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Everything You Need to Know About Estate Tax Philippines

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A lot of Filipinos are familiar with the term “estate tax”, even though only a few might actually know what it means. The estate tax in the Philippines can be quite complicated and there’s no easy way to do it.

WHAT IS ESTATE TAX?

Estate taxes are levied on the estate regardless of who gets the assets of the deceased. The executor is in charge of submitting a single estate tax return and paying the tax from the estate’s assets. An estate tax is computed on the whole worth of a dead person’s assets and must be paid before any distribution to beneficiaries is made.

Normally, the estate tax is confused with inheritance tax, although the two are not the same. The fundamental distinction between inheritance and estate taxes is who pays the tax. Inheritance tax is a state tax that must be paid by the beneficiary or the person or individuals who receive money or property from the estate of a deceased person. Inheritance taxes are the obligation of the property’s beneficiary. Because this tax is determined individually for each recipient, each beneficiary is responsible for paying his or her own inheritance taxes.

ESTATE TAX IN THE PHILIPPINES

According to the Philippine Bureau of Internal Revenue, Estate Tax is a tax on the dead person’s right to transmit his/her estate to his/her rightful heirs and beneficiaries at the time of death and on some transfers performed by law as equal to testamentary disposition. It is not a property tax. It is a tax levied on the right to transfer property following the death of the owner. The Estate Tax is based on the legislation in effect at the time of death, regardless of the beneficiary’s delay in real possession or enjoyment of the estate.

Simply put, when a family member or relative dies, their estate pays tax on the process of transferring their assets—real, personal, material, or intangible—to their heirs and other beneficiaries.

IMPACT OF TRAIN LAW IN ESTATE TAX

Congress passed Republic Act No. 10963, often known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which went into effect on January 1, 2018. Prior to the implementation of the TRAIN Law, Republic Act No. 8424, also known as the National Internal Revenue Code of 1997, governed the application of inheritance tax.

Section 22 of the TRAIN Law modifies the estate tax rate covered by Section 84 of the Tax Code. Previously, tax on the value of a decedent’s net estate was determined using a tax schedule in which an estate valued at P200,000 or more was taxed at a rate ranging from 5% to 20%. A flat rate of 6% will now be in force under the TRAIN statute.

For example, a relative or family member died at the time when TRAIN Law was already in effect. Every decedent’s estate tax, whether a resident or non-resident of the Philippines, is calculated by multiplying the net estate by six (6) percent. The estate tax rate under the TRAIN Law is 6%. Prior to the TRAIN Act, the estate tax rates ranged from 5% to 20%.

HOW TO COMPUTE ESTATE TAX UNDER TRAIN LAW

It is important to note that the six (6) percent tax rate is multiplied by the NET estate. To be able to know the net estate, one must be able to start determining the gross estate.

Gross Estate

For citizens, the gross estate includes all of the decedent’s properties at the time of death, real or personal, except bank deposits already withdrawn and subject to a final withholding tax of 6%, tangible or intangible, wherever located, but excludes the exclusive properties of the surviving spouse. It should include the property or properties located in the Philippines for both resident aliens and non-resident aliens.

In addition, properties situated outside the Philippines, if any, of resident and non-resident alien decedents, while not taxable, must nonetheless be reported in the return under the Schedule Section for information and to calculate the exact amount of permitted deductions.

If the estate is not claiming anything, this condition should be waived. If there is an accusation of missing property outside the Philippines, a certification from the nearest Philippine Consular Office should be obtained.

Deductions on the Net Estate of a Philippine Citizen or Resident Alien

The worth of a citizen’s or resident alien’s net estate is derived by subtracting the following items of deduction from the value of the gross estate:

1. Standard Deduction of Five Million Pesos (P5, 000, 000.00).

  • Claims against the estate refer to debts or claims of a monetary character that may have been pursued against the dead during his lifetime and reduced to simple money judgments;
  • Claims of the deceased against insolvent people, if the value of the decedent’s stake is included in the gross estate value;
  • Mortgages that have not been paid, taxes that have not been paid, and casualty losses
  • Previously taxed property;
  • Transfers for public use, which are all bequests, legacies, devises, or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof for strictly public purposes;
  • The Family Home, which is comparable to its current fair market value, with the proviso that if its current fair market value exceeds ten (10) million, the excess is liable to estate tax;
  • Sum received by heirs under Republic Act No. 4917, which includes any amount received by the heirs from the decedent’s employer as a result of the decedent-death; employee’s
  • The surviving spouse’s net portion of the conjugal partnership or community property

Deductions on the Net Estate on Non-Resident Alien in the Philippines

1. Standard Deduction of Five Million Pesos (P5, 000, 000.00)

  • The percentage of total losses and debts that the value of such component bears to the value of his whole gross estate, wherever located;
  • Previously taxed property;
  • Transfers to the general public;
  • The surviving spouse’s net portion of conjugal or community property

To calculate the Estate Tax, keep in mind that any estate with a gross value of more than PHP 200,000 is required to pay an estate tax under the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The estate tax in the Philippines is 6% of the net estate.

Simply remove all permissible deductions from the gross estate or the value of the deceased’s possessions to get the net estate. The estate tax is then calculated by multiplying the net estate by 0.06.

For example, if the gross estate is PHP 5 million and the deductions are PHP 1 million, the net estate is PHP 4 million. Multiplying the net estate of PHP 4 million by 0.06 yields PHP 240,000, which is the cost of the estate tax.

TRAIN LAW Modifications to the Estate Tax Settlement Method

  • Filing of notice of death – The TRAIN bill repeals the provision under Section 89 of the Tax Code that addresses the notice of death and its filing time.
  • Filing of estate tax returns — The TRAIN bill modifies Section 90 of the Tax Code, which contains estate-tax return procedural requirements. Estate-tax filings having a gross value of more than P5 million require certification from a certified public accountant. Previously, CPA certificates were only necessary for estate-tax filings with a gross value of more than P2 million.
  • Withdrawals from the deceased’s bank account – Withdrawals from a deceased person’s account were formerly limited to P20,000. Once allowed by the commissioner, the administrator of the estate or the heirs may withdraw an amount not exceeding P20,000. The TRAIN law now eliminates the P20,000 restriction on withdrawals from a deceased person’s account, replacing it with any amount subject to a 6% final withholding.
  • Payment of estate tax by installment – Payment by installment has been made especially simple by the TRAIN statute. The statute, on the other hand, has an implicit two-year cap for full estate-tax obligation, which was not covered by the prior tax system.

In the Philippines, How Do You Pay Estate Tax?

The estate tax return must be filed under oath once the estate tax has been calculated. The executor, administrator, or heirs are in charge of submitting the estate tax return. Estate tax returns with a gross value greater than P 5 Million must be accompanied by a statement verified by a Certified Public Accountant.

In addition, the estate tax return must be filed within one year of the decedent’s death. However, in meritorious circumstances, the Commissioner or any Revenue Officer authorized by him according to the NIRC may allow a reasonable extension of time to file the return, not to exceed thirty (30) days.

Finally, the estate tax must be paid at the moment the return is submitted, as a usual rule. When the Commissioner determines that payment of the estate tax would inflict undue hardship on the estate or any of the heirs, the Commissioner may grant an extension of time to pay. In such cases, the prolongation may not be more than five years if the estate is handled via the courts, or two years if the estate is settled extrajudicially.

How to Prepare an Estate Tax Return

Within one year of the deceased’s death, the executor of the estate must file an Estate Tax Return (BIR Form 1801). However, the BIR Commissioner may allow a filing extension of up to 30 days. In addition, the estate will be granted its own Tax Identification Number.

If you are the executor, you must submit the estate tax return with an Authorized Agent Bank (AAB) at the Revenue District Office (RDO) that has jurisdiction over the deceased’s domicile at the time of death.

If the dead had no legal abode in the country, the estate tax return must be filed with the Office of the Commissioner at RDO No. 39, South Quezon City. If the heirs or beneficiaries are not residents of the Philippines, you can also file the return at an AAB situated at the RDO where you live.

Requirements for Estate Tax Return

To apply for Estate Tax you should also prepare the following documents and requirements:

  • Estate Tax Return Form (BIR Form 1801)
  • A certified true copy of Death Certificate
  • Taxpayer Identification Number (TIN) of the deceased and their heir
  • Affidavit of Self-Adjudication, Deed of Extra-Judicial Settlement of Estate, Court Order, or Sworn Declaration of All Estate Properties
  • In the event of a judicial settlement, a certified copy of the partition schedule and the court order authorizing the same must be provided within thirty days after the order’s publication.
  • Proof of Claimed Tax Credit
  • Certified Public Accountant (CPA) Statement on the itemized assets of the deceased
  • Certification of the Barangay Captain for the claimed Family Home
  • Duly Notarized Promissory Note for “Claims Against the Estate” arising from Contract of Loan
  • Proof of the claimed Property Previously Taxed
  • Proof of the claimed Transfer for Public Use
  • Copy of Tax Debit Memo used as payment

Estate Tax Amnesty

President Duterte signed RA 11213 or the Tax Amnesty Act of 2019 in February 2019. This act allows taxpayers to settle their overdue tax payments without incurring penalties. The act stipulates for estate tax amnesty, allowing executors and heirs to pay any unpaid estate taxes. The amnesty applies to estates of decedents who died on or before December 31, 2017, and whose estate taxes remained unpaid as of that date.

Republic Act (RA) 11569, which was signed into law on June 30, 2021, extended the term for claiming inheritance tax amnesty by two years, from June 15, 2021, to June 14, 2023, as per RA 11213 or the Tax Amnesty Act of 2019.

The estate tax amnesty program gives persons who owe unpaid taxes on the estates of decedents who died on or before December 31, 2017, a chance to pay their debts. Those who take advantage of the amnesty within the time limit will pay either the reduced estate tax amnesty rate of 6% of the decedent’s entire net taxable estate (down from 20% before) or the minimum amnesty tax of P 5,000 if there is a negative net estate.

In the Philippines, how can I avoid paying Estate Taxes?

You might want to consider the following to avoid paying a large amount in Estate Tax:

Give Your Property To Your Beneficiaries

While you’re still alive, transfer your assets to your beneficiaries. You’ll have fewer assets in your name, which will lower your estate tax bill. You will, however, be responsible for the donor’s tax, which is calculated based on the total net gifts you made in a calendar year. The rate ranges from 2% to 15% of the total value of the net donations.

While You Are Still Alive, Sell Your Assets

Sell your assets to your designated heirs or beneficiaries during your lifetime. You’ll still have to pay taxes, but they’ll be less than estate taxes.

If you sell a home while still living, for example, the transaction will be subject to a 6% capital gains tax as well as additional taxes. These may appear to be a lot, but they only apply to the asset you’re selling.

Acquire an Insurance

Consider purchasing life insurance and designating your heirs as the policy’s beneficiaries. When you die away, your assets will be handed on to them. They can utilize the proceeds of the policy to pay the estate tax. When you pass away, your insurance proceeds are fully distributed to your beneficiaries. If the beneficiaries are designated as irrevocable, they are likewise immune from estate tax.