What is an estate tax? How about a real property tax? Are there differences between them?
Taxes have been one of the most unpopular policies since time immemorial in any country or administration. Everyone is familiar with Jesus Christ’s admonition to tax skeptics. In the Bible, he reminded them to “render to Caesar the things that are Caesar’s; and to God the things that are God’s.”
It is one thing, however, for a tax policy to be unpopular, it is quite another for it to be unclear. One can have a full grasp of a particular kind of tax yet be totally unfavorable about it. Yet it is unforgivable for one to be against a tax measure without a clear understanding of its basic principles.
Recently, a client sought a piece of advice regarding estate settlement. One of his questions about estate tax payment was striking. It’s a reflection that taxes in the Philippines might be unpopular because many do not clearly understand even the fundamentals.
He posed this question:
Why is there a need to pay an estate tax when his father regularly paid an annual tax to the city government on the real property?
Clearly, many of our citizens do not understand taxes in general and estate tax in particular. It is indeed high time to inform Filipinos about the different kinds of taxes imposed on them.
In this article, we try to solve the simple question by distinguishing an estate tax from a real property tax. A clarification on this matter will avoid mistaking one for the other.
What is estate tax in general?
The estate tax is a tax on the privilege to transfer one’s estate at the time of death to his heirs. This succession may be either through a will or intestate succession.
Section. 84. Rates of Estate Tax.—There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax rate of six percent (6%) based on the value of such net estate.
The National Internal Revenue (NIRC), as amended, lays down the rules on estate taxes. It is the Bureau of Internal Revenue (BIR) which primarily administers estate taxes.
In estate settlement, there is an application of a six percent (6%) tax rate on the net value of the estate. To come up with this net value of the estate, the taxpayer must first determine the gross value of the estate by accounting for and combining the values of the properties the decedent owned or at least had an interest in at the time of his death.
The tax code states in part:
Section 85. Gross Estate.—The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. […]
What about a Real Property Tax (RPT)?
Real property tax (RPT) or commonly known as “amilyar” is a tax on the value of the real property a person owns. This is a form of ad valorem tax based on a fixed proportion of the property’s value.
A province or city or municipality within the Metropolitan Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted. (Section 232, Local Government Code)
While the BIR administers estate tax, the local government units (LGUs) have the responsibility to administer RPT. These LGUs have some forms of administrative autonomy and flexibility in their local affairs.
Presently, LGUs are given the power to create their own sources of funds and RPT is one of their sources. In particular, the law grants the power to administer RPT to provinces, cities, and municipalities in Metro Manila.
The provinces and cities, including the municipalities within the Metropolitan Manila Area, shall be primarily responsible for the proper, efficient and effective administration of the real property tax. (Section 200, Local Government Code)
The following fundamental principles set forth in the Local Government Code guide the collection of RPT.
Section 199. Fundamental Principles.—The appraisal, assessment, levy and collection of real property tax shall be guided by the following fundamental principles:
(a) Real property shall be appraised at its current and fair market value;
(b) Real property shall be classified for assessment purposes on the basis of its actual use;
(c) Real property shall be assessed on the basis of uniform classification within each local government unit;
(d) The appraisal, assessment, levy and collection of real property shall not be let to any private person; and
(e) The appraisal and assessment of real property shall be equitable.
What are some differences between estate tax and RPT
Tax rates and bases
Starting January 1, 2018, there is a uniform tax rate of six percent (6%) of the net value of the estate. Meanwhile, the rate of an RPT is either one percent (1%), if imposed by a province, or two percent (2%) if imposed by a city or municipality within the Metropolitan Manila Area, of the assessed value of the real property.
Taxing authority
The BIR administers estate tax, whereas LGUs, particularly the provinces, cities, city or municipalities within the Metropolitan Manila Area, administer the RPT.
The relevant law for estate tax is the NIRC, as amended, while the Local Government Code, as amended, applies for RPT.
Accrual of Tax
Estate tax accrues from the moment of death of the decedent since, at this exact time, the law automatically transmits his estate to his heirs. Within one (1) year from such death, the heirs or persons administering the estate must file an estate tax return and pay the corresponding estate tax with the BIR or its accredited agencies.
Meanwhile, RPT accrues annually every first (1st) day of January. Within the year, the owner of the real property or any person having legal interest therein must pay the RPT in the LGU where the real property is located, but the concerned LGU may set a date on which the tax can be paid without interest.
Effects of non-payment
The failure of an estate to pay the correct estate tax within the prescribed period of one (1) year from the death of the decedent will subject the estate to interests and surcharges.
Moreover, there can be no partition or distribution of the estate until the completion of its settlement. The payment of estate tax is a prerequisite for the issuance of a certificate from the BIR showing payment of applicable taxes. Without this certificate, the Register of Deeds will not register in the proper books the transfer of the real property or real rights to the name of an heir or purchaser.
Currently, there is a prevailing tax amnesty, which includes estate tax. This is a rare opportunity for estates to grab and settle their outstanding tax liabilities.
With respect to RPT, failure to pay the annual local tax within the prescribed period will subject the real property to an interest of two percent (2%) per month on the unpaid amount. The local treasurer may eventually cause the declaration of the real property as delinquent. A delinquent real property may then be subject to levy and sale in a public auction.
Information is the key
Having the right information about the basic differences of the kinds of taxes will save you from heavy surcharges and interests as well as from losing your real property.
It pays to have a little bit of information about taxes. The costs are high to base our individual compliance with tax laws upon nothing but misinformation.
If you have more questions about Estate Settlement, here’s something that can help
I hope the article was able to help you out, but chances are you may have more questions about Estate Settlement. Please check out this additional resource and see if it can help you.
For more information, visit info.legalguide.ph/estate so you can understand this better.
