Finance executives want estate, donor tax rates at flat 6 percent to cure breaches

The Financial Executives Institute of the Philippines (Finex) has proposed to simplify and make the estate and donor tax system in the country more equitable by adopting a flat 6-percent tax rate and sparing the “family” home from such tax burden.

In a letter dated March 3 addressed to Sen. Juan Edgardo Angara, who chairs the Senate committee on ways and means, Finex said the flat rate would complement efforts to achieve a “simpler, fairer, and more efficient tax system.”

Currently, estate tax has several tiers, with the maximum at 20 percent. Graduated rates are also slapped on the donor’s tax, with a 15-percent top rate if given to a relative, and 30 percent if given to a stranger. Tax on “capital” real property is at 6 percent.

While the objective of these taxes is supposedly to raise revenues for the government while serving as a tool for distribution of wealth to serve the ends of social equity, Finex cited data showing the dismal performance of these tax measures in the past.

In 2013, Finex said only 40,325 estate returns had been filed as against 531,280 deaths, adding that estate tax collection currently amounts to a negligible 1 percent of total annual tax revenue.

“Clearly, the estate and donor’s taxes have proven ineffective for their intended role. On the other hand, it is effective in creating social and economic problems. These onerous laws breed contempt and disrespect as they are honored more in the breach,” a position paper prepared by Finex chair for national affairs committee Eduardo Yap read.

“Otherwise upright citizens perforce become tax evaders. Noncompliance leaves countless real properties stranded with the decedent and, in the process, excluded from the market,” it also read.

The paper said the estate tax could cause the liquidation of family business assets and even their dissolution just so a tax obligation would be met. As a consequence, Finex said capital in the hands of entrepreneurs would be impaired to the detriment of the economy.

“The estate tax has failed to reduce income inequality and distribution of wealth, if such were the intention in the first place. The wealthy and super rich are the targets of this tax, but there are enough loopholes in the tax system to reduce the tax bite through tax planning,” the paper read.

Finex also proposed to exclude the family home from gross estate and consequently, from estate tax, arguing that the cost of the estate tax to society and the economy may exceed intended benefits.

“It has the deleterious, albeit unintended, effect of breaking up or forcing the liquidation of the family home, a revered institution of Philippine society to which are anchored the close family ties that are the very foundation of Filipino culture. The home is where these ties are born, nurtured, and take root. In turn, close family ties that extend to several degrees of consanguinity and affinity, and is a safety net that enables less fortunate family members to survive financial crisis,” the paper read.