On February 14, 2019, President Duterte approved Republic Act No. 11213, otherwise known as the Tax Amnesty Act. The law provided for three types of tax amnesties:
- Estate Tax Amnesty;
- General Tax Amnesty; and
- Tax Amnesty on Delinquencies
For those who wish to avail themselves of the Estate Tax Amnesty, the law gives them two (2) years from the effectivity of the implementing rules and regulations to file the tax return and pay the tax.
The implementing rules and regulations for the Estate Tax Amnesty took effect on June 15, 2019. Therefore, technically speaking, the period to avail of the Estate Tax Amnesty expired last year or on June 15, 2021. But on June 30, 2021, President Duterte approved Republic Act No. 11569, which extended the Estate Tax Amnesty for another two years, or until June 14, 2023.
Lawmakers explained that they passed the law due to the difficulties brought about by the COVID-19 and, of course, to increase tax collection.
Amnesty comes from the Greek word amnēstía, which means forgetfulness, oblivion, deliberate overlooking of past offenses. It is also where we got the word amnesia.
A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.
In other words, the government will forgive and forget your failure to pay the tax and impose penalties for your failure. Instead, the government will give you another chance to pay the correct taxes.
Failure to pay the estate tax may cost you to pay a penalty of 25% or 50% of the amount due and interest of 20% per annum of the unpaid amount. These are on top of the tax due.
See: Settlement of Estate
What then is an estate tax, and why now is the best time to pay it?
What is Estate Tax
Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.
Let us break down this definition.
Meaning of Decedent and Estate
The deceased person is also called the decedent under the law. On the other hand, the estate is all the property, real or personal, tangible or intangible, owned by the deceased person wherever they are situated.
Tax on Right to Transmit Property to Heirs
An estate tax is not a tax on the ownership or use of the property. Instead, it is a tax on the right to transmit the decedent’s property to the heirs or beneficiaries. It is a tax on that privilege.
Tax at the Time of Decedent’s Death
Estate tax accrues as of the date of the death of the decedent. Under Article 777 of the Civil Code of the Philippines, all the property, rights, and obligations of the decedent are transmitted from the moment of the decedent’s death.
Includes Transfers Equivalent to Testamentary Disposition
The law considers certain transfers of property made by the deceased person before death as equivalent to a transfer of property by will (testamentary disposition). An example is a transfer in contemplation of death.
A transfer may be considered as a transfer in contemplation of death when “it is the thought of death, as a controlling motive, which induces the disposition of the property for the purpose of avoiding the tax…it is the contemplation of death and not necessarily of imminent death to which the statute refers. (see U.S. vs. Wells, 283 US 102.).”
The reason for considering these transfers as testamentary disposition is because “in most of these transfers, the property remains substantially that of the transferor during his lifetime notwithstanding the transfer, as he still retains either the ‘beneficial ownership’ or ‘naked title to the property. Hence, the transfer is essentially similar in respect to a transmission by testacy or intestacy upon the death of the owner.”
In other words, the transfer takes effect after the owner’s death and not upon the execution of the contract. The primary purpose was to evade the payment of the estate tax.
Unfortunately, this commonly happens in the Philippines, where parents decide to transfer their property to their children to save on estate taxes. But they do not know that these transfers may still be included in the computation of the gross estate.
Computation of Estate Tax
Under the Tax Amnesty Act, the heirs are required to pay an estate amnesty tax at the rate of six percent (6%) based on the decedent’s total net estate at the time of death.
The decedent’s total net estate is arrived at by subtracting the allowable deductions from the gross estate. The gross estate is all the property, real or personal, tangible or intangible, owned by the deceased person wherever they are situated. It also includes those transfers that the law considers as equivalent to testamentary disposition (see discussion on transfers in contemplation of death).
Note that there are different allowable deductions for citizens or residents of the Philippines and non-resident estates. Some of the allowable deductions for a citizen or resident of the Philippines are:
- Standard deduction equivalent to Five Million Pesos (₱ 5,000,000);
- Fair Market Value of the Family Home not exceeding Ten Million Pesos (₱ 10,000,000); and
- Value of the transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof for exclusively public purposes.
Hence, the computation looks like this:
Gross Estate – Allowable Deductions = Net Estate x 6% = Estate Tax
But suppose the allowable deductions exceed the value of the gross estate. In that case, the heirs, executors, or administrators may avail of the benefits of the tax amnesty and pay the minimum estate amnesty tax of Five thousand pesos (₱ 5,000).
Now that you have computed the estate tax, how do you pay the estate amnesty tax?
Procedure for Availment of Estate Amnesty Tax
To avail of the Estate Tax Amnesty, the law requires filing a sworn Estate Tax Amnesty Return (ETAR) as prescribed by the BIR. The ETAR is currently designated as BIR Form No. 2118-EA.
The executor/administrator/authorized representative of estates shall prepare three copies of the ETAR and the other documents required to be submitted. The ETAR shall be filed in the Revenue District Office (RDO) having jurisdiction over the decedent’s last residence at the time of his death.
Suppose the decedent is a non-resident, but the estate has an executor or administrator in the Philippines. Then, the executor or administrator shall file the ETAR in the RDO where he is registered. If not yet registered with the BIR, he shall file the ETAR where he resides. But if the non-resident decedent has no legal residence in the Philippines, the executor/administrator/authorized representative of the estate shall file the ETAR with RDO No. 39, South Quezon City.
The law further says that the executor/administrator/authorized representative of the estate should pay the estate amnesty tax when he files the ETAR. He shall pay the estate amnesty tax due to the Authorized Agent Bank (AAB) or Revenue Collection Officer (RCO) of the RDO using the Estate Tax Acceptance Payment Form (BIR Form No. 0621-EA).
Note that there are other requirements for issuing a certificate of availment of estate tax amnesty and an electronic certificate authorizing registration (eCAR).
Common Problems with Estate Tax Payment
While death is certain, when it will happen cannot be predicted. So most of the time, it catches people by surprise.
The heirs should file the estate tax return within one (1) year from the decedent’s death or in the case of the Tax Amnesty Act, before June 14, 2023. So, while the family might still be grieving, they would need to start listing all the property of the decedent. In addition, if the estate’s gross value is more than Five Million Pesos (₱ 5,000,000), the family would need to engage the services of a Certified Public Accountant since the law requires that a statement by a CPA should support the return.
If they cannot file the return within one year, the law authorizes the BIR Commissioner to grant an extension of not more than thirty (30) days to file the return. But the BIR Commissioner can only give the extension under meritorious cases. If there were no Tax Amnesty Act, the current pandemic would be a worthy reason for granting an extension.
Another problem is when the decedent left insufficient cash to pay the estate taxes. Let us say, for example, that the estate of the decedent is composed of several real properties and luxury vehicles. The heirs might be forced to sell these properties to pay the estate taxes.
The law says that if the available cash of the estate is insufficient to pay the total estate tax due, payment by installment shall be allowed within two (2) years from the statutory date for its payment without civil penalty and interest. In addition, when the Commissioner finds that the payment would impose an undue hardship upon the estate or any of the heirs, he may extend the time of payment not to exceed five (5) years in case the estate is settled through courts or two (2) years in case the estate is settled extrajudicially.
How Can FBRT Help You with Estate Planning and Estate Tax Concerns
As earlier stated, while death is certain, when it will happen cannot be predicted. But we definitely can prepare for this inevitable event.
FBRT can assist any person, whether a citizen, resident, or non-resident, in preparing a will. Our objective is to ensure that our client’s wishes are expressed in a will that can be implemented here in the Philippines.
Part of our work will be to advise the client regarding the tax implications of the client’s wishes. The client will be given options on the manner and timing of the distribution of his or her estate. The plan is to come up with strategies for tax reduction or avoidance (i.e., Estate Planning).
Settlement of Estate, which can be done judicially or extra-judicially (without court proceedings), is one of our fields of expertise. Our team of family and tax lawyers can assist clients in the proper distribution of the estate with particular emphasis on reducing costs and estate taxes legally.
Our team of family and tax lawyers features a dynamic, creative, and highly knowledgeable team armed with up-to-the-minute information and skills acquired, serving a wide range of clients. They truly live up to our motto, “We find solutions!”
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Metropolitan Bank and Trust Co. vs. CIR, G.R. No. 178797, August 4, 2009.
Gonzales & Robledo-Gonzales (1999 Revised Edition). National Internal Revenue Code. Rex Book Store.
De Leon (2000 7th Edition). Comprehensive Review of Taxation. Rex Book Store.
Enumerated in Section 86 of the National Internal Revenue Code as amended by Tax Reform for Acceleration and Inclusion (TRAIN) Law.
Section 5, Republic Act No. 11213.