Estate Tax in the Philippines

Estate Tax Overview

• Estate tax is levied, assessed, collected, and paid upon the transfer of the net estate of every decedent, whether resident or nonresident of the Philippines.
• The tax rate is 6% based on the value of the net estate.

Gross Estate Determination

• The gross estate includes the value of all property (real or personal, tangible or intangible) at the time of the decedent's death, wherever situated.
• For nonresident decedents who were not citizens of the Philippines at the time of death, only the part of the gross estate situated in the Philippines is included in the taxable estate.
• Includes the decedent's interest at the time of death.
• Includes interests transferred in contemplation of death, intended to take effect at or after death, or where the decedent retained certain rights or powers.
• Transfers where enjoyment was subject to change through the exercise of a power by the decedent to alter, amend, revoke, or terminate are included.
• Property passing under a general power of appointment exercised by the decedent is included.
• Proceeds of life insurance receivable by the estate, executor, or administrator, or by beneficiaries (unless the designation is irrevocable) are included.
• Subsections (B), (C), and (E) apply to transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, whether made before or after the effectivity of this Code.
• For transfers with insufficient consideration, the gross estate includes the excess of the fair market value over the consideration received.
• The capital of the surviving spouse is not deemed part of the gross estate.

Net Estate Computation

• The net estate's value is determined by deductions from the gross estate.

Deductions Allowed for Citizens or Residents of the Philippines

• A standard deduction of P5,000,000 is allowed.
• Claims against the estate are deductible, provided the debt instrument was duly notarized, and loans contracted within 3 years before death require a statement showing the loan's disposition.
• Claims of the deceased against insolvent persons are deductible if the decedent's interest is included in the gross estate value.
• Unpaid mortgages or indebtedness related to property included in the gross estate value are deductible, but not income tax after death, property taxes not accrued before death, or estate tax.
• Deductions for claims, unpaid mortgages, or indebtedness are limited to the extent they were contracted bona fide and for adequate consideration.
• Losses incurred during estate settlement from fires, storms, shipwreck, casualties, robbery, theft, or embezzlement, if not compensated by insurance and not claimed for income tax purposes, are deductible if incurred by the estate tax payment date.
• Property Previously Taxed allows a deduction for property forming part of the gross estate situated in the Philippines if it was from a prior decedent within 5 years.
  • Deduction percentages vary based on the time elapsed since the prior decedent's death (100% within 1 year, decreasing to 20% if more than 4 but not more than 5 years).
  • These deductions are allowed only if the donor's or prior decedent's estate tax was determined and paid, and the property's value was included in the donor's or prior decedent's gross estate.
  • If a mortgage was deducted in the prior estate, and paid before the decedent's death, the deduction is reduced by that amount.
• Amounts for transfers for public use are deductible for bequests, legacies, devises, or transfers to the Philippine government or its subdivisions for public purposes.
• An amount equivalent to the current fair market value of the decedent's family home is deductible, but if it exceeds P10,000,000, the excess is subject to estate tax.
• Any amount received from the decedent's employer under Republic Act No. 4917 is deductible if included in the gross estate.

Deductions Allowed for Nonresident Estates

• A standard deduction of P500,000 is allowed.
• A proportion of deductions specified in paragraphs (2), (3), (4) for citizens/residents is allowed based on the ratio of the Philippine-situated gross estate to the entire gross estate.
• An amount equal to the value of property previously taxed is deductible, following similar rules as for resident estates.
• Amounts for transfers for public use are deductible for bequests, legacies, devises, or transfers to the Philippine government or its subdivisions for public purposes.

Other Considerations

• The net share of the surviving spouse in the conjugal partnership property is deducted from the net estate.
• Tax credit is allowed for estate taxes paid to a foreign country, subject to limitations based on the net estate's proportion in that country.
• The merger of usufruct in the owner of the naked title is not taxed.
• The transmission or delivery of inheritance or legacy by the fiduciary heir or legatee to the fideicommissary is not taxed.
• The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor is not taxed.
• All bequests, legacies, devises or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, are not taxed.
  • No more than 30% of the bequests, devises, legacies, or transfers can be used for administrative purposes.
• The value of the right of usufruct, use, habitation, or annuity is determined based on the beneficiary's probable life, according to the latest Basic Standard Mortality Table, approved by the Secretary of Finance.
• The estate is appraised at its fair market value at the time of death; for real property, the higher of the fair market value determined by the Commissioner or the Provincial/City Assessors is used.

Estate Tax Returns and Payment

• Estate tax returns are required in all cases of transfers subject to the tax, particularly when the estate includes registered or registrable property.
• The return must include the gross estate value, deductions, and necessary information to establish correct taxes.
• Estate tax returns exceeding P5,000,000 must include a statement certified by a Certified Public Accountant with itemized assets, deductions, and the amount of tax due.
• The estate tax return must be filed within one (1) year from the decedent's death.
• A certified copy of the schedule of partition and court order approving it must be furnished to the Commissioner within 30 days of the order's promulgation.
• The Commissioner can grant a reasonable extension (not exceeding 30 days) for filing the return in meritorious cases.
• The tax shall be paid, either electronically or manually, at the time the return is filed by the executor, administrator or the heirs.
• If payment on the due date would cause undue hardship, the Commissioner may extend the payment time, not exceeding 5 years if settled through courts or 2 years if settled extrajudicially.
  • If an extension is granted, the Commissioner may require a bond.
• Payment by installments is allowed within 2 years from the statutory date if the estate's available cash is insufficient.
• The executor or administrator is primarily liable for the estate tax; beneficiaries are subsidiarily liable to the extent of their distributive share.

Executor/Administrator Responsibilities

• An executor or administrator can apply for a determination of the estate tax amount and discharge from personal liability.
• The Commissioner must notify the executor or administrator of the tax amount within one year of the application (or one year after the return is filed).
• Paying the notified amount discharges the executor/administrator from personal liability for any later-found deficiency.

Deficiency Definition

• Deficiency means the tax amount exceeds the amount shown on the return, with adjustments for previous assessments, collections, abatements, and refunds.
• If no amount is shown on the return, the deficiency is the tax amount exceeding previously assessed or collected amounts, adjusted for abatements and refunds.

Other Requirements

• Judges cannot authorize delivery of a distributive share without a certification from the Commissioner that the estate tax has been paid.
• Registers of Deeds cannot register documents transferring real property or chattel mortgages by gifts inter vivos or mortis causa, legacy, or inheritance without a certification of tax payment.
• Debtors of the deceased cannot pay debts to heirs, legatees, executors, or administrators without the Commissioner's certification, unless the credit is included in the estate inventory.
• If new obligations of the decedent appear after estate tax payment and are satisfied by court order, interested parties have a right to restitution of the proportional tax part.

Transfer of Shares and Bonds

• Shares, bonds, or rights cannot be transferred in the books of any corporation without a certification that the taxes have been paid.
• Banks with knowledge of a depositor's death must allow withdrawals subject to a final withholding tax of 6%.

Donor's Tax Overview

• The tax for each calendar year is 6%, computed on the gift amount exceeding P250,000.
• Contributions to political campaigns are governed by the Election Code.
• Transfers for less than adequate consideration are considered gifts to the extent the property's fair market value exceeds the consideration.

Exempt Gifts

• Gifts to the National Government, its agencies not for profit, or political subdivisions are exempt.
• Gifts to educational, charitable, religious, cultural, or social welfare corporations/institutions/NGOs/trusts/philanthropic organizations/research institutions are exempt, provided no more than 30% is used for administration.

Rules for Non-resident Donors

• The law is the same.
• Gifts to qualified entities are also exempt.

Tax Credit for Donor's Taxes

• The tax imposed upon a donor citizen or resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country.
• Limitations are based on the net gift's proportion in the country and the entire net gifts.
• If the gift is made in property, the fair market value at the time of the gift is its amount, following Section 88(B) valuation for real property.
• A donor making any transfer by gift (except exempt ones under Section 101) must make a return under oath.
  • Return must include each gift made, deductions, previous net gifts, donee name and further information required by rules and regulation made pursuant to law.
• If the donor is non-resident, no tax shall be collected to intangible property if the country of the donor does not impose tax on the transfers.

Definitions

• Gross estate includes all tangible and intangible property.
• In the case of nonresident donors, excluded is the property located outside of the Philippines.