“If death and taxes are inevitable, unnecessary tax erosion is not.”
– Robert Brosterman & Thomas Brosterman, Top Experts in the Estate Planning Field
Maricar posted a comment on our website after reading one of our most often read articles “The 1st Thing You Have To Do in Settling the Estate of a Deceased Person” I quote in full her query:
“Hi Atty., quick question lang po on the Notice of Death. So if I use BIR form 1904 and attach the Death Certificate, I can already submit this to BIR for the TIN application of the estate right? That is, I can complete Step 1 (via 1904) and then go back some other time for the rest of the steps (2-6). Thank you!”
My reply to Maricar was in the affirmative. In my opinion, based on numerous experiences in dealing with the Bureau of Internal Revenue (BIR), submitting BIR form 1904 (along with a copy of the Certificate of Death of the deceased) will suffice and be considered as the Notice of Death.
However, the good news is that Section 89 of Republic Act No. 8424, as amended (The Tax Reform Act of 1997) has now been repealed by Section 24 of Republic Act No. 10963. Therefore, the requirement of a Notice of Death for estates whose gross value exceeded P20,000 pesos to be given to the BIR no longer exists.
RA 10963 is also known as the “Tax Reform for Acceleration and Inclusion.” Its famous acronym is TRAIN. The much anticipated tax reform law took effect on the new year (January 1, 2018). It mainly overhauled the provisions on value-added tax, excise tax, estate and donor’s taxes, among others, of the Tax Code (RA 8424).
Here are the 7 most important changes that TRAIN did for estate taxation in the Philippines:
- Lowered the Rate of Estate Tax. TRAIN lowered the rate of estate tax to SIX PERCENT (6%), which makes it at par with the capital gains tax for the sale, transfer or conveyance of real properties. The previous rates started from the low 5% to as high as 20%, which included the payment of stated lump sum amounts under each bracket.
A word of caution though. This tax rate shall only be applied to persons who died on January 1, 2018 onwards. The 6% tax rate shall not apply to the estate of deceased persons who died prior to the effectivity of RA 10963. There is no retroactive application of such a tax rate that was included in the TRAIN amendments to the Tax Code.
- Increased the Standard Deduction. Section 86 (A) (5) of RA 8424 pegged the standard deduction at P1 million pesos. The good news is that now the standard deduction of estate of a Filipino or a resident in the Philippines FIVE MILLION PESOS (PhP 5,000,000.00). Meanwhile, Section 23 of TRAIN added a new provision which gives a standard deduction to estates of non-residents in the amount of FIVE HUNDRED THOUSAND (PhP 500,000.00).
- Increased the Deduction for Family Home. The previous maximum amount of the fair market value of the Family Home that can be deducted was only One Million Pesos (P1,000,000.00). Section 23, of RA 10963 has increased the amount of deduction of the Family Home to TEN MILLION PESOS (PhP 10,000,000.00).
In addition, the same provision of TRAIN removed this phrase: “As a sine qua non condition for the exemption or deduction, said family home must have been the decedent’s family home as certified by the barangay captain of the locality.” Simply put, the documentary requirement of the certification from the Punong Barangay where the family home is located is now dispensed with.
- Removed the “Notice of Death” Requirement. As discussed in the beginning of this article, the legal requirement for the submission of a written Notice of Death to the BIR has now been repealed by Section 24 of Republic Act No. 10963.
Prior to the effectivity of TRAIN, the BIR would impose a penalty in the amount of TEN THOUSAND PESOS (PhP 10,000.00), during the processing of the estate tax return if the filer cannot present the written Notice of Death filed within 2 months after the death of the person to the BIR. Thus, filers of estate tax return will not be imposed this penalty anymore.
- Lengthened the Period to File the Estate Tax Return. Under Section 25 of RA 10963, the estate tax return shall now be filed within ONE (1) YEAR from the decedent’s death. The previous period of filing the estate tax return was six (6) months.
Interest and surcharges are imposed on the estate when the return is filed outside the 6 month period under the provisions of RA 8424. Now, TRAIN has given a more realistic time period within which to file the estate tax return in order to allow families enough space to grieve and settle the estate of their loved ones with the BIR.
- Allowed the Withdrawal of Money From the Bank Account of the Deceased. Section 27 of RA 10963 now allows the withdrawal of money in the bank account in the name of the decedent, or jointly with another, subject to a final withholding tax of SIX PERCENT (6%).
Prior to the amendment, banks were not allowed to have the money deposited in bank account of the decedent withdrawn by the heir unless a Certificate Authorizing Registration (CAR) has been duly issued by the BIR, if the amount is over Twenty Thousand Pesos (P20,000.00). The new amendment took out the cap amount of PhP 20,000 and thereby allows the heirs to withdraw the entire amount in the bank account of the decedent subject to the 6% withholding tax – which is equivalent to the new estate tax rate.
- Finally, Allowed the Payment of Estate Taxes by Installment. Section 26 of RA 10963 has introduced a new provision which allows the payment of estate tax by installment within two (2) years from the statutory date for its payment without civil penalty and interest.
In simple terms, if a person dies on January 2, 2018 the heirs have until January 2, 2019 to pay the estate tax due on the estate of the decedent. Under the new provision, if the heirs can prove that there is insufficient cash to pay for the estate tax due, payment by installment shall be allowed. Hence, the heirs can pay by installment the estate tax due until January 2, 2021 without incurring any penalty or interest thereon.
We will have to wait for the specific Revenue Regulation to be issued by the Department of Finance, upon recommendation of the BIR, to determine how the installment payments can be made, how the heirs can prove that there is insufficiency of money to pay for the computed estate tax due, and what are the specifics guidelines in order to apply for such payment by installment.
To recapitulate, RA 10963 has provided us with several beneficial provisions covering the estate taxation regime. We hope that this serves as an easy guide for everyone who are in need to settle the estate of their deceased loved ones, in the near term or beyond.