The National Tax Research Center (NTRC) and several other groups have expressed their support for a legislative proposal granting a one-time amnesty on estate tax payments and lowering its rate from the current 5-20 percent to a flat 6 percent, as part of the Comprehensive Tax Reform Program (CTRP) of the Department of Finance (DOF) that is designed to make the current system simpler, fairer and more efficient, especially for low- and middle-income taxpayers.
To prevent the proposed uniform rate of 6 percent from inadvertently increasing the rates for estates charged 5 percent or lower under the current tax table, the DOF has proposed a hike in the P1 million threshold for family home exemptions to P3 million, on top of the standard deduction of P1 million.
“We seek to maintain the family home exemption at P3 million (plus a standard deduction of P1 million), [which] is an improvement from the maximum rate of P1 million and standard deduction of P1 million,” DOF Assistant Secretary Mark Dennis Joven said during a hearing by the Senate ways and means committee.
“So basically, someone with a net estate of P4 million or lower will not be subject to that 6% estate tax,” Joven said. “We consider him or her not rich enough to be subject to the redistributive effects of estate tax.”
Finance Secretary Carlos Dominguez III said at the presentation of the 2017 national budget last year that he was pushing for the lowering of estate tax rates to encourage the updated documentation of land ownership and the development of idle lands, which , in turn will “unlock the land market, help local government units raise more revenues and encourage more efficient land use that can help foster investments and create jobs.”
The NTRC has backed Dominguez’s proposal, with its Executive Director, Trinidad Rodriguez telling the committee chaired by Sen. Juan Edgardo Angara that substantially lowering the estate tax rate would “ease the burden of the heirs from the ordeal of paying the said tax after having suffered a loss of a family member, and shouldering many other expenses related to the death.”
“A flat tax rate is deemed simpler and easier to understand, enhancing the chances of higher tax compliance. More specifically, setting the estate tax at 6 percent, meaning the same rate as the capital gains tax, and for that matter, also for the donor’s tax, is deemed more practical and reasonable,” Rodriguez said.
She likewise pointed out that imposing a uniform rate on all types of transfer transactions, either through sale, inheritance or donation, will minimize the tendency of taxpayers to resort to “manipulative tax planning” to minimize their tax liabilities.
Rodriguez bared the low compliance rate on the part of the heirs to settle their tax liabilities, citing as an example that the tax returns in 2015 only totaled 43,123 or around 7% of total deaths in the country.
“Administrative efficiency could have also contributed to the low collection,” she said. “Also, the generous deductions from gross estate before arriving at net estate, which is the base of the tax, must have significantly narrowed down the tax base.”
Rodriguez noted that in 2014 and 2015, around 80% of tax filers had reported net estate worth of not over P200,000. “So that means that these are exempt tax filers. So any collection based on the records of the BIR, are mainly fines and penalties, maybe for late filing or late payment of estate tax,” she said.
Related to this is the tendency of some tax filers to overstate expenses if only to reduce their tax liabilities.
Thus, the proposal to simplify the estate tax system is timely and worth pursuing, she added.
Aside from the NTRC, the League of Provinces of the Philippines (LPP) and the Financial Executives Institute of the Philippines (FINEX) also backed the proposed estate tax reforms during the Senate hearing.
LPP Executive Director Sandra Tablan Paredes said the local government units also support the amnesty plan and even the repeal of the estate tax, given that LGUs find it difficult to collect this tax because she believes that paying the government is the last thing on the mind of families grieving the death of their loved ones.
FINEX national affairs committee chairman Eduardo Yap said his organization is also supporting the reforms in the estate tax as this would help “simplify the tax system, encourage voluntary compliance and likely raise revenue collections.”
“What are the adverse effects of the estate tax ….? It breaks up family homes because the estate or the heirs are forced to sell in order to meet the estate tax obligation. It forces businesses to sell assets to meet personal estate tax obligation, and thereby it impairs and reduce[s] capital in the hands of the private sector. Real properties are stranded with their titles not transferred to the heirs. It hinders property development to the detriment of home accessibility and affordability,” Yap said.
Senator Juan Miguel Zubiri similarly expressed support for the proposal.
“I’m fully supportive of bringing [the estate tax rate] down so that we can open more lands (for development),” Zubiri said at the hearing.
BIR Commissioner Caesar Dulay also said the Bureau “supports the position of the Department of Finance with respect to the proposed law on estate tax” as embodied in House Bills 4814 and 4815 that were passed on third and final reading by the House of Representatives last Feb. 13.
HB 4814 exempts any person from paying the estate taxes on the property of a deceased loved one from taxable year 2016 to prior years, while HB 4815 provides for a single estate tax rate of 6 percent based on the value of the net estate.
Several senators have also filed their respective bills on estate tax amnesty, raising the estate tax exemption or lowering the estate tax rate, among them Senate President Aquilino Pimentel III, Senators Francis Escudero, Ralph Recto and Vicente Sotto III.
Simplifying the property tax system by lowering estate and donor tax rates to around 6 percent will unlock the land market and encourage more efficient land use that can help foster investments and create jobs.