Tax obligations after death

IN THE CHRISTIAN tradition, we Filipinos will again observe All Soul’s Day (Nov. 2) to pay respect to loved ones who have passed away. For those who hold deeply personal relationships, death, which signifies the end of a person’s earthly life, brings pain and sorrow for the eternal parting of a beloved.

Just as death is an ubiquitous certainty, tax is an inevitable reality. Upon death, succession takes place, and the State is instantly vested with the right to tax the decedent’s privilege of passing on property to the heirs. Accordingly, estate tax accrues upon death, and certain tax requirements have to be met.

Under the Consolidated Revenue Regulations on Estate Tax and Donor’s Tax (Revenue Regulations No. 2-03), following are the guidelines and requirements for estate tax purposes:

SECURING OF TAXPAYER IDENTIFICATION NUMBER (TIN) FOR THE ESTATE
The estate, which refers to the mass of properties left by a deceased person, is within the operative definition of the term “person” for tax purposes. As such, it is necessary to register and secure a separate TIN for the estate (apart from the decedent’s TIN).

For resident decedents, the TIN of the estate should be secured from the Revenue District Office (RDO) where the decedent was domiciled at the time of death. In case of a non-resident decedent, the TIN must be obtained from the RDO where the executor or administrator is registered (or from the RDO having jurisdiction over the executor’s or administrator’s legal residence in case such executor/administrator is not registered). If the non-resident decedent does not have an executor or administrator in the country, the TIN shall be secured from the Office of the Commissioner of Internal Revenue (CIR) through RDO 39-South Quezon City.

FILING OF NOTICE OF DEATH
Within two (2) months after the decedent’s death, a written notice of the death must be filed with the CIR, in all cases of transfers subject to tax, or where the gross value of the estate exceeds P20,000.

FILING OF ESTATE TAX RETURN AND PAYMENT OF ESTATE TAX
The estate tax return should be filed within six (6) months from the decedent’s death in the following instances:

1. transfers subject to estate tax;

2. gross value of the estate exceeds P200,000; or

3. estate consists of registered or registrable property (i.e., real property, motor vehicle, share of stock or other similar property) for which a clearance from the BIR is required before transfer of ownership in the name of the heirs or transferees.

In meritorious cases, the six-month period for filing the estate tax return may be extended for a maximum period of thirty (30) days. An application for extension should be filed with the RDO where the estate is registered.

The estate tax return shall be filed under oath in duplicate and should set forth the following:

1. gross value of the estate of the decedent at the time of death or the part of the gross estate situated in the Philippines in case of non-resident foreign nationals;

2. deductions allowed from the gross estate; and

3. such other information as may be necessary to establish the correct tax.

In case the gross value of the estate exceeds P2 million, the estate tax return should be supported by a statement from a certified public accountant containing the itemized assets of the decedent, itemized deductions from gross estate and the amount of estate tax due.

The estate tax is usually paid upon filing the estate tax return. However, subject to the BIR’s approval, payment may be extended for a period not to exceed two years (if the estate is settled extrajudicially) or five years (in case of judicial settlement). No extension shall be granted if the delay is due to negligence, intentional disregard, or fraud.

A bond may be required in such amount not exceeding double the amount of the tax and with such sureties as the CIR deems necessary, conditioned upon the payment of the estate tax. Further, during the period of extension, the running of the three-year statute of limitations for deficiency assessment is suspended.

In case the available cash of the estate is insufficient to pay the total estate tax liability, the estate may be allowed to pay by installment. In this case, a Certificate Authorizing Registration (clearance) shall be released only with respect to the property corresponding to the tax which has already been paid. As such, there can be issued as many clearances as there are properties released by installment payments of the estate tax.

Whether paid through a BIR approved extension or installment, any payment after the statutory due date of the estate tax (i.e., six months from death) but within the extension/installment period granted, shall be subject to interest at the rate of 20% per annum. Conversely, failure to pay within six months from decedent’s death, without securing BIR approval, will trigger interest, surcharge and compromise penalty.

SECURING OF TAX CLEARANCE
An estate tax clearance must be secured from the RDO having jurisdiction over the estate. Such clearance will serve as the authority to transfer the remaining distributable properties/shares of the estate to the heirs or beneficiaries.

Under the Tax Code, the Register of Deeds and Corporate Secretary shall not recognize any transfer of real property or shares of stock in the concerned registries unless a tax clearance is issued by the BIR certifying that the estate tax has been paid. The same certification is required where the decedent has maintained a bank account, singly or jointly with others, before any withdrawal from the said bank account by the heirs can be allowed.

While death and taxes are certain, so are the penalties that come with failure to comply with the above tax obligations. Tax compliance facilitates the smooth transfer of properties in favor of the heirs, beneficiaries or transferees. More importantly, it minimizes the agonizing burden of struggling with tax issues for heirs who are still coping with a loss.

The author is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call (02) 845-2728 or e-mail the author at rachel.i.diciano@ph.pwc.com for questions or feedback.Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article.

source:  Businessworld