Estate Tax vs. Donor’s Tax in the Philippines: Differences, Rates, and Deadlines

Introduction

In the Philippine tax system, estate tax and donor’s tax are two distinct forms of transfer taxes governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, effective January 1, 2018. These taxes are imposed on the gratuitous transfer of property, but they differ in timing, scope, and application. Estate tax applies to transfers occurring upon death, while donor’s tax applies to transfers made during the donor's lifetime. Understanding these taxes is crucial for estate planning, compliance, and avoiding penalties. This article provides a comprehensive overview of their differences, applicable rates, deadlines, exemptions, deductions, computation methods, filing requirements, and related legal considerations within the Philippine context.

Overview of Estate Tax

Estate tax, often referred to as inheritance tax in common parlance, is a tax on the right of the deceased person (decedent) to transmit their estate to heirs or beneficiaries. It is not a tax on the property itself but on the privilege of transferring the estate at death. The tax is levied on the net estate, which is the gross estate minus allowable deductions.

Scope and Taxable Estate

Gross Estate: Includes all real, personal, tangible, and intangible properties owned by the decedent at the time of death, wherever situated, for Filipino citizens and resident aliens. For non-resident aliens, only properties situated in the Philippines are included.
- Real properties (e.g., land, buildings).
- Tangible personal properties (e.g., vehicles, jewelry).
- Intangible personal properties (e.g., shares of stock, bank deposits, intellectual property rights).
- Special inclusions: Transfers in contemplation of death, revocable transfers, properties subject to power of appointment, proceeds of life insurance (if the beneficiary is the estate, executor, or administrator), and retirement benefits or pensions.
Valuation: Properties are valued at fair market value (FMV) at the time of death. For real properties, the higher of the zonal value (as determined by the Bureau of Internal Revenue, BIR) or the assessed value (from the local assessor’s office) is used. Shares of stock are valued based on book value for unlisted shares or average closing price for listed shares.
Exemptions: Certain transfers are exempt, such as:
- Bequests to the government or its political subdivisions for public purposes.
- Properties already taxed within five years prior to death (vanishing estate tax credit).
- Mergers or consolidations under specific corporate reorganizations.
- Benefits from the Government Service Insurance System (GSIS), Social Security System (SSS), or Philippine Health Insurance Corporation (PhilHealth) under certain conditions.

Allowable Deductions

Deductions reduce the gross estate to arrive at the net estate. For residents and citizens:

Ordinary deductions: Funeral expenses (up to PHP 200,000 or 5% of gross estate, whichever is lower), judicial expenses, claims against the estate, unpaid mortgages or debts, losses from fire, storm, or other casualties.
Special deductions: Standard deduction of PHP 5,000,000; family home allowance up to PHP 10,000,000; medical expenses incurred within one year prior to death (up to PHP 500,000). For non-resident aliens, deductions are limited to a proportionate share based on Philippine-situs properties, without the standard deduction or family home allowance unless reciprocity exists.

Who Pays and Liability

The estate tax is paid by the executor, administrator, or heirs. It is a liability of the estate itself, and payment is required before the distribution of assets. If unpaid, heirs may be held personally liable to the extent of their share.

Overview of Donor’s Tax

Donor’s tax is imposed on the privilege of the donor to transfer property by way of gift during their lifetime (inter vivos). It is a tax on the act of giving, not on the property or the donee. Unlike estate tax, it encourages lifetime transfers to potentially reduce future estate tax liabilities.

Scope and Taxable Donations

Taxable Gifts: Includes any transfer of property (real, personal, tangible, or intangible) without consideration or for inadequate consideration. Common examples: Cash gifts, real estate donations, forgiveness of debt, transfer of shares.
- For residents and citizens: All donations worldwide are taxable.
- For non-residents: Only donations of properties situated in the Philippines.
Valuation: FMV at the time of donation. Similar rules as estate tax for real properties (zonal or assessed value) and shares.
Exemptions:
- Gifts to the government or accredited non-profit institutions for educational, charitable, religious, cultural, or social welfare purposes (subject to BIR approval).
- Dowries or gifts on account of marriage (up to PHP 10,000 per parent).
- Political contributions certified by the Commission on Elections (COMELEC).
- Gifts below the annual exemption threshold of PHP 250,000.
- Transfers for adequate and full consideration (e.g., sales).

Allowable Deductions

Deductions are limited compared to estate tax. Primarily, the annual exemption of PHP 250,000 per donor per calendar year. Multiple donations in a year are aggregated, and the tax is computed on the excess over PHP 250,000. No standard deductions like in estate tax.

Who Pays and Liability

The donor is primarily liable for the tax. However, if the donor fails to pay, the donee may be held liable. In cases of donations between spouses, special rules apply under the Family Code.

Key Differences Between Estate Tax and Donor’s Tax

While both are transfer taxes under Sections 84 to 104 of the NIRC, they differ in several fundamental aspects:

Aspect	Estate Tax	Donor’s Tax
Timing of Transfer	Upon death (mortis causa)	During lifetime (inter vivos)
Taxpayer	Estate/heirs	Donor (primarily)
Basis	Net estate after deductions	Total gifts exceeding PHP 250,000 per year
Scope	Worldwide for residents/citizens; Philippine-situs for non-residents	Same as estate tax
Purpose	Tax on inheritance transmission	Tax on gratuitous lifetime transfers
Deductions/Exemptions	Extensive (e.g., standard PHP 5M, family home PHP 10M, medical PHP 500K)	Limited (annual PHP 250K exemption, specific exempt gifts)
Valuation Date	Time of death	Time of donation
Aggregation	Single event (entire estate)	All donations in a calendar year
Relation to Other Laws	Integrated with Civil Code provisions on succession and estate settlement	Governed by Civil Code on donations; may involve Anti-Dummy Law or foreign ownership restrictions
Tax Planning Impact	Paid post-death; planning via wills/trusts	Used for pre-death planning to reduce estate size

Other nuances include:

Stranger Rule in Donor’s Tax: Prior to TRAIN, donor’s tax had higher rates for donations to strangers (non-relatives). Under TRAIN, a uniform rate applies regardless of relationship.
Integration with Estate Tax: Donations made within three years prior to death may be scrutinized as "in contemplation of death" and included in the gross estate.
Administrative Processes: Estate tax often involves judicial or extrajudicial settlement, while donor’s tax is simpler, requiring only a deed of donation and BIR filing.

Applicable Rates

Under the TRAIN Law, both taxes have been simplified to a flat rate:

Estate Tax Rate: 6% of the net taxable estate. No tax if the net estate is PHP 5,000,000 or below due to the standard deduction.
Donor’s Tax Rate: 6% of the total gifts in excess of PHP 250,000 in a calendar year.

Pre-TRAIN rates were progressive:

Estate tax: 0% to 20% based on net estate brackets.
Donor’s tax: 2% to 15% for relatives, 30% for strangers.

The uniform 6% rate aligns with global trends to simplify taxation and encourage compliance.

Filing and Payment Deadlines

Compliance deadlines are strict, with penalties for late filing or payment.

Estate Tax:
- Filing Deadline: The estate tax return (BIR Form 1801) must be filed within one year from the decedent's death.
- Payment Deadline: Tax is due at the time of filing. Installment payments may be allowed if the estate lacks liquidity.
- Extensions: Up to five years for judicial settlements or two years for extrajudicial settlements, subject to BIR approval and interest charges.
- Where to File: Accredited agent bank, Revenue District Office (RDO), or authorized BIR personnel.
Donor’s Tax:
- Filing Deadline: The donor’s tax return (BIR Form 1800) must be filed within 30 days after the date of donation.
- Payment Deadline: Tax is paid simultaneously with filing.
- Multiple Donations: If multiple donations occur in a year, separate returns are filed for each, but tax is computed cumulatively at year-end if needed.
- Where to File: Same as estate tax.

Failure to meet deadlines incurs:

Surcharge: 25% (or 50% for willful neglect/fraud).
Interest: 12% per annum (reduced from 20% pre-TRAIN).
Compromise penalties: Based on BIR schedules.

Computation Examples

Estate Tax Example

Gross Estate: PHP 20,000,000
Deductions: PHP 5,000,000 (standard) + PHP 2,000,000 (other) = PHP 7,000,000
Net Estate: PHP 13,000,000
Tax: 6% of PHP 13,000,000 = PHP 780,000

Donor’s Tax Example

Total Gifts in a Year: PHP 1,000,000
Exemption: PHP 250,000
Taxable Amount: PHP 750,000
Tax: 6% of PHP 750,000 = PHP 45,000

Penalties and Remedies

Penalties: As noted, surcharges, interest, and compromises apply. Criminal penalties for tax evasion under the NIRC.
Remedies: Taxpayers can file for refunds (e.g., overpayments) within two years. Protests against assessments must be filed within 30 days. Appeals go to the Court of Tax Appeals (CTA) and Supreme Court.
Amnesty Programs: Periodic tax amnesties (e.g., under RA 11213, Tax Amnesty Act) may forgive past deficiencies for estate tax but not donor’s tax in all cases.

Special Considerations

Community Property: Under the Family Code, conjugal or absolute community properties are divided, affecting gross estate computation.
Foreign Elements: Reciprocity rules for non-resident aliens exempt certain intangibles if their home country offers similar exemptions to Filipinos.
Corporate Donations: Subject to additional rules under the Corporation Code and Securities Regulation Code.
Tax Treaties: The Philippines has double taxation treaties that may provide relief for cross-border transfers.
Recent Developments: While TRAIN simplified rates, ongoing proposals (e.g., under the Comprehensive Tax Reform Program) may adjust exemptions or rates. Compliance with electronic filing (eBIRForms) is mandatory.

Conclusion

Estate tax and donor’s tax serve as mechanisms to ensure equitable wealth distribution and government revenue from gratuitous transfers. Their differences in application underscore the importance of strategic estate planning, such as making lifetime donations to leverage the lower exemption threshold and reduce the eventual estate tax burden. Taxpayers are advised to consult with certified public accountants, lawyers, or the BIR for personalized advice, as individual circumstances (e.g., marital property regimes, business ownership) can significantly impact computations. Strict adherence to rates, deadlines, and filing requirements is essential to avoid substantial penalties.