The Department of Finance wants Congress to pass a sharp reduction in estate tax rates to promote the faster development of idle real estate and encourage more people to pay taxes on the transfer of land from deceased persons to their heirs.
In a briefing with reporters, Finance Secretary Carlos G. Dominguez III said he wanted to see the estate tax rate of 20 percent be cut to as low as 6 percent of the value of the property being transferred.
If passed by Congress and enacted into law, this lower estate tax rate would put it on a par with the tax level for capital gains, which, at present, is the preferred method of transferring assets from a property owner to his heirs.
“Quite frankly, we know when people go around buying and leasing land, most of the land are still in the name of people’s [deceased] grandfathers,” the finance chief said. “They don’t want to transfer [ownership] because they don’t want to pay the 20-percent [estate tax].”
“Most likely, the outcome that we want is to reduce the tax rates to something like [the rate for] capital gains on stocks of 6 percent,” he added.
The policy marks a new approach to the drive of the Bureau of Internal Revenue to raise estate tax collections from the heirs of deceased property owners. During the administration of President Aquino, Internal Revenue Commissioner Kim Henares set an ambitious goal of P50 billion in collections from estate taxes by 2016, or an average of P12.5 billion a year when the target was set in 2012.
The old program called for greater enforcement by the BIR in coordination with other agencies like the National Statistics Office to monitor the death of wealthy individuals, but its success in raising revenues was limited.
Instead of strong-arm tactics, however, Dominguez’s scheme hopes to encourage compliance by making it cheaper to do so and hopefully compensate the lower estate tax each individual will pay government with higher volume of payments.
At the same time, the economic activity to be generated by the faster development of the property would also generate greater revenues for the government, he explained.
“A lot of people don’t pay [estate taxes] because they don’t like to pay for the transfer of the land,” he said. “A lot of land is still in the name of their grandfathers, so its [value is] locked up. If you are encouraging them to just pay lower taxes—lets say 6 percent—then there’s a potential for [the properties] to be developed quickly.”
The finance chief also explained that the high estate tax rate discouraged heirs from declaring the correct value of the properties they inherited. The resulting lower property values also contribute to these becoming idle land, he said—something he hopes to change if the lower rate is approved by Congress.
“Now, we would encourage the economy to move ahead,” Dominguez said. “It’s part of the tax reform program.”
“So those who have estate planning businesses, I am sorry but you will be out of business soon,” he added.