BIR Estate Tax Calculation: Zonal Value vs. Fair Market Value in the Philippines

Introduction

In the Philippines, estate tax is a levy imposed on the transfer of a decedent's estate to their heirs or beneficiaries. It is essentially a tax on the right to transmit property upon death, calculated based on the net value of the estate. The Bureau of Internal Revenue (BIR) administers this tax under the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963, commonly known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on January 1, 2018. Prior to TRAIN, estate tax rates were graduated, ranging from 5% to 20%, with a PHP 5 million exemption. Post-TRAIN, the tax simplified to a flat 6% rate on the net estate, incorporating a standard deduction of PHP 5 million among other allowable deductions.

A critical aspect of estate tax computation is the valuation of assets in the gross estate, particularly real properties, which often constitute a significant portion of Filipino estates. The BIR mandates using the higher of two values for real properties: the zonal value (as determined by the BIR) or the fair market value (FMV) as indicated in the tax declaration issued by the local assessor's office. This "higher-of" rule ensures that the estate is not undervalued, preventing revenue loss to the government while aligning with principles of fair taxation. Misunderstanding or misapplying these valuation methods can lead to underpayment, penalties, or delays in estate settlement.

This article provides a comprehensive overview of BIR estate tax calculation with a focus on zonal value versus FMV in the Philippine context. It covers the legal basis, valuation principles, procedural aspects, practical examples, and common pitfalls, drawing from relevant tax regulations, revenue issuances, and established practices.

Legal Framework for Estate Tax

The estate tax is governed by Sections 84 to 97 of the NIRC, as amended. Key provisions include:

Section 84: Defines the gross estate as the value of all property, real or personal, tangible or intangible, owned by the decedent at the time of death.
Section 85: Specifies inclusions in the gross estate, such as proceeds from life insurance (if the beneficiary is the estate or executor), transfers in contemplation of death, and revocable transfers.
Section 86: Outlines allowable deductions, including funeral expenses (up to PHP 200,000 or 5% of the gross estate, whichever is lower), judicial expenses, claims against the estate, unpaid mortgages, losses, a family home deduction (up to PHP 10 million), medical expenses (up to PHP 500,000 incurred within one year before death), and a standard deduction of PHP 5 million.
Section 87: Exemptions for certain properties, such as benefits under the GSIS, SSS, or similar laws.
Section 88: Valuation rules, emphasizing FMV at the time of death.
Section 90: Requires filing an estate tax return (BIR Form 1801) within one year from death (extendable under certain conditions), with payment due at filing.

Revenue Regulations (RR) No. 12-2018 implements the TRAIN amendments, providing detailed guidelines on valuation. RR No. 2-2003 (as amended) further elaborates on zonal valuation for internal revenue purposes. The Local Government Code (Republic Act No. 7160) empowers provincial and city assessors to determine FMV for local taxation, which intersects with BIR rules.

The Supreme Court has upheld the BIR's authority in valuation matters, as seen in cases like Estate of Benigno Toda Jr. v. CIR (G.R. No. 147188, 2004), where undervaluation led to deficiency assessments, emphasizing that taxpayers bear the burden of proving alternative values.

Valuation Methods for the Gross Estate

The gross estate is valued at its FMV as of the date of death. FMV is defined as the price at which the property would change hands between a willing buyer and seller, neither under compulsion. For different asset types:

Personal property (e.g., stocks, jewelry): Quoted market prices or appraised values.
Intangible property (e.g., patents): Appraised or book values.
Real property: Subject to special rules due to its immovability and varying market conditions.

For real properties, RR No. 12-2018 states: "The fair market value of the real property shall be the higher amount between the zonal value as determined by the Commissioner or the fair market value as shown in the schedule of values fixed by the provincial and city assessors." This rule applies uniformly to lands, buildings, and improvements.

If the property is agricultural, commercial, industrial, or residential, the same principle holds. For condominiums or properties in subdivisions, unit-specific zonal values may apply. In cases where no zonal value exists (rare in urban areas), the BIR may use the assessor's FMV or commission an independent appraisal.

Zonal Value Explained

Zonal values are predetermined values per square meter assigned by the BIR to classified areas (zones) within cities and municipalities. They serve as a benchmark for computing internal revenue taxes, including estate tax, donor's tax, and capital gains tax.

Determination: The BIR Commissioner establishes zonal values through Department of Finance (DOF) Department Orders, based on recommendations from Regional Technical Committees. These committees consider factors like location, accessibility, infrastructure, market trends, and actual sales data. Zonal values are periodically revised (every 3-5 years or as needed) to reflect economic changes. For instance, values in Metro Manila are higher than in rural areas.
Classification: Properties are classified as residential, commercial, industrial, agricultural, or special (e.g., hospital zones). Sub-classifications may include prime, secondary, or tertiary areas.
Access and Application: Zonal schedules are publicly available on the BIR website or district offices. For estate tax, the zonal value at the time of death applies, even if revised later.
Purpose in Estate Tax: Zonal values prevent undervaluation by providing a minimum threshold. They are often higher than assessors' FMV in booming areas, leading to higher gross estate values.
Limitations: Zonal values are not always reflective of true market conditions (e.g., overvalued in depressed areas). Taxpayers can challenge them via appraisal, but this requires strong evidence like recent comparable sales.

Fair Market Value Explained

FMV, in this context, refers to the value in the latest tax declaration issued by the provincial, city, or municipal assessor under the Local Government Code.

Determination: Assessors fix FMV through mass appraisals, considering location, size, shape, utility, and market data. Schedules of market values (SMVs) are approved by local sanggunians and updated every three years. For buildings, depreciated replacement cost is used.
Classification: Similar to zonal values, but more localized. Assessors' FMV is used for real property tax (RPT) computation.
Role in Estate Tax: It acts as the alternative benchmark. If the assessor's FMV exceeds the zonal value (uncommon but possible in underdeveloped zones), it prevails.
Differences from Zonal Value:
- Source: Zonal (BIR/national); FMV (LGU/local).
- Update Frequency: Zonal values are more frequently adjusted for tax purposes; assessors' values may lag.
- Scope: Zonal values cover broader zones; assessors' can be property-specific.
- Bias: Zonal values tend to be conservative (higher) to maximize revenue; assessors' aim for equity in local taxation.

In practice, zonal values often govern in urban centers like Makati or Quezon City, where they exceed assessors' values by 20-50%.

Calculation Process

To compute estate tax:

Determine Gross Estate:
- List all assets at FMV.
- For real properties: Higher of zonal value or assessor's FMV, multiplied by area (e.g., land value = zonal value/sqm × sqm).
- Add buildings/improvements at depreciated FMV.
Compute Deductions:
- Funeral, judicial, medical expenses (substantiated).
- Claims, unpaid obligations.
- Family home (up to PHP 10 million, if qualified).
- Standard deduction: PHP 5 million.
- Others (e.g., vanishing deduction for previously taxed property).
Net Estate: Gross estate minus deductions.
Tax Due: 6% of net estate (if positive). No creditable withholding tax, but payments are final.

Filing involves submitting BIR Form 1801 with supporting documents like death certificate, tax declarations, deeds, and appraisals if contesting values. The BIR may audit and issue a Certificate Authorizing Registration (CAR) upon payment, necessary for property transfers.

Practical Examples

Example 1: Urban Residential Property

Decedent owns a 500 sqm lot in Quezon City with a house. Zonal value: PHP 20,000/sqm. Assessor's FMV: PHP 15,000/sqm. Building FMV: PHP 5 million.

Land value: Higher of PHP 20,000 × 500 = PHP 10 million or PHP 15,000 × 500 = PHP 7.5 million → PHP 10 million.
Total real property: PHP 10 million + PHP 5 million = PHP 15 million.
Assume other assets: PHP 5 million; total gross: PHP 20 million.
Deductions: PHP 1 million (expenses) + PHP 5 million (standard) = PHP 6 million.
Net: PHP 14 million.
Tax: 6% × PHP 14 million = PHP 840,000.

Example 2: Rural Agricultural Land

1,000 sqm farmland in Laguna. Zonal value: PHP 500/sqm. Assessor's FMV: PHP 800/sqm.

Land value: Higher → PHP 800 × 1,000 = PHP 800,000.
If gross estate is PHP 4 million (including this), deductions PHP 5.5 million → Net zero, no tax.

Example 3: Dispute Scenario

If taxpayer claims actual FMV is PHP 10,000/sqm (below zonal PHP 15,000/sqm), they must submit an independent appraisal report from a BIR-accredited appraiser. BIR may accept if justified; otherwise, zonal prevails.

Challenges and Considerations

Undervaluation Risks: Using lower values invites audits, penalties (50% surcharge + 20% interest p.a.), and criminal charges under Section 255 of the NIRC.
Appraisal Options: Taxpayers can request BIR appraisal or hire accredited appraisers, but costs apply.
Non-Resident Decedents: Only Philippine-situs properties are taxed, valued similarly.
Conjugal Properties: For married decedents, only the decedent's share is included (50% under absolute community regime).
Amnesty and Relief: The Estate Tax Amnesty (under RR No. 6-2019, extended) allows settlement of pre-2018 estates at 6% with no penalties.
Interplay with Other Taxes: Unlike capital gains tax (6% on gain using zonal/FMV), estate tax is on net value. Donor’s tax also uses the higher-of rule.
Common Pitfalls: Delays in obtaining tax declarations, incomplete documentation, or ignoring improvements (e.g., fences).
Judicial Remedies: Disputes can be appealed to the Court of Tax Appeals, as in CIR v. Estate of Santos (G.R. No. 166387, 2009), where valuation evidence was scrutinized.
Policy Rationale: The higher-of rule balances revenue needs with fairness, but critics argue it inflates taxes in volatile markets.

Conclusion

Understanding zonal value versus FMV is pivotal in BIR estate tax calculation, ensuring compliance and minimizing liabilities. By mandating the higher value, the Philippine tax system safeguards against evasion while adapting to local market dynamics. Executors and heirs should consult tax professionals early, gather accurate valuations, and file promptly to avoid complications. As economic conditions evolve, staying abreast of BIR issuances remains essential for effective estate planning. This framework not only upholds fiscal integrity but also facilitates orderly wealth transfer across generations.