In the Philippines, estate planning is still considered as an exercise for the wealthy. Often times, even planning for matters after the unexpected is considered as taboo and some would even believe that it would likely invite bad karmic consequences.
In the advent of the current COVID-19 pandemic and the increasing mortality rates around the world, particularly in the Philippines, we are again (and more than ever) confronted to deal with the task of ensuring that our family and loved-ones are well-protected in the event of our untimely demise and to ensure that our heirs’ burden of paying the estate taxes are, at least, minimized.
Estate Tax in General
It is a well-settled rule that estate tax is governed by the statute in force at the time of death of the decedent. Upon the decedent’s death, succession takes place, and the right of the State to tax the privilege to transmit the estate automatically arises. As of January 1, 2018, the Philippine Tax Code imposes an estate tax at the rate of six percent (6%) based on the net value of the estate whether the decedent is a resident or a non-resident of the Philippines.
The decedent’s gross estate is comprised of all the properties, whether real or personal, tangible or intangible, wherever situated. This includes any interest in the properties at the time of death including transfers in contemplation of death, transfers for insufficient consideration, revocable transfers, properties passing under a general power of appointment, and proceeds of life insurance.
However, if the decedent was neither a resident nor a citizen of the Philippines at the time of his or her death i.e. a non-resident alien, only the portion of the estate situated in the Philippines is included in the taxable estate, except intangible personal property, whose exclusion from the gross estate is subject to the rule on reciprocity.
The properties comprising the gross estate shall be valued according to their fair market value as of the time of the decedent’s death.
The Philippine Tax Code provides for certain allowable deductions from the gross estate to determine the decedent’s net taxable estate. There is a distinction as to the type and amount of deductions allowed to be deducted from the gross estate depending on whether the decedent is a citizen or resident of the Philippines or a non-resident alien. We summarize these allowable deductions below:
The value of the properties previously taxed are allowable as a deduction from the gross estate of the decedent when such property is situated in the Philippines and either 1) transferred from the estate of any person who died within five (5) years prior to the death of the decedent, or 2) transferred to the decedent by gift within five (5) years prior to the decedent’s death. The value of the properties deductible from the gross estate is relative to the time of transfer vis-à-vis to the time of death of the decedent.
Further, estate tax imposed by the Philippine Tax Code shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to certain limitations.
Filing and Payment of Estate Tax
The filing of an estate tax return is required for all transfers subject to estate tax, or regardless of the gross value, where the estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property located within the Philippines for which a Certificate Authorizing Registration is required to effectively transfer such propertiesto the legal heirs. In the event that the gross estate exceeds Five Million Pesos (PhP 5,000,000.00), the estate tax return shall be supported with a statement duly certified to by a Certified Public Accountant.
Under the Philippine Tax Code, the estate tax return is generally required to be filed by the executor, administrator, or any of the legal heirs within one (1) year from the decedent’s death. The estate tax imposed shall be filed at the same time the return is filed. The estate tax return shall be filed in the following venues:
If the estate tax return cannot be filed within one (1) year from the decedent’s death, the executor, administrator, legal heirs, or any person authorized by the heirs may file an application for extension of time to file the estate tax return. The Commissioner or any Revenue Officer authorized by him/her shall have the authority to grant, in meritorious cases, a reasonable extension, not exceeding thirty (30) days, for the filing of the estate tax return.
In case of insufficiency of cash for the immediate payment of the total estate tax due, the estate may be allowed to pay the estate tax due through cash installments or partial disposition of the estate and the application of its proceeds to the estate tax due.
The extension of time to file the return, the extension of time to pay estate taxes, and payment by installment shall be filed with the RDO where the estate is required to secure its TIN and file the estate tax return. This request shall be approved by the Commissioner or his/her duly authorized representative.
Liability for Estate Taxes
The estate tax imposed is generally paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary. Where there are two or more executors or administrators, all of them are severally liable for the payment of the tax.
The executor or administrator of an estate 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/her distributive share bears to the value of the total net estate. The extent of the heir/beneficiary’s liability, however, shall in no case exceed the value of his share in the inheritance.