Tax introduction

The variety of transfer taxes is

quite confusing. The amendments
introduced by the Tax Reform for
Acceleration and Inclusion (TRAIN)
Law or Republic Act No. 10963 now
provide much clearer rules for
taxpayers.
Before the TRAIN Law, the Tax Code
had a complicated estate tax schedule
with rates ranging from 5% to 20%
based on the value of the net estate of
the decedent. TRAIN, which amended
Section 84 of the old Tax Code, now
imposes a flat 6% rate.
For donor’s tax, the previous Tax Code
contained a complex tax schedule with
different tax rates for relatives and
strangers, which the Tax Code calls non-
relatives. With the TRAIN Law, that
schedule has been likewise simplified to a
single tax rate of 6% of net donations for
gifts above P250,000 yearly, regardless of
the donee’s relationship to the donor.
 The Department of Finance (DoF) explained
that lowering estate and donor’s tax would
harmonize the existing transfer tax legislation,
regardless of whether the person died,
donated a property, or simply wanted to
transfer a property. The DoF added that while
this change would result in lost revenue, one
of the goals was to make the land market
more efficient in order for land to be used for
the best purposes.
It is worth noting that despite the uniform
rate for donor’s and estate taxes, there are
still some key points to take into
consideration.
 The requirement of filing a Notice of Death
within two months from the time of death is no
longer required and the filing of returns within
six months has been changed by virtue of the
amendments introduced by the TRAIN Law.
Under the present tax law, estate tax returns
must be filed and the tax must be settled within
a year from the time of death to avoid
penalties. But heirs now have the option to pay
in installments should there be insufficient cash
in the estate to cover the total estate tax due.
 Another interesting amendment is that funeral,
judicial and medical expenses can no longer be
deducted from the gross estate in the
computation of estate tax. However, while the
TRAIN Law removed these deductible expenses,
it increased the Standard Deduction to P5
million pesos from the previous P1 million,
which is available to resident and non-resident
citizens. On the other hand, non-resident aliens
are entitled to a deduction of only up to
P500,000.
 Another significant amendment is the increase
in the threshold of the fair market value of
family homes that are exempt from estate tax.
Under the old law, the allowable deduction
must be in an amount equivalent to the current
fair market value of the family home (or the
extent of the decedent’s interest, whichever is
lower), but not exceeding P1 million. The TRAIN
Law now provides that if the current fair market
value of the family home exceeds P10 million,
only the excess shall be subject to estate tax.
 Perhaps one of the areas in the previous estate tax
law that received much attention was the fact that
the administrator of the estate could only withdraw
P20,000.00 from the estate of the decedent. This
created difficulties for the administrators
considering the high cost of a funeral service, its
allied activities, and post-funeral requirements. The
TRAIN Law gives more leeway for the estate
administrators as any amount may now be
withdrawn from the deceased’s bank account,
subject only to a 6% final withholding tax.
 Thereare also some interesting amendments to the
donor’s tax provisions.
 Under the old law, donations to a non-relative were
taxed at 30% and the P100,000 exemption was not
allowed. Thus, during estate planning, properties
that were intended to be given to non-relatives
were better left in the estate. Under the TRAIN Law,
the donor’s tax is fixed at 6% based on annual total
gifts exceeding P250,000 in a calendar year,
regardless of whether the donee is a relative or not.
 The time of filing of returns and payment of
tax remains the same under the TRAIN Law.
Donors are required to file a return and pay
the full tax due within 30 days from the date
the gift is made. For several gifts made in one
calendar year, the donor is required to make a
consolidated return within the same period
after the date of each gift for the proper
computation of donor’s tax.
 Unlike estate tax, no deduction can be made
from the total gifts made in a calendar year
but the TRAIN Law has increased the threshold
of exemption from P100,000 to P250,000.
Thus, one can take advantage of the said
exemption by spreading out the gifts during
one’s lifetime. This cannot be done in estate
tax because there is only one event that would
determine when estate tax will attach, i.e.
the death of the decedent.
Since valuation of properties is determined
at the time of death or when the gift was
given, one may consider donating his or her
real property instead of leaving the same
in his or her estate because the value of
real properties generally increases over
time. If the real property is left in the
estate instead of being donated at an
earlier time, the tax payable would be
higher.
Interestingly,under the old law, estate
planning had become a major service for
legally minimizing the taxes incurred
during the transfer of property because of
the varying rates of transfer taxes. Under
the TRAIN Law, a question may be raised
about the relevance of estate planning at
least from a tax standpoint.
 Needless to say, there are many other factors besides the
tax rate that need to be considered in determining the
ideal mode of gratuitous transfer of property and assets.
These include distributing an estate to the satisfaction of
all heirs, ensuring that the decedent’s wishes are observed,
ensuring property goes to the right beneficiaries,
establishing trustees for the estate, and others. There are,
in fact, other pertinent areas where competent estate
planning can make a significant difference for one’s
beneficiaries, notwithstanding the new uniform transfer
rate. But for the time being, the fixed flat rate of 6% has
been viewed as a welcome and equalizing change.
 This article is for general information only
and is not a substitute for professional advice
where the facts and circumstances warrant.
The views and opinion expressed above are
those of the author and do not necessarily
represent the views of SGV & Co.

Source: https://www.bworldonline.com/great-equalizer-train-law-introduces-uniform-transfer-tax-rates/