PREVIOUSLY, the National Internal Revenue Code provided a table of rates that the estate of a decedent would pay if the value of the net estate met a certain threshold. To get the value of the net estate, we would subtract the deductions allowed by law from the gross value of the estate.
For instance, if the net taxable estate’s value was over P10 million, it would pay the amount of P1,215,000 plus an additional rate of 20 percent for the excess of P10 million.
Thus, if the value of net estate is P11 million, the estate shall pay P1,215,000. An additional P200,000 shall be imposed, which is the 20 percent of the excess of P10 million. The total amount would be P1,415,000.
The Tax Reform for Acceleration and Inclusion (TRAIN) law has simplified the computation of the net estate tax. There is no longer a table or graduated rates. The estate tax is now fixed at 6 percent of the value of the net estate. So, using the previous example of P11 million, the estate tax shall be P660,000.
The TRAIN law has simplified deductions, as well. Originally, there were two categories of deductions: ordinary and special. These two categories were composed of several other items, most of which required proof through official receipts and the like. Further, the allowable deductions were subject to limitations that were cumbersome to derive.
Broadly speaking, the TRAIN law provides for three types of deductions.
There is the standard deduction of P5 million. This amount is an increase from the original, which was P1 million. The value of the family home is another deduction, the amount of which is capped at P10 million. This is another increase. Before the amendment, such deduction was pegged at P1 million. If the value of the family home exceeds P10 million, the excess would be subject to estate tax. The final deduction shall be the debts of the decedent.
The fact that the P5 million is considered as a standard deduction is a boon for many Filipinos. Since it is a standard deduction, there is no need to substantiate the same with receipts—it can be automatically claimed.
An interesting situation arises regarding bank deposits of decedents. Originally, the heirs could only withdraw up to P20,000 from the deposits. The TRAIN law has removed that cap, but the amount withdrawn would be subject to a final withholding tax of 6 percent.
Now, this situation could arise: What if the amount of the net estate tax due, after deductions, was zero or less than the amount subjected to final withholding tax? Such a situation would be possible and there may not be a tax liability in the first place if the gross estate and deductions are considered. The advanced deduction from the final withholding tax prejudices the estate of the decedent when it should not. In effect, the withdrawn amount of deposit is taxable by itself, regardless of the net estate of the decedent.
How should this be resolved? The author is of the opinion that, instead of a final withholding tax, it serves the purpose of the TRAIN law better if it is a creditable withholding tax. This is so that the withheld amount could still be utilized against the tax imposed on the net estate and, perhaps, refunded if there is excess. Such change in treatment, however, would require an amendment and not a mere implementing regulation.
There are, however, other peculiarities in this final withholding tax approach that may be clarified further through the implementing rules and regulations (IRR). The requirement is to impose a final withholding tax on the withdrawn amount. Should all withdrawals from a deposit account, where a decedent is the depositor, a joint or a codepositor, be subject to the 6-percent final withholding tax? In a joint account, for example, the surviving depositor may actually be withdrawing his own share from the joint deposit. Would that still be subject to a final withholding tax? Also, even in a case where the sole depositor is the decedent, it is possible that the deposit is considered part of the conjugal assets where the surviving spouse owns a part of it. The withdrawn amount may pertain to the share of the surviving spouse. Would that still be subject to a final withholding tax? While these are not clear in the TRAIN law, perhaps these instances can be clarified by the IRR, as it may not have been the intention of the law subject to final withholding tax deposits that are not part of a decedent’s estate.
The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at josemilio.teves@bdblaw.com.ph, or call 403-2001 local 150.