TRAIN: ‘til death are we taxed – softening the imposition of estate tax

  - Rafael Roberto Carmona (The Philippine Star) - July 17, 2018 - 12:00am
It is difficult to accept the death of a loved one. The lifetime bonds that were formed with them make it all the more difficult to come to terms after they pass away. The emotional scars left behind from losing a loved one cuts deep, and adding to that the various administrative and financial burdens that ensue after they pass away only cause further distress to the already grieving relatives.

Naturally, our loved ones tend to look out for us even after death, leaving behind any and all fortunes they may have accumulated during their lifetime. In many cases, this is to ensure that the decedent’s family may continue to be financially supported. However, under our Tax Code, the inheritance received by heirs of the decedent is considered as a transfer or a flow of wealth, thus making it subject to tax, specifically estate tax. Prior to the changes brought about by the Tax Reform for Acceleration and Inclusion (TRAIN), the estate to be inherited by the heirs was subject to a substantial rate of estate tax. TRAIN primarily aims to relieve much of this tax burden, as well as provide a greater measure of ease in administrative compliance.

Under the provisions of our Tax Code, prior to the amendments implemented by TRAIN, the computation of estate tax is done using a graduated rate, similar to that used in computing the personal income tax. The estate is subject to a flat amount of tax, plus five percent to 20 percent, increasing based on a graduated tax bracket. Now under TRAIN, much of the tax burden from the decedent’s estate is alleviated by lowering – and effectively, simplifying – the computation of estate tax, and increasing the amount of deductions that may be claimed to lower the taxable estate. Further, several administrative provisions were also changed, providing more ease in filing the estate tax return.

The most notable change under TRAIN, in relation to estate taxes, is the change in the estate tax rate from five percent to 20 percent graduated rate, to a flat six percent tax rate. The change is straightforward but significant in that it simplifies the computation of the estate tax due, and for some lowers the amount of tax that is imposed on the net estate of the decedent, leaving more for the heirs to benefit from. This is further complemented by the increase in allowable deductions that may be claimed in computing the net taxable estate.

Under our Tax Code, as amended by TRAIN, the standard deduction allowed to resident and citizen decedents has increased from P1,000,000 to P5,000,000. Further, the limit on the family home deduction that may be claimed by resident or citizen decedents has increased as well from P1,000,000 to P10,000,000. However, in a slight contrast to the above, funeral expenses, judicial expenses, losses, and indebtedness (i.e. ELITE) related to that of the decedent are no longer allowed as deduction from the estate. Nonetheless, these amendments make it more convenient to compute for the estate tax in favor of the decedent. It is inarguably easier to apply and claim the standard deduction than it is to substantiate the ELITE deductions to be claimed by the estate. Incidentally, the increases in the standard deduction and the family home deduction also makes claiming the ELITE deduction unnecessary since it starkly overshadows the amount that may be deducted from the estate.

Now aside from the changes in the estate tax computation brought by TRAIN, this was also accompanied by amendments to certain administrative provisions. This is to give taxpayers more ease in the filing and payment requirements of the estate tax return and the estate tax. In particular, Section 25 of TRAIN extends the deadline of filing of the estate tax return from six months from the time of the decedent’s death to one year from that date. This not only allows more time for the family to grieve their loss, but also provides more time for the administrative proceedings to be properly and fully accomplished. In a sense, it is an extension of courtesy and respect towards the family of the deceased by providing them with the time they surely need to cope with the death of their loved one. 

As for the payment of the estate taxes, Section 25 of TRAIN provides that the estate tax due thereon may now be paid on installment within two years of the statutory deadline of its due date, giving more time that may be needed to compute and settle any agreements among the inheriting parties, or to give more time to liquidate any non-cash assets that may be used to pay the estate tax due. Accompanying this is Section 26 of TRAIN which now allows banks to authorize withdrawal of the deposits held solely or jointly by a decedent prior to the payment of estate taxes, provided that they are aware of that person’s death and that the cash withdrawn from the account be subjected to six percent withholding tax. This amendment then frees up the cash of the decedent which may then be used by the family for immediate daily sustenance and needs without having to require outside assistance.

To close, the amendments to the estate tax provisions are a refreshing splash of cool water for taxpayers, especially now when they are experiencing heat from the other changes brought about by TRAIN. These amendments are righteous in a sense that it gives proper consideration to the hard work that we endure during our lifetime. Coupled with our drive to ensure the survival and comfort of the loved ones we would eventually leave behind, and the uncertainty as to when that time may come, then the sense of security that these amendments to the Tax Code provide is invaluable.

Rafael Roberto Carmona is an associate from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.

Prescribes and circularizes the Revised BIR Form No. 1701Q (Quarterly Income Tax Return)

RMC No. 32-2018 Prescribes and circularizes the Revised BIR Form No. 1701Q (Quarterly Income Tax Return) January 2018 (ENCS)
Digest | Full Text | 1701Q |1701Q/Guide
May 9, 2018


Prescribes the policy regarding the processing of claims for refund of CGT or CWT

RMO No. 30-2018 Prescribes the policy regarding the processing of claims for refund of Capital Gains Tax or Creditable Withholding Tax
Digest | Full Text
July 10, 2018

Clarifies the requirements on the withdrawal from the bank deposit account/s of a deceased depositor/joint depositor

RMC No. 62-2018  Clarifies the requirements on the withdrawal from the bank deposit account/s of a deceased depositor/joint depositor without the required electronic Certificate Authorizing Registration
Digest | Full Text 
July 10, 2018


Prescribes the processing time of One-Time Transactions for the issuance of Electronic Certificate Authorizing Registration (eCAR)

RMC No. 48-2018 Prescribes the processing time of One-Time Transactions for the issuance of Electronic Certificate Authorizing Registration (eCAR)
Digest | Full Text
June 6, 2018


Estate and donor’s tax

 by Dean Nilo Divina

“The TRAIN law reduced the estate tax to 6 percent.”
We continue with our series of articles on estate and donor’s taxes. The Bureau of Internal Revenue (BIR) has issued Revenue Regulations 12-2018 (Rev. Regs. 12-2018) dated 25 January 2018 on estate and donor’s tax as has been modified by Republic Act 10963 (the TRAIN law).

Congress and the government have reduced the tax cost of a loved one passing or for a person/entity acting benevolently. The TRAIN law reduced the estate tax to 6 percent from a scheduler rate with a high of 20 percent and donor’s tax also reduced to 6 percent from a scheduler rate with a high of 15 percent or 30 percent if the donation was made to a relative or to a stranger, respectively. The following are some of the equally important points of Rev. Regs 12-2018 implementing the amendments of the TRAIN law on estate and donor’s tax:

• The standard deduction for citizen or resident has been increased to P5 million from P1 million. The standard deduction for the estate in the case of a non-resident alien is P500,000.00.

• The maximum deductible amount in the case of one’s Family Home has been increased to P10 million from P1 million of the fair market value. Though the TRAIN law removed the requirement, the revenue regulations maintained the requirement in obtaining a certification from the barangay of the locality that the family home is the actual residential home of the decedent and his family at the time of the decedent’s death.

• Obtaining a Tax Identification Number for the estate is still required, but there is no longer a requirement to file a Notice of Death.

• The time of filing and payment of estate tax is one year from the decedent’s death. This was six months before the TRAIN law.

• With prior approval of the bureau, the payment of estate tax may be extended up to five years if the estate is settled through the Courts, or up to two years in the case of extra-judicial settlement. Payment after the one-year period but within the approved extension period will be subject to interest but not to surcharge penalty.

• With prior approval by the bureau, the estate tax may be paid by installment. The estate tax return shall still be filed within the one-year period from the date of decedent’s death, indicating the frequency (i.e., monthly, quarterly, semi-annually or annually), the deadline and the amount of each installment. The cash installments shall be made within two years from the date of filing of the estate tax return. Should two years have lapsed without the payment of the entire tax due, the remaining balance shall be due and demandable subject to the applicable penalties and interest reckoned from the prescribed deadline for filing of the return and payment of the estate tax.

• With prior approval by the bureau, the estate may opt for the partial disposition of estate to be able to use its proceeds to pay the estate tax due. Specifically, this is a disposition of certain property of the estate, whether real, personal or intangible property, for the payment of estate tax. The estate shall pay the proportionate estate tax due of the property intended to be disposed of and an electronic Certificate Authorizing Registration (eCAR) shall be issued.

• The revenue regulations clarified that a general renunciation by an heir of his/her share in the inheritance is not subject to donor’s tax unless specifically and categorically done in favor of identified heir or heirs to the exclusion of the other co-heirs in the hereditary estate.

• The filing and payment of donor’s tax is within 30 days after the gift has been made, but the computation of donor’s tax is cumulative over a period of one calendar year.

We will update our readers as these regulations or jurisprudence on estate and donor’s tax develop over time.

Valuation of unlisted shares of stock in estate and donors tax

By Dean Nilo Divina-
“The question is whether the Adjusted Net Asset Method is likewise applicable to determine FMV of unlisted shares transferred due to death or donation.”
With the issuance of Revenue Regulations 12-2018 (Rev. Regs. 12-2018), the Bureau of Internal Revenue (BIR) finally clarified the applicable rules in determining the fair market value (FMV) of unlisted shares of stock in computing estate and donor’s tax.

The confusion on the applicable method of valuing unlisted shares arose when then Commissioner Kim-Jacinto Henares issued Revenue Regulations No. 6-2013 (Rev. Regs. 6-2013) on 11 April 2013 which prescribed the “Adjusted Net Asset Method” in valuing shares of stock.

Prior to Rev. Regs. 6-2013, it was a settled rule that the FMV of unlisted shares of stock is based on its book value which follows the following formula: total assets minus total liabilities, as reflected in the corporation’s audited financial statements (AFS). This method of valuation of unlisted shares is prescribed in Revenue Regulations 02-2003 (Rev. Regs.02-2003), the consolidated BIR rules specifically for computing estate and donor’s tax.

On the other hand, the Adjusted Net Asset Method requires that the value of the assets, as reflected in the corporation’s AFS, be adjusted to reflect the market value of real properties, as determined by an independent appraiser. Considering that most real properties are booked by corporations at cost and the value of real properties usually increases over time, the real property asset valuation of independent appraisers is usually higher than the value of such asset as reported in the AFS. As such, the Adjusted Net Asset Method of Rev. Regs. 6-2013 would increase the value of the unlisted shares and, consequently, would increase the amount of computed taxes, such as capital gains tax (now at 15 percent of the net capital gains on sale of shares).

To illustrate, let us discuss the situation of Corporation X. The assets of Corporation X consist of only one parcel of land. Under its AFS, the value of the parcel of land is P1,000, which is the amount paid for by Corporation X to purchase said property. Assuming the total liability of Corporation X as reported in its AFS is P500, the FMV of Corporation X is P500 under Rev. Regs. 02-2003 which prescribes that the FMV of unlisted shares is equivalent to its book value (total assets less total liabilities).

However, under the Adjusted Net Asset Method of Rev. Regs. 6-2013, the appraised value of the real property owned by Corporation X should be considered in determining the FMV of its shares. Thus, if the independent appraiser determines the current market value of the land increased to P1,500, the assets of Corporation X would be equivalent to the appraised value instead of the amount reflected in its AFS. Consequently, under Rev. Regs. 6-2013, the FMV of Corporation X is P1,000 (adjusted amount of assets less total liabilities). Clearly, the Adjusted Net Asset Method would result in increase in taxes.

However, the question posed by many taxpayers for almost five years is whether the Adjusted Net Asset Method is likewise applicable to determine FMV of unlisted shares transferred due to death or donation.
“Both estate and donor’s tax is fixed at six percent of the value of the net estate or donation.”
  Rev. Regs. 6-2013 stated its scope is limited only to provisions of the Tax Code referring to capital gains tax. In fact, the BIR did not identify Rev. Regs. 02-2003 as among the regulations amended by Rev. Regs. 6-2013. In practice, however, some BIR examiners have taken the conservative position and applied the Adjusted Net Asset Method to compute estate and donor’s tax.

Recently, the BIR addressed this confusion by issuing Rev. Regs. 12-2018 which prescribes the latest rules on estate and donor’s taxes. Under this recent regulation, unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. Notably, Rev. Regs. 12-2018 merely replicates the relevant provisions on Rev. Regs. 02-03 on the method of valuing unlisted shares.

In fact, the BIR further clarified that, in determining the book value of unlisted shares for estate and tax purposes, appraisal surplus shall not be considered and that it shall be exempt from Rev. Regs. 6-2013. Clearly, the BIR has taken the position that unlisted shares are valued at book value in computing estate and donor’s taxes, instead of applying the Adjusted Net Asset Method.

Additionally, the BIR likewise reiterated the valuation of listed shares prescribed in Rev. Regs. 02-03 which is the arithmetic mean between the highest and lowest quotation at a date nearest the date of death or donation, if none is available on the date of death or donation itself.

On a final note, with the enactment of Republic Act 10963, otherwise known as the Tax Reform for Acceleration and Inclusion, both estate and donor’s tax is fixed at six percent of the value of the net estate or donation. Transfers of shares through death and donation are still not subject to documentary stamp tax.

Hopefully, this issuance will be sufficient to clarify both taxpayers and BIR examiners in computing the proper estate and donor’s taxes.
For comments and questions, please send email to nilo.divina@divinalaw.com

Revenue Regulations (RRs)
are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes

Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.

Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio

Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.

Revenue Bulletins (RB) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public.

BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws.
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