Paying Estate Tax Temporarily Without Extrajudicial Settlement in the Philippines

Introduction

In the Philippines, the settlement of a deceased person's estate involves complex legal and tax obligations, primarily governed 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, and subsequent regulations. Estate tax, often referred to as inheritance tax in common parlance, is imposed on the privilege of transmitting the property of the decedent to their heirs or beneficiaries. Typically, the process requires an extrajudicial settlement of estate (ESE) among heirs when there is no will or when the estate is settled amicably without court intervention. However, circumstances may arise where heirs face delays in executing an ESE due to disputes, incomplete documentation, or other logistical issues. In such cases, paying the estate tax "temporarily" or provisionally without a formal ESE becomes a practical necessity to avoid penalties, facilitate urgent transactions, or comply with timelines.

This article explores the concept of temporary estate tax payment in the absence of an ESE, including its legal foundation, procedural steps, implications, benefits, potential pitfalls, and related considerations. It draws from provisions under the NIRC, Bureau of Internal Revenue (BIR) regulations, and established practices in Philippine estate administration. Understanding this mechanism is crucial for heirs, executors, administrators, and legal practitioners to navigate estate settlement efficiently while minimizing tax liabilities and administrative hurdles.

Legal Basis

The foundation for paying estate tax without an immediate ESE lies in the mandatory nature of estate tax filing and payment, which is independent of the formal distribution of assets. Under Section 90 of the NIRC, the estate tax return must be filed within one year from the decedent's death by the executor, administrator, or any of the heirs. This obligation does not presuppose the completion of an ESE; rather, it prioritizes tax compliance to prevent the accrual of interest, surcharges, and penalties as outlined in Section 248 and 249 of the NIRC.

Key legal provisions enabling temporary payment include:

Section 91(A) of the NIRC: This mandates payment of the estate tax upon filing the return, but allows for extensions under certain conditions. If an extension is granted for filing (up to six months for illness or other causes), payment may also be deferred without interest during the extension period. This creates a window for "temporary" payment, where an initial or estimated tax can be remitted to halt penalty accrual while the ESE is being finalized.
Revenue Regulations (RR) No. 12-2018: Implementing the TRAIN Law, this regulation clarifies that the estate tax is computed on the gross estate minus allowable deductions, with a flat rate of 6% on the net estate exceeding PHP 5 million (after a standard deduction of PHP 5 million, among others). It permits the filing of a preliminary estate tax return if complete information is unavailable, allowing for amendments within the prescriptive period. This preliminary filing facilitates temporary payment based on available data, with adjustments made later upon ESE completion.
Section 95 of the NIRC: This allows for installment payments if the estate consists largely of illiquid assets (e.g., real property) and cash is insufficient. Up to two years of installments may be approved by the BIR Commissioner, with interest at the prevailing rate. This can serve as a temporary relief mechanism without requiring an immediate ESE, as the focus is on liquidity rather than asset distribution.
BIR Revenue Memorandum Circular (RMC) No. 44-2018 and related issuances: These provide guidelines for issuing Electronic Certificates Authorizing Registration (eCAR) for property transfers. In practice, the BIR may issue a provisional eCAR for specific assets (e.g., to allow sale of property to fund the tax) upon partial or estimated tax payment, even if the ESE is pending. This is particularly relevant when heirs need to liquidate assets urgently to cover the tax liability.

Additionally, jurisprudence such as in Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation (G.R. No. 192398, 2013) underscores that tax payments can be made provisionally or under protest to preserve rights, which aligns with temporary payments in estate contexts where asset valuation or heir agreements are unresolved.

The Civil Code of the Philippines (Articles 774-1105) complements this by recognizing the estate as a juridical entity during settlement, allowing interim actions like tax payment by any interested party without prejudicing final distribution.

Procedure for Temporary Payment

The process for paying estate tax temporarily without an ESE involves several steps, emphasizing compliance and documentation to avoid future disputes. While not explicitly termed "temporary" in statutes, the mechanism operates as such in practice:

Determine the Responsible Party: If no executor or administrator is appointed, any heir or beneficiary may file the estate tax return and make the payment (Section 90(B), NIRC). This can be done individually or jointly, with the filer acting in a fiduciary capacity.
Gather Preliminary Documentation: Compile available information on the gross estate, including bank accounts, real properties, shares, and other assets. Valuations can be based on zonal values for real property (from BIR) or fair market values for others. Deductions such as the PHP 5 million standard deduction, family home allowance (up to PHP 10 million), and medical expenses (up to PHP 500,000) can be claimed provisionally.
File the Preliminary Estate Tax Return: Use BIR Form No. 1801. Submit it to the Revenue District Office (RDO) where the decedent resided or where the estate is administered. If complete details are lacking due to absent ESE, note this in the return and file as a preliminary version. Payment can be made via authorized agent banks, BIR collection agents, or online through the eBIRForms system.
Make the Provisional Payment: Remit the computed tax based on the preliminary return. If liquidity is an issue, apply for installment payment under Section 95, submitting a sworn statement of assets and a payment plan. The BIR may require a surety bond equivalent to the tax amount for installments exceeding one year.
Secure Provisional Clearances: Upon payment, request a provisional eCAR for specific transactions, such as withdrawing bank deposits exceeding PHP 20,000 (per PDIC rules) or selling property. For banks, Republic Act No. 11201 allows withdrawals up to PHP 500,000 without full clearance, but estate tax payment evidence facilitates larger amounts.
Amend Upon ESE Completion: Once the ESE is executed and notarized (as required by Section 1, Rule 74 of the Rules of Court), file an amended return within the three-year prescriptive period (Section 222, NIRC) to reflect accurate distributions, additional deductions (e.g., claims against the estate), and any overpayments for refund.

Throughout, maintain records of payments, as overpayments can be credited or refunded under Section 229 of the NIRC, subject to a two-year claim period.

Advantages of Temporary Payment

Opting for temporary estate tax payment offers several benefits:

Penalty Mitigation: Interest accrues at 6% per annum (reduced from 12% under TRAIN) from the due date. Early payment stops this, potentially saving significant amounts.
Facilitates Urgent Transactions: Provisional eCAR enables asset sales or withdrawals, providing liquidity for funeral expenses, debts, or further tax payments.
Preserves Heir Rights: Payment does not imply waiver of disputes; it protects the estate from BIR enforcement actions like levies.
Tax Planning Flexibility: Allows time to maximize deductions, such as transferring the family home or claiming vanishing deductions for previously taxed properties.
Compliance with Timelines: Avoids the five-year assessment period extension if returns are not filed timely.

Challenges and Risks

Despite its utility, this approach is not without drawbacks:

Overpayment Risks: Preliminary valuations may overestimate the tax, leading to refunds that require additional paperwork and audits.
Disputes Among Heirs: One heir's unilateral payment may spark conflicts, potentially requiring court intervention for reimbursement.
BIR Scrutiny: Provisional filings invite audits; incomplete returns could result in deficiency assessments with 25-50% surcharges.
Liquidity Constraints: Even with installments, securing bonds or partial payments can be burdensome for cash-strapped estates.
Prescription Issues: Failure to amend timely may bar refunds or adjustments.

To mitigate, consult a tax lawyer or accountant early, and consider alternative dispute resolution for heir disagreements.

Related Considerations

Special Cases: For non-resident decedents, only Philippine-situs properties are taxed, and payment procedures align similarly. Conjugal properties under the Family Code require separate computation for community property regimes.
Penalties for Non-Compliance: Late filing incurs a 25% surcharge, plus interest and possible compromise penalties up to PHP 50,000.
Integration with Other Taxes: Capital gains tax (6%) and donor's tax may interplay if assets are sold or deemed donated pre-settlement.
Digital Tools: The BIR's eCAR system and Online Registration and Update System (ORUS) streamline processes, but require e-signatures and TINs.
Recent Developments: Post-TRAIN amendments, including RR No. 13-2021, emphasize electronic filing, enhancing efficiency for provisional payments.

Conclusion

Paying estate tax temporarily without an extrajudicial settlement serves as a vital bridge in Philippine estate administration, balancing tax compliance with practical realities. By leveraging preliminary filings, installment options, and provisional clearances, heirs can safeguard the estate's value while resolving distribution matters. However, this requires meticulous planning and professional guidance to navigate legal nuances and avoid pitfalls. Ultimately, timely action not only fulfills fiscal duties but also honors the decedent's legacy through orderly succession.