The Tax Reform for Acceleration and Inclusion (TRAIN) Act, otherwise known as Republic Act (RA) 10963, is basically a blend of increases as well as reductions in tax rates. While it increased the tax on certain passive incomes, documentary stamp as well as excise on petroleum products, minerals, automobiles and cigarettes, it also reduced the tax on personal income, estate and donation. The overall effect is seen to generate approximately P130 billion in revenues which shall be used to fund the government’s “Build, Build, Build infrastructure program” and “socio-economic programs”.

The revisions introduced by RA 10963 cover the provisions relating to Estate and Donor’s tax which were last amended decades ago.

Estate Tax is a tax levied on the transmission of properties from a decedent (a person who died) to his lawful heirs and beneficiaries based on the Fair Market Value (FMV) of the net estate at the time of the decedent’s death. It is not a tax on property nor on the transferor or transferee. It is a tax imposed on the privilege of transmitting property upon the death of the owner. Its object is to tax the shifting of economic benefits. Death therefore, is the generating source of the power to tax (Lorenzo v. Posadas Jr., G.R. No. L-43082). The rights to succession are transmitted at the moment of death of the decedent (Art. 777, New Civil Code). The heirs succeed immediately from that very moment. No manual or physical transfer of the property is required for the estate tax to accrue. The law in force at the time of death of the decedent governs notwithstanding the postponement of the actual possession or enjoyment of the property by the beneficiary.

Prior to RA 10963, the Net Taxable Estate (Estate Tax Base) of a citizen or resident decedent can generally be computed as follows:

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Some of the amendments introduced under RA 10963 on estate tax include the adoption of a fixed flat tax rate, the allowable deductions in computing a decedent’s net taxable estate, and procedural matters intended to streamline processes.

In particular, the following are the amendments primarily aimed to simplify its computation, procedures and payment:

• The estate tax rate was reduced from graduated rates of 5% to 20% of the net estate to a fixed flat rate of 6% on the amount in excess of P5 million.
• Estates with a net value of P5 million and below will be exempted from paying the estate tax.
• Judicial, funeral (threshold is up to P200,000) and medical expenses (threshold is up to P500,000) are no longer allowed.
• Standard deduction (wherein no substantiation is required) is however increased from P1,000,000 to P5,000,000
• Family home threshold for exemption has been increased from P1,000,000 to P10,000,000. Barangay Certification is no longer a requirement
• Deduction for Expenses, Losses, Indebtedness and Taxes for non-residents are no longer allowed. In lieu thereof, non-residents are now allowed to have a standard deduction of 500,000
• Proportionate deduction allowed to non-residents is now limited to claims against the estate, claims of the deceased against insolvent persons, and unpaid mortgages
• Notice of death is no longer a requirement
• CPA certification is required only if the gross estate is above P5,000,000. Previous threshold is up from P2,000,000.
• The deadline for filing of estate tax return has been extended from 6 months from death to one (1) year from death
• Payment of estate tax can be made in installment up to two years if cash of the estate is insufficient to pay tax due
• In lieu of a required certification from the BIR that the estate tax has been paid, the new law permits withdrawal of funds in bank deposit accounts (left by the decedent) by the heirs subject only to 6% withholding tax. Prior to RA 10963, only withdrawals up to P20,000 is allowed

Donor’s tax, on the other hand, is a tax on the privilege to transfer property from a living person to another living person without consideration or for less than an adequate and full consideration in money or money’s worth. Like an estate tax, it is in the nature of an excise tax which is imposed on the privilege to transfer of property during a person’s lifetime. It is imposed on the donor of the property and the donated property must be valued at FMV at the time of the donation.

The rates of donor’s tax were graduated ranging from 2% to 15% if the donor and donee are related, and 30% if otherwise. Under RA 10963, donor’s tax rate imposes a single rate of 6%, regardless of the relationship between the donor and the donee. Only donations with at least P250,000 worth will be charged a donor’s tax.

Donation of real property is now subject to DST of P15 for every P1,000.

RA 10963 also added as an exception to the general rule (in a transfer of less than an adequate and full consideration in money or money’s worth) that a sale, exchange or transfer of property made in the ordinary course of business (i.e., bona fide transfer, at arm’s length, and free from donative intent) will be considered as made for an adequate and full consideration in money or money’s worth. In other words, a sale or exchange of property for less than adequate and full consideration is subject to donor’s tax. The burden of proving that the same is being made in the ordinary course of business apparently lies with the donor.

Other changes include the deletion of exemption relating to donation proper nuptias before its celebration (or within one year thereafter) by parents to each of their legitimate recognized and adopted children.

The amendments brought about by the TRAIN relating to estate and donor’s tax surely is a welcome development. The reduced tax rates will simplify transfer of properties to beneficiaries and will have the effect of easing the burden of paying huge amount of transfer taxes.

For unsettled delinquent estate tax, taxpayers hopefully await the passing of the tax amnesty program as there are still estate taxes that remain unpaid covering high value properties that were left behind by departed Filipinos.

This article is for general information only. If you have any question or comment regarding this article, you may email the author at mark.tamayo@mtfcounsel.com.

Atty. Mark Anthony P. Tamayo is a Partner of Mata-Perez, Tamayo & Francisco Law offices (MTF Law) and a law professor and professional lecturer.