Four bills and a tax: Amending the estate tax system
I have a friend who loves the British TV drama “Downton Abbey.” Now, why would a taxman like me suddenly be thinking of a TV show about an aristocratic family and its country mansion? Well, as my friend told me, one of the show’s episodes revolved around how the “death duties”—the British term for “estate taxes”—for the enormous property (think hacienda) where the fictional country manor sits would be paid.
Should the family sell some of the land and break up the property that’s been in the family for several generations, or try to negotiate a schedule to pay the death duties over 20 years?
Of course, the age of the great haciendas of the Colonial era being long past, there aren’t that many enormous properties for which huge taxes have to be paid when they become someone’s inheritance, but the problems that accompany the payment of estate taxes aren’t limited to the upper crust of society and involve many other issues aside from where to get the money to pay the tax.
More often than not, wading through the interminable documentary requirements poses an even bigger challenge—any taxman worth his salt knows that.
In recent weeks, there’s been some talk about moves to abolish the estate tax. Part of me thinks that proposal isn’t such a bad idea, but the more prudent side of me also knows that abolishing a particular tax won’t necessarily solve the problem.
It’s not hard to see why some people aren’t convinced that estate taxes contribute significantly to the country’s tax collections.
Data from the National Statistics Office shows that in 2010, there were just over 488,000 registered deaths—no mention, though, of how many of those individuals belonged to which economic class.
The BIR’s Annual Report for 2013 offered the information that there were only 28,634 registered estate taxpayers for that year, and taxes on property—which include estate taxes—totaled only P3.275 billion, a minuscule 0.269 percent of the BIR’s total collection of P1.216 trillion. Taking such data into consideration, it’s obvious that estate taxes account for a very small slice of the pie where tax revenues are concerned.
Still and all, one doesn’t throw the baby out with the bathwater, and for one thing, perhaps the reason why so little is paid by way of estate taxes is precisely because it’s so difficult to file and pay them in the first place.
A few weeks ago, some friends of mine from MAP were discussing the ins and outs of estate taxation, and we fell to debating on the merits of four Senate bills that were filed to amend the estate tax laws. Perhaps it might help to take a quick look at those elements of estate taxes that cause such concern for the families of decedents across the country, and how these bills will address those issues.
Probably the first and most immediate problem so many heirs have is that they simply don’t have enough money to pay the estate taxes on their inheritance.
Section 97 of the Tax Code says, in a nutshell, that the heirs of a decedent can’t touch his (or her) bank deposits until the estate taxes have been paid. That usually means the heirs can’t even withdraw money to pay for the funeral expenses or the final medical bills of their deceased relative, much less use the money to pay the very estate taxes that will be imposed on them. But the problem stretches further back in time.
In many cases, real properties have passed from one generation to another without the payment of estate taxes simply because the heirs can’t afford to pay the taxes that accumulated over the decades. I’ve also heard countless stories of people who are “custodians” of properties that are still registered in the names of their grandparents or great-grandparents.
Senate Bill (SB) No. 2244 proposes some options to deal with these issues.
First, the bill suggests that the requirement for an estate tax clearance be scrapped, and a “withholding tax” be imposed on the decedent’s bank deposits, for estate tax purposes. The deposits can then be released—minus the withholding tax on estate, of course—to the heirs, who will then file and pay the remaining estate tax due. The bill also proposes the use of a gross estate tax (GET) system.
Imposing the GET, albeit at a lower rate than the current estate tax and with far fewer requirements, will encourage more heirs to pay estate taxes and do away with many of the administrative costs associated with administering the estate tax system. And for those estate taxes that remained unpaid for several decades, the bill recommends the grant of an amnesty, to allow the concerned heirs to “wipe the slate clean,” so to speak.
No discussion, however brief, of a particular tax system would be complete without considering its exemptions. The general rule is that an estate with a net worth of P200,000 is considered exempt from estate taxes. This figure, though, was set in 1997—18 years ago!—and if you factor in the value of money today, it is high time for an adjustment. This is what SB No. 1489 hopes to achieve, by proposing that the minimum value of the net taxable estate be pegged at P400,000.
Let’s not forget the issue of the family home, perhaps the single most important item in a deceased’s estate. At present, the Tax Code allows an exemption for the family home up to the amount of P1 million. Property values and the purchasing power of the peso being what they are now, even a modest family home in a socialized-housing project would cost at least P1 million.
This is where SB No. 2102 comes in—it proposes that the exemption for the family home be raised to P10 million. That would free up more of the heirs’ funds for the payment of debts and medical expenses the decedent may have left behind, and in some cases, save the family from selling the family home itself to pay those debts or the estate tax itself.
And, talking about medical expenses, how often have we seen a decedent’s medical expenses for a final illness bring his family to its knees, leaving them with virtually nothing left to settle the estate taxes? SB No. 2028 took this into account, and proposes to raise the maximum allowable deductions for medical expenses from the present ceiling of P500,000 to P1.5 million.
All things considered, the bottom line is that scrapping a particular tax from the Tax Code isn’t the way to make the national tax system more progressive; indeed, the end result would be that the country would lose one source of tax revenues, and for a developing economy such as ours, every peso paid in taxes counts. No one can blame the government for imposing taxes, but the people do have the right to expect that efforts will be made to lessen the burden of paying those taxes. It’s never easy to convince a person to part with his hard-earned money.
So when it comes to asking a bereaved family to pay estate taxes, the best thing to do – as far as I’m concerned – is, as with all taxes, to make the process as painless as possible.
Because no matter what some may say about the “oppressiveness” of taxation, there’s no rule, after all, which says that taxation can’t, at times, be merciful.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is a Senior Partner of The Tax Offices of Romero, Aguilar & Associates and member of MAP National Issues Committee and MAP Tax Committee. Feedback at <[email protected]> and <[email protected]>. For previous articles, please visit <map.org.ph>)