Death tax

DEMAND AND SUPPLY By Boo Chanco

The dreaded former BIR commissioner Kim Henares once warned that secrecy of bank deposits no longer apply once you die. The full force of the inheritance tax falls on the family members you leave behind.

Estate or Inheritance Tax is also called the Death Tax. Imposing it is justified as a social equity measure. It is supposed to help redistribute wealth to a wider base of society in the hope of building a bigger and stronger middle class. I guess it is necessary in an economic system that perpetuates social inequality.

We have plenty of good examples… the vast estates that some old alta sociedad families have acquired centuries ago through land grants from Spain, our colonizer.

Indeed, why should any family have the perpetual right to own such vast tracks of land from which they derive much economic benefits that their children, grandchildren and great grandchildren inherit? As they would exclaim out in the streets: Ano sila? Anak ng Diyos?

In contrast, the world’s richest men, Bill Gates and Warren Buffett who did inherit their wealth, have declared that the bulk of the riches they earned will go back to society. Both are working through a foundation that seeks solutions to many of the world’s most serious problems, notably in health and education.

Mr. Gates has said: “Our kids will receive a great education and some money so they are never going to be poorly off, but they’ll go out and have their own career.” Unfortunately, that is not how the richest Filipinos think, hence the need for the inheritance tax. However, our ruling elite skillfully avoid it and they call that estate planning. Wala pa rin!

Imposing our current inheritance tax can also be rather cruel. Those in the middle class end up sliding over to near poverty levels after a main breadwinner dies. Many are forced to sell assets, including the family home to pay the tax.

But many more ignore the law entirely and somehow manage to transfer inherited wealth via extra-legal means. There are always civil servants willing to take a bribe at the expense of the Treasury.

There is also a basic problem… while our inheritance tax rate is high, it is not a significant source of income for government.

Finex, in its position paper, pointed out “estate tax collection amounts to a negligible one percent of total annual tax revenue.” The amount collected from inheritance tax is so inconsequential that it does not deliver on its intended social equity objective.

The July 6 hearing of the Senate ways and means committee on tax reform focused on estate and donor’s tax, and the proposed flat tax on gross receipts of MSMEs. One of the resource persons was businessman Ed Yap in his capacity as chairman of National Affairs Committee of Finex.

Speaking for FINEX, Ed proposed to set the inheritance tax rate at six percent, instead of current 20 percent maximum. While the tax rate will be fixed, the tax base changes as realty assets are subject to periodic upward valuation adjustments. In a way, savings from the tax rate cut will, over time, be negated or wiped out because in some cases, recent zonal valuation upgrades exceeded 200 percent.

Ed also thinks the proposed P3 million exemption for the primary home is insufficient. Instead,he proposes the total exclusion of the primary home from the gross estate. Exclusion is consistent with the need to preserve and protect the family home from liquidation to meet estate tax obligation. This is also how many other countries do it.

Mr Yap pointed out it is not appropriate to use BIR zonal valuation to calculate the value of the real assets in the deceased’s estate for estate tax purpose. Zonal values are based on commercial-for-profit transactions. Transfers to heirs by reason of death are of a different nature being involuntary and without profit motive.

If the primary home will not be excluded as proposed, the next best solution is to reduce the zonal value by applying an assessment level, (say 20 percent, meaning 80 percent discount), similar to the long standing practice of LGUs when levying realty taxes.

The senators seem receptive to the proposed changes, particularly the proposal to exclude the primary home.  Sen. Dick Gordon has a bill to repeal the estate tax entirely.

There was also a proposal for an amnesty for unpaid estate taxes. The measure has merit as many real properties of estates with unsettled tax obligation are left stranded and excluded from the market. It is a good proposal but should happen only AFTER tax reform is instituted, (as a matter of principle and to avoid distraction from tax policy reforms.)

The other issues on the proposed eight percent tax on gross receipts of MSMEs greater than P3 million instead of VAT will require more hearings. Sen. Frank Drilon seemed inclined to expand the coverage beyond the P3 million threshold to include self-employed individuals to ease compliance and tax administration. Sen. Drilon makes sense.

With the passage of the reform proposals there would be more incentive for voluntary compliance. There will be less need for estate tax planning such as transferring assets to heirs or corporate vehicles in contemplation of death and buying life insurance to cover future estate tax obligation.

Again, I see the proposals as simplifying compliance and is a step in the right direction. The proposals come from people with vast experience in the implementation of tax laws.

 By the way, a happy birthday to Usec Karl Kendrick Chua who is spearheading the drive for the tax reform packages. I hope I didn’t mess up his celebration last Friday with my column. I just think it is necessary for young capable technocrats like him to look beyond the numbers and see how implementation can be made as painless as possible to increase tax compliance.

 The overall concept for real tax reform calls for a common sense approach: simplify the tax system to raise more revenues for government and reduce, if not eliminate corruption at the revenue collection agency.

Indeed, I got this comment from former BIR commissioner Jojo Bunag: “Agree with the you completely, Boo. For instance, I find something wrong with present practice of BIR of getting all your books in an effort to find some little mistake you made. Many times they don’t even have time to review everything.”

Sec. Carlos Dominguez also deserves our congratulations for being proven right when he insisted to pursue Mighty Corporation on its tax obligations. The tobacco company has made a compromise offer of P25 billion, a lot more than the P3 billion which President Duterte publicly said he was ready to accept.

But since Mighty’s tax deficiency is in the vicinity of P40 billion, maybe they can sweeten the offer some more. But, yes, a compromise agreement saves us time and effort of a court case. And since government will get the cash now and not after 10 or more years of litigation, assuming government wins the case, the lower figure seems justified.

Congratulations too to Customs commissioner Nick Faeldon who bravely went after Mighty and did the difficult field work of raiding the bodegas of the cigarette maker to prove government’s case.

I am curious to hear the excuse(s) of former finance chief Cesar Purisima and former BIR chief Kim Henares who both treated Mighty like a sacred cow, even with strong indications that something wrong was going on. Neglect of duty should be a concern of the Ombudsman.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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