Introduction

Estate tax in the Philippines is a levy imposed by the government on the privilege of transferring the net estate of a deceased person to their heirs or beneficiaries. It is governed primarily by the National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on January 1, 2018. The Bureau of Internal Revenue (BIR) administers and enforces these rules, ensuring compliance through specific forms, deadlines, and valuation methods.

This tax applies to the estate of every decedent—whether a Filipino citizen, resident alien, or non-resident alien—and is based on the fair market value of the properties at the time of death. Unlike inheritance tax, which is paid by heirs, estate tax is shouldered by the estate itself before distribution. The TRAIN Law simplified the estate tax regime by introducing a flat rate and increasing deductions, aiming to ease the burden on families while generating revenue for public services.

Understanding estate tax computation is crucial for executors, administrators, heirs, and legal professionals to avoid penalties, ensure proper asset distribution, and comply with BIR requirements. This article covers the legal framework, components of the gross and net estate, allowable deductions, tax rates, computation steps, filing procedures, payment options, exemptions, special rules, and common pitfalls.

Legal Framework and BIR Oversight

The estate tax is outlined in Sections 84 to 97 of the NIRC, as amended. Key revenue regulations from the BIR include:

Revenue Regulations (RR) No. 12-2018: Implements the TRAIN Law's estate tax provisions.
RR No. 2-2003: Provides guidelines on estate tax returns and payments.
RR No. 6-2014: Covers valuation of properties for tax purposes.
Various BIR rulings and memoranda addressing specific scenarios, such as estate settlements involving minors or non-residents.

The BIR Commissioner has the authority to prescribe rules, forms, and procedures. Non-compliance can lead to audits, assessments, and legal actions under the Tax Code.

Who is Subject to Estate Tax?

Estate tax applies to the transfer of the net estate of:

Filipino Citizens and Resident Aliens: The tax covers worldwide properties, regardless of location.
Non-Resident Aliens: Only properties situated in the Philippines are taxed.

The decedent's status is determined at the time of death. For married decedents, the conjugal or community property regime affects how assets are divided and taxed. Under the Family Code, absolute community of property is the default regime unless otherwise specified in a prenuptial agreement.

Exemptions include:

Estates where the gross value does not exceed PHP 200,000 (no tax return required).
Certain transfers, such as those to the government for public purposes or under special laws (e.g., agrarian reform beneficiaries).

Components of the Gross Estate

The gross estate is the total fair market value (FMV) of all properties owned by the decedent at death. It includes:

Real Properties: Land, buildings, improvements in the Philippines (for non-residents) or worldwide (for residents/citizens). Valued at the higher of zonal value (per BIR) or assessed value (per local government).
Personal Properties: Cash, bank deposits, vehicles, jewelry, artworks, household items.
Intangible Properties: Shares of stock (listed: closing price; unlisted: book value), bonds, receivables, intellectual property rights, franchise rights.
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: Gifts made within three years before death if deemed motivated by impending death.
Revocable Transfers: Properties where the decedent retained control or reversionary interest.
Properties Subject to Power of Appointment: If the decedent had general power over them.
Retirement Benefits and Pensions: Taxable if not previously taxed.
Claims Against Insolvent Persons: Included at face value unless proven uncollectible.

Valuation rules (per RR No. 6-2014):

FMV at death.
For real property: Zonal value or assessor's value, whichever is higher.
For shares: Listed—average of high/low prices; unlisted—adjusted net asset value.
Foreign currency: Converted at prevailing exchange rate.
Usufruct or life interests: Actuarial valuation using BIR tables.

Allowable Deductions from the Gross Estate

To arrive at the taxable net estate, subtract allowable deductions from the gross estate. Deductions must be substantiated with documents like receipts, court orders, or certificates.

Standard and Mandatory Deductions (for all decedents):

Standard Deduction: PHP 5,000,000 (fixed under TRAIN Law; no need for proof).
Family Home: Up to PHP 10,000,000 (must be certified as such by the barangay and used as the family's dwelling).
Medical Expenses: Up to PHP 500,000 incurred within one year before death, supported by receipts.
Claims Against the Estate: Valid debts owed by the decedent, proven by promissory notes, contracts, or court judgments.
Claims Against Insolvent Persons: If included in gross estate.
Unpaid Mortgages, Indebtedness, and Taxes: Deductible if incurred before death and unpaid at death.
Losses, Indebtedness, and Taxes (LIT): Casualty losses not compensated by insurance; taxes accrued before death.
Transfers for Public Use: Bequests to government or accredited institutions for charitable, educational, or public purposes.
Vanishing Deduction: For properties previously taxed within five years (graduated: 100% if within 1 year, down to 20% if 4-5 years).
Share in Conjugal Property: For married decedents, deduct the spouse's share in community property.

Special Rules for Non-Resident Aliens:

Deductions are prorated based on the ratio of Philippine gross estate to worldwide gross estate.
No standard deduction or family home allowance unless reciprocity exists with the decedent's country.

Expenses like funeral costs, judicial expenses, and attorney's fees are no longer deductible under TRAIN Law (previously allowed pre-2018).

Estate Tax Rates

Under the TRAIN Law, the estate tax rate is a flat 6% on the net estate. This replaced the old graduated rates (up to 20% on amounts over PHP 10 million).

No tax if net estate is PHP 5,000,000 or less (due to standard deduction).
Tax = 6% × (Gross Estate - Deductions).

For pre-TRAIN deaths (before 2018), old rules apply: Graduated rates from 0% (up to PHP 200,000) to 20% (over PHP 10 million), with different deductions.

Step-by-Step Computation of Estate Tax

Determine Gross Estate: Sum FMV of all includible properties.
Calculate Allowable Deductions: Subtract substantiated deductions.
Compute Net Estate: Gross Estate - Deductions.
Apply Tax Rate: 6% of Net Estate.
Subtract Credits (if any): Foreign estate taxes paid (for residents/citizens on foreign properties), subject to limits.
Add Penalties/Interest (if late): If applicable.

Example:

Gross Estate: PHP 20,000,000
Deductions: Standard (PHP 5M) + Family Home (PHP 10M) + Medical (PHP 500K) = PHP 15,500,000
Net Estate: PHP 4,500,000
Tax: 6% × PHP 4,500,000 = PHP 270,000

For community property:

Separate conjugal assets (e.g., half to surviving spouse).
Tax only the decedent's share.

Filing and Payment Procedures

Estate Tax Return: BIR Form 1801, filed by executor, administrator, or heirs.
Deadline: Within one year from death (extendable up to 30 days for cause).
Where to File: Revenue District Office (RDO) where decedent resided or was registered.
Required Documents: Death certificate, TIN of estate/heirs, deeds, certificates of stocks, bank statements, appraisals, proofs of deductions.
Payment: Simultaneous with filing; via BIR-accredited banks, eFPS, or tax debit memo.
Installment Payment: Allowed if estate lacks sufficient cash (up to 5 years, with interest and bond).
Notice of Death: Required within two months if gross estate exceeds PHP 20,000.

For judicial settlements, file return before court distribution. Extra-judicial settlements require affidavit and BIR clearance.

Penalties for Non-Compliance

Late Filing/Payment: 25% surcharge + 12% interest per annum.
Deficiency: 50% surcharge if willful neglect or fraud.
Underdeclaration: Up to 50% of deficiency.
Criminal Penalties: Fines (PHP 1,000 to PHP 50,000) or imprisonment for evasion.
Compromise settlements possible via BIR.

Special Considerations and Exemptions

Donations Mortis Causa: Treated as part of estate if revocable.
Trusts: Taxable if decedent retains control.
Agricultural Lands: Special valuation under CARP laws.
Estates Under Administration: Provisional payments may be required.
Amnesty Programs: Occasional estate tax amnesties (e.g., RA 11213 in 2019) allow settlement of delinquencies.
COVID-19 Extensions: BIR issued memoranda extending deadlines during pandemics.
International Treaties: Tax treaties may provide relief for double taxation.

Common Pitfalls and Best Practices

Undervaluation: Leads to assessments; use BIR-approved appraisers.
Missing Documents: Delays clearance; maintain records.
Multiple Heirs: Coordinate to avoid disputes; secure waivers if needed.
Non-Residents: Ensure reciprocity proofs for deductions.
Planning: Use lifetime gifts (subject to donor's tax at 6%) to reduce estate size.

Consult a tax lawyer or CPA for complex cases, as BIR rulings can vary. Compliance ensures smooth asset transfer and avoids hefty penalties.

Conclusion

Computing estate tax in the Philippines involves meticulous valuation, deduction claims, and adherence to BIR rules under the simplified TRAIN Law framework. With a flat 6% rate and generous deductions, it balances fiscal needs with family protection. Proper planning and timely filing are essential to honor the decedent's legacy without undue burden. For updates, refer to official BIR issuances, as tax laws evolve.