted preferred shares are valued at par value. For shares listed in the stock exchanges, the fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.

The fair market value of units of participation in any association, recreation or amusement club (such as golf, polo, or similar clubs), shall be the bid price nearest the date of death published in any newspaper or publication of general circulation.

To determine the value of the right to usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

What are the allowable deductions in the estate of a citizen or resident?

The value of the net estate of a citizen or resident alien in the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

  1. Standard Deduction of PHP 5,000,000.00
  2. Claims against the estate 

To be deductible, the following requisites must be present:

  • The liability represents a personal obligation of the deceased existing at the time of his death;
  • The liability was contracted in good faith and for adequate and full consideration in money or money’s worth;
  • The claim must be a debt or claim which is valid in law and enforceable in court;
  • The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed;
  • For simple loans:
    • debt instrument duly notarized at the time the indebtedness was incurred
    • duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death
    • proof of financial capacity of the creditor to lend the amount at the time the loan was granted as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor
    • statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent
  • For unpaid obligation that arose from the purchase of goods or services:
    • pertinent documents evidencing the purchase of goods or services and statement of account given by the creditor to the decedent debtor;
    • duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest at the time of death;
    • certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor;
    • certified true copy of the updated latest subsidiary ledger/records of the debt of the debtor-decedent
    • Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate and the Court Order approving said claims
  1. Claims of the deceased against insolvent persons as defined under R.A. 10142 where the value of the decedent’s interest therein is included in the value of the gross estate
  2. Unpaid mortgages upon, or any indebtedness in respect to, property where the value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate
  3. Taxes which have accrued as of the death of the decedent which were unpaid as of the time of death
  4. Casualty losses – incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise
  5. Property previously taxed – an amount equal to the value specified below of any property received by decedent after having been previously taxed (estate tax or donor’s tax) within 5 years from his death:
  • 100% of the value if received within 1 year prior to death of the decedent;
  • 80% of the value if received more than 1 year but not more 2 years prior to death of the decedent;
  • 60% of the value if received more than 2 years but not more than 3 years prior to death of the decedent
  • 40% of the value if received more than 3 years but not more than 4 years prior to death of the decedent
  • 20% of the value if received more than 4 years but not more than 5 years prior to the death of the decedent
  1. Transfers for public use
  2. The Family Home – amount not to exceed PHP 10,000,000.00
  3. Amount received by heirs under R.A. No. 4917
  4. Net share of the surviving spouse in the conjugal partnership or community property

What constitutes a family home in order to deduct its value from the gross estate of the decedent?

The family home is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside, as certified by the Barangay Captain of the locality.

What are the conditions for the allowance of family home as deduction from the gross estate?

In order for the family home to be deducted from the gross estate, the following conditions must be fulfilled:

  1. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated;
  2. The total value of the family home must be included as part of the gross estate of the decedent; and
  3. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent’s interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding PHP10,000,000.00

How is the net estate of a decedent who is a non-resident alien of the Philippines computed?

The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting the following from the value of his gross estate situated in the Philippines:

  1. Standard Deduction – PHP 500,000.00
  2. Proportion of the total losses and indebtedness which the value of such part bears to the value of his entire gross estate wherever situated, to wit:
  • Claims against the estate;
  • Claims of the deceased against insolvent persons where the value of the interest therein is included in the value of the gross estate;
  • Unpaid mortgages, taxes and casualty losses;
  • Property previously taxed
  • Transfers for public use
  • Net share of the surviving spouse in the conjugal property or community property

What is an estate tax return?

The estate tax return is a statement under oath showing the gross value of the estate, itemized assets of the decedents, itemized allowable deductions and the amount of tax due.

When the gross value of the estate exceeds PHP 5,000,000.00, it shall be supported with a statement duly certified by a Certified Public Accountant (CPA).

When should the estate tax return be filed?

The estate tax return shall be filed within 1 years from the decedent’s death.

May the one (1) -year period be extended?

Yes. The Commissioner or any Revenue Officer authorized by him pursuant to the NIRC shall have authority to grant, in meritorious cases, a reasonable extension, not exceeding 30 days, for filing the return.

Where should the estate tax return be filed?

The Revenue District Office (RDO) with jurisdiction over the last place of residence of the decedent. In case the decedent is a non-resident, the estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO where the executor or administrator of the estate is registered or domiciled. If there is no executor or administrator appointed, the return and the TIN shall be secured from the Office of the Commissioner through RDO No. 39-South Quezon City.

When should the estate tax be paid?

As a general rule, the estate tax shall be paid at the time the return is filed by the executor, administrator or the heirs.

May the period to pay the estate tax be extended?

Yes, when the Commissioner finds that the payment of the estate tax or any part thereof would impose undue hardship upon the estate or any of the heirs. The extension to pay shall not exceed 5 years in case the estate is settled through the courts, or 2 years in case the estate is settled extrajudicially.

May the estate tax due be paid on installment basis?

Yes. Payment of estate tax by cash installment is allowed within 2 years from the date of filing of the estate tax return, upon approval of the Commissioner or his duly authorized representative.

Suppose the heirs decide to sell a single parcel of land from the estate, would it be possible to pay only the estate tax pertaining to that lot sold?

Yes, but only if the proceeds of such sale are applied to the estate tax due. Moreover, a written request must be made for the partial disposition of estate to be approved by the BIR. The request shall be filed together with a notarized undertaking that the proceeds thereof shall be exclusively used for the payment of the total estate tax due. Finally, the proportionate estate tax due on the lot being sold shall have to be paid prior to the issuance of the electronic Certificate Authorizing Registration (eCAR).

Who is liable to pay the estate tax?

The executor or administrator has the primary obligation to pay the estate tax but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance.

Are the shares, bonds or rights belonging to the decedent subject to estate tax?

Yes. In fact, shares, bonds or rights belonging to the decedent shall not be transferred to any new owner in the books of any corporation, Sociedad anonima, partnership, business, or industry organized or established in the Philippines unless an eCAR is issued by the Commissioner or his duly authorized representative.

How can the heirs withdraw the bank deposits from the account of the decedent?

Prior to the TRAIN Law, heirs could not withdraw the bank deposits from the account of the decedent. However, under the new law, heirs are allowed to withdraw from the said deposit account, subject to a final withholding tax of 6% of the amount to be withdrawn, provided that the withdrawal shall only be made within 1 year from the date of the decedent.

What are the documentary requirements needed to withdraw bank deposits from the account of the decedent?

The executor, administrator or any of the legal heirs shall provide the bank where such withdrawal was made the following:

  1. TIN of the estate of the decedent
  2. BIR Form No. 1904 duly stamped received by the BIR
  3. Sworn statement by any one of the joint depositors to the effect that all of the joint depositors are still living at the time of withdrawal
  4. Statement that the withdrawal is subject to the final withholding tax of 6%

For its part, the bank shall issue the corresponding BIR Form No. 2306 certifying that the 6% final tax has been withheld.

SOURCE:          BIR Revenue Regulation No. 12-2018 (January 25, 2018)

                        Revenue Memorandum Circular No. 62-2018 (June 28, 2018)

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