How to Compute Estate Tax in the Philippines

Introduction

Estate tax in the Philippines is a form of transfer tax imposed on the privilege of transmitting the estate of a deceased person to their heirs or beneficiaries. It is 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 from January 1, 2018. Prior to the TRAIN Law, estate tax rates were progressive, ranging from 5% to 20%, but the amendments introduced a flat rate to simplify compliance and administration.

The estate tax is not a tax on the property itself but on the right to transfer it upon death. It applies to both residents and non-residents, though the scope differs based on citizenship and residency status. The Bureau of Internal Revenue (BIR) administers the collection, and accurate computation is crucial to avoid penalties, which can include surcharges, interest, and compromise fees.

This article provides a comprehensive guide to computing estate tax in the Philippine context, covering definitions, components of the estate, deductions, exemptions, filing procedures, payment options, special considerations, and potential pitfalls. It draws from relevant provisions of the NIRC, Revenue Regulations (RR), and judicial interpretations to ensure a thorough understanding.

Key Concepts and Definitions

Estate Tax vs. Inheritance Tax

Estate tax is levied on the entire estate before distribution to heirs, whereas inheritance tax (which the Philippines does not impose) would be on the share received by each heir. The Philippines follows an estate tax system.

Gross Estate

The gross estate includes the fair market value (FMV) of all 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. Properties encompass:

• Real property (land, buildings, improvements).
• Personal property (vehicles, jewelry, stocks, bonds, cash, bank deposits).
• Intangible assets (patents, copyrights, goodwill).
• Proceeds from life insurance if the beneficiary is the estate, executor, or administrator, or if the decedent retained incidents of ownership.
• Transfers in contemplation of death, revocable transfers, and property passing under a general power of appointment.

Valuation is based on FMV as of the date of death. For real property, it is the higher of zonal value (set by the BIR) or assessed value (from local government). For shares of stock, listed shares use the arithmetic mean between high and low quotations; unlisted shares use book value.

Net Estate

The net estate is the gross estate minus allowable deductions and exemptions. This forms the tax base.

Taxpayer

The estate itself is the taxpayer, represented by the executor, administrator, or heirs. Joint and several liability applies to heirs who receive property before tax payment.

Computation of Estate Tax

The estate tax rate is a flat 6% on the net estate, but only if it exceeds the standard deduction threshold. The formula is:

Estate Tax = 6% × (Gross Estate - Allowable Deductions - Standard Deduction)

If the net estate after deductions is PHP 5,000,000 or less, no estate tax is due due to the standard deduction.

Step-by-Step Computation

1. Determine the Gross Estate:

   • List all assets and their FMV at death.
   • Include community property (for married decedents) but only the decedent's share.
   • For conjugal partnerships, the gross estate includes the decedent's exclusive property plus half of conjugal property.
   • Exclude non-taxable items like GSIS/SSS proceeds, war damage payments, and certain retirement benefits.

2. Subtract Allowable Deductions: Deductions reduce the gross estate to arrive at the taxable net estate. They include:

   • Funeral Expenses: Actual expenses up to 5% of the gross estate or PHP 200,000, whichever is lower.
   • Judicial Expenses: Costs for estate administration, such as attorney's fees, court fees, and appraisal costs, if supported by receipts.
   • Claims Against the Estate: Debts owed by the decedent, enforceable by law, including unpaid taxes (except estate tax itself).
   • Claims Against Insolvent Persons: If included in gross estate, deductible if uncollectible.
   • Unpaid Mortgages or Indebtedness: On property included in gross estate.
   • Losses: From fire, storm, or other casualties not compensated by insurance, occurring after death but before distribution.
   • Transfers for Public Use: Value of property transferred to government or charitable institutions.
   • Family Home Deduction: Up to PHP 10,000,000 for the decedent's dwelling, including land, if certified as such and used by the family.
   • Medical Expenses: Incurred within one year before death, up to PHP 500,000, substantiated by receipts.
   • Vanishing Deduction: For property previously taxed (e.g., inherited within 5 years), a percentage deduction applies: 100% if within 1 year, decreasing by 20% per year up to 5 years.
   • Standard Deduction: A flat PHP 5,000,000, replacing itemized deductions for ordinary expenses in pre-TRAIN regimes.

   For non-resident aliens, deductions are limited to a proportionate share based on Philippine-situs property relative to worldwide estate.

3. Apply the Tax Rate:

   • If net estate > PHP 0 (after standard deduction), tax = 6% of net estate.
   • Example: Gross estate = PHP 20,000,000; Total deductions (excluding standard) = PHP 2,000,000; Standard deduction = PHP 5,000,000.
     • Net estate = 20M - 2M - 5M = 13M.
     • Tax = 6% × 13M = PHP 780,000.

4. Add Penalties if Applicable:

   • Late filing: 25% surcharge + 12% interest per annum.
   • Underpayment: Similar penalties plus compromise fees.

Special Considerations

Marital Deductions and Regimes

Under the absolute community of property (default for marriages after August 3, 1988), all property acquired during marriage is conjugal, and the decedent's estate includes half. For conjugal partnership of gains (pre-1988 default), only fruits of separate property and acquired property are shared. The surviving spouse's share is not part of the gross estate.

Non-Resident Decedents

For non-resident aliens, only Philippine properties are taxed. Reciprocity applies for intangibles: If the foreign country does not tax Philippine citizens' intangibles, the Philippines reciprocates.

Trusts and Transfers

Revocable trusts or transfers where the decedent retains control are included in the gross estate. Irrevocable trusts may escape taxation if control is fully relinquished.

Estate Planning Tools

While not directly affecting computation, tools like life insurance (beneficiary not estate), donations inter vivos (subject to donor's tax), and family corporations can minimize estate tax exposure legally.

COVID-19 and Other Extensions

During pandemics or calamities, the BIR may extend deadlines via Revenue Memorandum Circulars.

Filing and Payment Procedures

Filing Requirements

• Estate Tax Return (BIR Form 1801): Filed within one year from death. Electronic filing via eBIRForms or EFPS for large estates.
• Documents Needed: Death certificate, TIN of estate/heirs, deeds/inventories of property, appraisals, receipts for deductions, CPA certification if gross estate > PHP 5M (for pre-TRAIN, but still recommended).
• Filed with the Revenue District Office (RDO) where the decedent resided, or for non-residents, RDO 39 (South Quezon City).

Payment Options

• Pay upon filing, via banks, BIR offices, or online.
• Installments: Up to 5 years if gross estate > PHP 2M and insufficient cash, with bond requirement.
• Partial payment allowed, but full settlement needed for property transfer.

Notice of Death

Required within two months of death if gross estate > PHP 20,000.

Penalties and Remedies

• Deficiencies: BIR audits can assess additional tax; appeal to Court of Tax Appeals.
• Criminal Penalties: For willful evasion, fines up to PHP 100,000 and imprisonment.
• Amnesty Programs: Occasional amnesties (e.g., under RA 11213) allow settlement without penalties.

Judicial and Administrative Interpretations

Supreme Court rulings emphasize strict compliance, such as in CIR v. Estate of Benigno Toda Jr. (on valuation) and CIR v. Pineda (on joint liability). BIR issuances like RR No. 12-2018 detail TRAIN amendments, clarifying deductions and valuations.

Conclusion

Computing estate tax in the Philippines requires meticulous valuation and documentation to ensure compliance with the NIRC. The flat 6% rate simplifies the process, but overlooking deductions or misvaluing assets can lead to overpayment or penalties. Heirs should consult tax professionals or the BIR for case-specific advice, as laws may evolve through new legislation or regulations. Proper estate planning can mitigate tax burdens, preserving wealth for future generations.