Margarita Gomez Nepomuceno Malaluan

November 2006


“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

This inquiry into tax evasion documents practices in evading estate taxes such as the non-filing of returns or ‘staying alive;’ various ways of reducing the taxable estate; simulating transactions, forgery and falsification in the transfer of real property; and corruption. The study identifies several factors that enable and/or encourage taxpayer’s noncompliance with estate taxes. Summarizing, these are lack of awareness and preparedness to meet estate tax obligations; gaps and loopholes in the tax administration system; assistance from tax practitioners and other actors that facilitate tax evasion; taxpayers’ perceptions of the low probability that evasion will be detected; taxpayers’ perceptions of unfairness towards estate and other taxes in general; taxpayers’ disapproval of how tax revenues are spent; and corruption. Authors give recommendations towards improving greater estate tax compliance in light of these factors, both as encouragement towards greater compliance and deterrents to evasion.

Tax Evasion Practices in Philippine Estate Tax
Margarita Gomez and Nepomuceno Malaluan *


Margarita Gomez has a masters degree in Development Economics. Until recently, she taught economics at the University of the Philippines and De la Salle University in Manila. Nepomuceno Malaluan has degrees in economics and law from the University of the Philippines. He is a trustee at the Action for Economic Reforms.

Table of Contents

I. Description of the study Introduction Objective, scope and methodology of the study Theoretical framework A summary of the premises of the study

1 4 7 11

II. Estate taxation Acknowledging some negative arguments Justifications for estate tax Basic features on the law on estate tax Some characteristics of estate taxes

13 14 17 18

III. Methods of estate tax evasion Non-filing of return: “staying alive” Reducing taxable estate Simulating transactions, forgery and falsification in the transfer of real property Corruption Evasion in the estate tax process (diagram)

21 23 28 31 34

IV. Factors that affect estate tax evasion The taxpayer Facilitators: lawyers and other actors Cultural Factors Obstacles to effective tax administration Corruption: par for the course

35 39 40 41 46

V. Recommendations


Appendix 1. The Law on Estate Taxes Appendix 2. BIR Form 1801 Appendix 3. Certificate Authorizing Registration


I: Description of the study

Introduction In recent years the Philippine economic outlook has been dampened by a growing concern over the country’s fiscal performance. In 2004 and 2005 the fiscal problem was regarded to be of crisis proportions. While analysts identify the assumed liabilities of, and lending to, inefficient government corporations as a substantial source of fiscal pressure, the government’s deteriorating revenue performance remains the principal factor that contributes to the chronic fiscal deficit. The Bureau of Internal Revenue’s (BIR) tax effort, as a percentage of gross national product, has gone down consistently since 1997, from 13% in that year to 9.88% in 2004.

Table 1. Tax Effort of the BIR (1995-2004) Year BIR Collections (In Million Pesos) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 P211,462 260,774 314,697 337,177 341,320 360,802 388,679 394,549 426,010 468,177 GDP (In Million Pesos) P1,906,328 2,171,922 2,421,306 2,665,060 2,976,904 3,354,727 3,631,474 3,883,230 4,210,505 4,739,140 11.09 12.01 13.00 12.65 11.47 10.76 10.70 10.16 10.12 9.88 Tax Effort

Source: Annual Reports 1995-2004, Bureau of Internal Revenue

In response to the crisis, in September 2004, the Energy Regulatory Commission had to make the unpopular decision to allow the National Power Corporation (NPC) provisional authority to increase its electricity charges by PhP0.9798/kWh, and to


PhP1.0353/kWh by April 2005. This was intended to ease the fiscal pressure from the losses of government owned and controlled corporations. On the revenue side, Congress passed several revenue legislations. These include RA 9334 (An Act Increasing the Excise Tax Rates on Alcohol and Tobacco Products) and RA 9337 that, among others, provided for the increase in the Value Added Tax rate from 10% to 12% as well as a wider coverage for the tax. The VAT increase, along with the easing-up of NPC losses arising from the electricity rate increase, somewhat improved the economic outlook for 2006. At the start of the year, Moody’s credit rating for the Philippines remained negative, but Standard & Poor as well as Fitch Ratings both upgraded the country’s sovereign credit rating from “negative” to “stable”. Even as legislated tax measures increasd tax rates and coverage, the declining tax effort clearly indicates evasion. There is an estimated average annual revenue loss of P 400 billion that is attributed to the high tax evasion and the persistence of graft and corruption. (Fiscal Studies Group, 2003) Evasion rates on domestic sales (VAT) and income for 1999 are estimated to be roughly 63% and 62%. (Manansan, 2000) The BIR has initiated several programs to improve its capability to detect potential and foregone tax revenues as well as to entice taxpayers into greater compliance. A Tax Computerization Program (TCP) was begun in 1994 to improve the BIRs capacity to verify income information and facilitate taxpayer compliance. The Voluntary Assessment and Abatement Program (VAAP) initiated in 2002 and later amended as the Enhanced Voluntary Assessment Program (EVAP) offers last priority in audit and investigation to all individuals and companies that avail of the program until January 2006. A Run After Tax Evaders (RATE) program was initiated by former BIR Commissioner Guillermo Parayno in 2005. for the auditing of 2005 tax returns. Estate taxes contribute a small portion of total tax revenue. Aggregated transfer taxes (estate and donors taxes), accounted for 0.15%, 0.13% and 0.16% of total tax revenue in 2001, 2002 and 2004 respectively. (BIR Annual Reports) The small relative share of Philippine estate taxes to total tax collections finds resonance in other countries. In April 2006, the BIR Commissioner, released Revenue Memorandum Order 11 identifying priorities, procedures and policies


Table 2. Revenue Share by Type of Tax (2004) Classification Taxes on Net Income and Profit Excise Taxes Value-Added Taxes Percentage Taxes Other Taxes – transfer (w/c
includes estate tax), travel, doc. stamp and misc. taxes

Collection (in million Pesos) 278,213.65 59,529.62 80,216.03 27,952.21 22,265.06 468,176.58

% of total

59.4 12.7 17.1 6.0 4.75 100


Source: Annual Report 2004, Bureau of Internal Revenue

For instance, in 1992, revenues from estate taxes in the United Kingdom and the US respectively were only 0.56% and 1.12% of total taxes. Percentage shares were higher for Japan (1.66%) and Korea (1.20%) and much lower for some countries where one would expect an effective tax effort, 0.01% for New Zealand and 0.30% for Germany. (Gale,, 2001) A record yield of estate taxes in the UK was reached in 1977, amounting to 3% of total tax revenue. (James, 1992) For the Philippines, the record yield, between 1990 to 2004, was 0.21% was reached in 1997. Assuming that tax collection efforts could improve estate tax revenues tenfold, estate taxes would still account for not much more than 2% of total tax revenue. Nevertheless, the Bureau of Internal Revenue appears to view estate taxes as a significant area in which collection efforts can be improved. Former BIR Commissioner Guillermo Parayno has expressed the need to “ collect foregone revenues from lackluster collection and (to) verify the causes for nonpayment of (estate) taxes…” To this end, he recommended that the BIR “ identify potential estate taxpayers, get a list of landowners and their properties, where they are and what kind of policy of attraction must be


Table 3. Revenue Contribution of Estate Taxes to Total Taxes (1990 – 2004) Year Estate Tax Collection (in Million Pesos) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 180.03 143.28 180.54 143.69 217.03 280.69 417.06 676.85 317.67 435.89 301.50 393.28 344.55 518.17 467.14 % of Total Tax Collected 0.17 0.12 0.13 0.10 0.12 0.13 0.16 0.21 0.09 0.13 0.08 0.10 0.09 0.12 0.10

Source: Statistical Division, Bureau of Internal Revenue

provided to let them surface and legitimize their property records so that the Bureau will be able to trace properties inherited from parents and ancestors that are not yet transferred into the name of the new owners”. This will also allow the BIR to collect other taxes such as donor’s taxes on properties purchased in the names of minors and capital gains taxes for other transfers of property through sale. (Tax News Digest, NTRC, TRJ) Objective, scope and methodology of the study Tax evasion reduces the potential revenues of the state and the goods and services that it can provide to the citizenry. It also misallocates resources into unproductive activities for the purpose of cheating. If rampant and unchecked, it can seriously undermine the legal and economic system. The main objective of this report is to


contribute to the efforts towards the reduction of tax evasion in the Philippines by uncovering and documenting practices of estate tax evasion. Estate tax evasion refers to unlawful acts that reduce an estate’s tax liability from what would otherwise be due if the rules for effecting transfers of ownership by way of succession

were strictly followed. Illegality distinguishes tax evasion from avoidance

which covers legal acts committed to reduce tax liabilities, for example by exploiting loopholes in the Tax Code. Being unlawful, the detection of evasion by the tax authority should result, under the rules, in the assessment of the proper tax, the imposition of civil penalties, and under certain circumstances, the imposition of criminal liability. The study provides a summary of estate tax law as well as a brief discussion on the characteristics of estate taxes. From interviews with various economic actors, the study identifies methods of estate tax evasion, describes the roles of other actors, gains insights into taxpayer’s attitudes, and identifies flaws in the administration and enforcement of estate taxes. Corresponding recommendations on how to prevent or mitigate evasion are a result of these findings. The field survey as well as the analysis and recommendations in the study are guided by some of the key theories on tax evasion as applied to estate and other taxes and by the factors that have been identified by past research as relevant to deterring or abetting evasion. It is beyond the scope of this study to inquire into the extent of as well as the economic costs of estate tax evasion. To reiterate, this study is an investigative inquiry into the roles of different economic actors at different points of the estate tax process and the methods employed by them to evade estate taxes. The method employed in the study is that of interviewing key informants and no claim is made as to having conducted any kind of random sampling survey. Understandably, the opportunities for persuading respondents to candidly share commission or even knowledge of illegal acts were extremely limited. As an example of this guardedness, none of the lawyers interviewed admitted to ever participating in, abetting or facilitating tax evasion, even if at least one of them was well-known to be adept at unscrupulously going around the law. Some lawyers explained that the decision
Art 774 of the Civil Code of the Philippines: Succession is a mode of acquisition by virtue of which property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law.


to evade was made by clients, and that when clients made that decision, they employed other persons (their own friends, contacts) and only returned to their lawyers when the act of evasion was completed. Another instance of respondent’s lack of candor was that of a BIR officer, who flatly stated that, “It is impossible to evade estate taxes.” Encountering this problem, the researchers eventually decided not to always make it clear to those interviewed that the study was specifically on methods of evasion. This omission was necessary in some cases, so that prospective subjects would agree to be interviewed. About 50% of those interviewed (mostly government personnel and tax practitioners) were unaware of the specific objective of the study. The other 50% placed their trust in the researchers’ assurance of confidentiality. Aware of the purpose of the study, they sometimes lent guarded disclosure but oftentimes their full cooperation. Most of them were willing to talk about the evasion techniques they had employed or those that they had knowledge of having been employed by others. In contrast to tax practitioners, heirs were more forthright, admitting to having committed acts that clearly constituted evasion. While they explained the reasons for committing acts of evasion or participating in the commission of evasion, the respondents revealed their attitudes towards estate and other taxes. Most respondents expressed a desire to contribute to the improvement of the tax system. The study had originally intended to interview only a few key informants. However as the research progressed, it became obvious that the trail of evasion had to be followed and many statements, which verged on the incredible had to be validated. For example, one of these was the relative share of BIR personnel to the tax received by the government. In total, forty-six persons were interviewed: 11 Department of Finance and Bureau of Internal Revenue personnel (former and current), 4 local government personnel (Register of Deeds Officer, Assessors and Civil Registry), 5 lawyers, 1 accountant that specialized in taxes, 4 bank officers, 2 fixers cum real estate brokers, and 19 taxpayers. Doubtless, this study has not uncovered all the methods that may be employed in the evasion of estate taxes nor can it define the extent to which these methods are employed. However, the interviews revealed that evasion is far from difficult and there is ample opportunity to evade estate taxes.


Theoretical framework

Motivations for estate creation and their incidence implications

The question of incidence is important since it determines which of the parties involved in the transfer of an estate will have the incentive to diminish the disutility of bearing the burden of the tax. This burden depends on the motivations and perceptions of the parties involved with respect to the estate. Legal as well as economic literature on estate taxation state that since the tax is levied on the estate, theoretically the burden of the tax is on the estate itself and carries no personal incidence. However, the incidence of the tax has to ultimately be attributed to one or more economic actors since as a consequence of the tax some person or persons do actually forego a measure of wealth as well as expected future income. The persons that bear the burden of this disutility acquire a motivation to act in a number of ways in order to cope with it. However, it is necessary to identify the different motivations for estate creation in order to determine the identity of the economic actor(s) that bear the tax burden. Behavioral responses indicating the avoidance of disutility or the maximization of utility with respect to net transfers are indicators as to which of the parties involved considers his/herself to bear the tax burden. The accidental bequest model assumes that estates are not created to provide bequests for the next generation but in order to cope with retirement and the uncertainty of one’s lifespan. The preference leads the creator of an estate to save for precautionary reasons, for example, against future medical expenses. In this case, the potential legator does not particularly care about the net estate that will be left to beneficiaries and thus takes no action at all to avoid or diminish potential estate tax liability. In circumstances where this model applies the incidence of the tax inevitably falls entirely on the accidental beneficiaries, who depending on their circumstances, may or may not be in a position to respond in a manner that will decrease the disutility of bearing the tax burden. In the altruistic model, makers of bequests gain utility from making them and may deny themselves opportunities for increased consumption in order to enlarge the value of the estate. Thus, estate creators may engage either in outright tax evasion or undertake


appropriate estate planning measures to decrease the tax liability and maximize the benefits received by their intended beneficiaries. Other altruistic bequest makers may cede control over assets in favor of the next generation, retaining only the assets that yield an income sufficient to ensure them some level of comfort. In this case, either one of the parties involved may consider the incidence to fall upon themselves depending on the strength of their motivations and their ability to do something about transferring the maximum value possible. Exchange models treat transfers and bequests as payments for services from their children. Exchanges in the form of goods that can be ordinarily secured through the market such as housekeeping assistance, driving, and the like or more personal services such as enjoyable company, frequent visits are exchanged on the basis of a delayed payment, i.e., the bequest. In the meantime bequest makers have the added advantage of having some measure of control over their future beneficiaries’ actions and activities. If bequests are exchanged for control over future beneficiaries then the burden of the tax may be involuntarily borne by the beneficiaries of the estate. (Gale, 2001) Acknowledging the possibility of rare exceptions, it may be too facile to attribute just one of the above-mentioned motivations to the creators of estates. It may be more realistic to recognize that the makers of bequests derive utility from different combinations of all three motivations. For example, in Filipino culture the exchange relationship between generations is generally observed. Children’s concern with the consumption level of their parents is manifest and (with the exception of those referred to as the “black sheep” of a family) so is the desire to create as large a bequest as possible. Furthermore, it is necessary to consider the affective relationships within the Filipino family and the way that wealth is commonly regarded in Filipino culture. While assets acquired by parents are recognized by law and by tradition as private property, there is the added dimension of family members regarding these assets as family wealth. Barring a conflict within the family with respect to the distribution and control of these assets, cooperative behavior may be exhibited by family members with the objective of diminishing tax liability as if the incidence of the tax is borne equally by all. In addition, this cooperative behavior may be more evident because Filipino parents are more able to


command cooperation and have greater authority even over adult and economically independent children than would parents in western economies. If decedents, in their lifetimes, exhibit behavior to demonstrate that they suffer some loss of utility in leaving less to intended beneficiaries then they bear the burden of the tax, and may engage in tax avoidance or evasion activities. But since the creators of estates have no direct tax liability until they die, if they so desire, they can escape some or all of the burden of estate tax liability and pass it on partially or entirely to the beneficiaries of the estate. (Santos 1994, Gale 2001) Then it is the beneficiaries who will forego some measure of the potential wealth in meeting the obligation for the payment of estate taxes and in that sense it can be said that they ultimately bear the burden of the tax. Thus for purposes of this study it is hypothesized that with the exception of an unambiguously accidental bequest, altruistic motives towards the next generation as well as cooperative behavior will be exhibited within the family group in coping with, avoiding or evading estate taxation.

Factors that affect evasion Current literature on tax evasion acknowledges the seminal journal article of Michael Allingham and Agnar Sandmo (1972) titled “Income tax evasion: A theoretical analysis” as the leading formal economic theory of tax evasion. In the AllinghamSandmo model, tax evasion is similar to a portfolio choice where a utility-maximizing taxpayer decides how much income or assets to report for tax purposes, given some risk of being discovered and paying a penalty. This results in the prediction that a higher penalty rate or a higher probability of detection discourages tax evasion. Many other models of non-compliance with income taxation have been developed assuming a utility maximizing taxpayer that weighs the savings (utility) from successful tax evasion against the penalty (disutility) and a subjective probability of both. A higher tax rate increases the temptation to evade but this is offset by a greater probability of detection especially if accompanied by stiff penalties. On the other hand, higher tax rates and lower probability of incurring penalties increase incentives for evasion. (Alm, undated; Manansan, 2000)


Bloomquist (2003) examines the relationship between income levels and the opportunity cost of compliance to income tax evasion. Individuals in the top decile level of income have less transaction visibility and thus greater evasion opportunities because a predominant share of their income is derived from asset ownership. The lower income levels exhibit greater compliance since their incomes, largely wage-based, are generally subject to 3rd party reporting. However, lack of financial capability increases the relative opportunity cost of compliance. Asserting that increased income inequality increases noncompliance, Bloomquist shows that there is generally greater compliance in areas with less unemployment and poverty and for firms whose average profits are greater than the industry average. Ritsema’s study (2003) based on the results of a tax amnesty program in Arkansas, found that tax delinquency was more evident among single and younger persons, that information and education were inversely related to tax delinquency, that lack of funds was the most common reason for the initial delinquency and that prior state contact, such as receiving a letter from the state were significant factors for taxpayers’ participation in the amnesty program. (Ritsema et. al., 2003) Erard (1993) found that the use of a lawyer or a certified public accountant is significantly associated with increased noncompliance. Andreoni (1991) and Feinstein (1998) found that the use of tax practitioners promoted greater noncompliance on more ambiguously defined items but greater compliance on unambiguously defined items in the tax law. Identifying alternative modes of income tax evasion, income understatement and overstatement of deductions, Martinez-Velasquez (2003) found that increased enforcement in deterring one mode decreases compliance in the form of the alternative mode of evasion. James (2004) relates increases in tax liability, administrative requirements and heavy-handed tax enforcement with decreased compliance. Treating tax enforcement agents endogenously allows for the examination of the effects of the interaction between taxpayer and tax collector, who may or may not conspire to evade tax liability. The taxpayer factors in the possibility of bribery which increases the probability that successful evasion can be accomplished. The tax collector takes into consideration the


utility of receiving a bribe against the disutility of penalties that may be imposed upon him if the malfeasance is discovered. Erard and Feinstein (1994) discuss the effects of ethical and social factors, such as guilt and shame on the taxpayer’s decision-making. Thus, prevalent non-compliance, such that it is more the norm than the exception will encourage and exacerbate noncompliance or evasion even more. However, Ritsema’s above-mentioned study found that morality was not a significant factor in the decision to avail of the tax amnesty. Finally, taxpayers’ perceptions of the fairness of the tax burden and perceptions of government expenditure policy and corruption likewise factor into the decision whether or not to evade taxes. Alm, Jackson and Mckee (1992) found that taxpayers are more willing to comply if they perceive that they will receive benefits from a public good financed by the tax revenue. Etzioni (1986) found that public perception that the tax structure or system of enforcement is unfair increased the likelihood of evasion.

A summary of the premises of this study

Since taxpayers’ utility is decreased by the presence of an estate tax, there exists a motivation for estate tax evasion. A basic premise of this study is that tax evasion will be greater as opportunities for evasion are perceived present. Taxpayers will be much less likely to take the course of evasion if they do not believe that it is possible to escape detection. The decision to evade will be considerably influenced by their awareness of this possibility. The Filipino propensity for employing informal networks among family, friends and acquaintances, the cooperative links within the family and within these networks strengthen the perception that evasion is possible and increase the opportunities to achieve evasion successfully. It is further premised that perceptions that tax evasion and corruption are prevalent and that taxpayers are not treated fairly and equally strengthens the temptation to evade taxes. The perception that tax revenues are not prudently spent and the dissatisfaction of Filipinos with the government adds a moral rationalization for tax evasion activities.


Although, it can be hypothesized that it is difficult for the very wealthy to hide their wealth, which is largely formal sector and more obvious to all, they are conceivably in a better position to engage professional and expert assistance for tax evasion. While wage-earners have less opportunities for evasion, the deterioration of real income

provides a greater opportunity cost in complying with estate tax liabilities. However, no conclusions as to the propensity of different income or demographic groups to evade estate taxation are possible within the scope of this study. It is also presumed that existing evasion methods undertaken with respect to other taxes, e.g. keeping 2 sets of books for the purpose of evading income taxes, aid in the evasion of estate taxes, particularly with respect to asset valuation. Assets differ in the ease or difficulty with which their existence can escape detection as part of an estate. It is widely acknowledged that evasion is greater when information is such that taxpayers have a greater ability to conceal the existence of assets. Therefore, methods and opportunities for estate tax evasion will differ according to the different types of assets included in an estate.


II. Estate taxation

Acknowledging some negative arguments

Before stating the various grounds that justify the imposition of estate taxes, we briefly discuss the arguments against it.

Moral arguments

It is argued that that taxing the dead is morally repugnant. The death of a family member with a taxable measure of wealth represents a significant reduction in family income that was provided by the decedent during her/his lifetime. Advantages that members of the family once enjoyed are also reduced by the loss of the decedent’s human capital - knowledge, experience and network or personal connections. Overall, estate taxation exacerbates these losses. (Gale and Slemrod, 2001)


On the grounds of economic efficiency, it is argued that estate taxation influences changes in the allocation of resources. Essentially a tax on wealth, it may affect labor supply decisions, encourage spendthrift behavior, penalize effective entrepreneurship and reduce the amount of saving and additional investments made by the creators of estates, and thus impair economic growth. Studies are unable to reach unambiguous results with respect to the effect of estate taxation on labor supply, savings and investment, i.e., there is no clear evidence that estate taxation affects the allocation of resources any more or less than do income or other taxes. In fact, being a once per generation tax, it may have smaller disincentive effects than income taxes. Another argument is that the taxing of estates can contribute substantially to the degradation of small businesses and family farms. With respect to the effects of estate taxation on family endeavors, it is surmised that the tax has different effects according to


the size and nature of the enterprise as well as the degree to which the endeavor was dependent on the decedent. The existence of a lower limit for the value of net estates to which the tax applies may partially address this concern. There is also the argument that estate taxes are inequitable and discriminate against physical capital because human capital, is also be transmitted to some degree but it is not taxed. However, taxing human capital is extremely impractical since it entails extreme difficulties in valuation and may cause even greater inefficiencies in the allocation of human and financial resources as well as on future economic productivity. The low revenue yields from estate taxation raise questions as to the effectivity of estate taxes in achieving a redistribution of wealth. Evidence is lacking that it actually does so and estate taxes have even been interpreted as a means of “penalizing one segment of the population, without assisting the remainder.” Finally, it is argued that estate taxation yields relatively smaller revenues when compared to other taxes, has on the other hand, large compliance costs. (Wagner, 1973)

Justifications for estate taxation

State partnership and citizen’s benefit

Government undertakes programs that affect the creation and distribution of wealth within an economy. It provides for and ensures the maintenance of the legal and social infrastructure within a given economy. (Slemrod,1998) Since the government is a citizen’s partner in the creation and preservation of value and wealth, it is a rightful claimant in the distribution of the estates of decedents. Furthermore, it provides the service of ensuring that the distribution of estates is in accordance with a decedent’s wishes. As corollary to the above, that which rightfully belongs to state cannot be given away by the decedent. (Santos, 1994)


Possession of wealth and the ability to pay

The possession of wealth conveys advantages to individuals over and above the income that can be derived from that wealth. It confers on individuals a relatively higher social status, a greater ability to take advantage of economic opportunities, and the ability to dis-save, which provides them with economic security for old age or for unexpected economic downturns. Although difficult to value accurately, the possession of wealth confers power and control over economic resources such as command over goods and services that derive from the ownership of property. (James, 1992) These added

privileges associated with wealth are untaxed by the state and yet confer on the individual possessor or recipient of wealth an added ability to pay as well as a greater ability to contribute to the government’s needs. (Santos, 1994) Estate taxation can be viewed as a substitute for an annual tax on wealth, which would entail much greater administrative costs - particularly in terms of achieving annual valuations of net worth. (James, 1992) Eugene Sterle refers to it as “a rough method of taxing ability to pay on a lifetime rather than an annual basis” or “a once a generation tax based on ability to pay.” (Gale, 2001) When a decedent has accumulated wealth that is more than for his personal needs, a taxable estate is created and this is indicative of an ability to pay. A greater ability to pay is likewise acquired by beneficiaries upon receiving an inheritance. Furthermore, it is an unearned ability.

An instrument for the redistribution of wealth

The most commonly acknowledged rationale for the imposition of estate taxes is the redistribution of wealth. This is based on the perception that the possession of wealth more easily begets wealth and therefore decreases equality of opportunity within an economy. However, unless estate taxes carry tax rates that verge on conficscatory, it is difficult to attribute a redistribution of wealth or income to the effects of this tax alone. So many other factors affect asset and income distributions that it is not surprising if the


redistribution of either cannot be attributed to the imposition of estate taxes - in isolation from these other income determinants. Still, if it can be reasonably posited that without estate taxation inherited wealth decreases economic equality then there is an economic justification for its imposition. In fact, unless regressive in character, all taxes purport to carry redistributive objectives and effects. Thus one can rationally claim that estate taxes, being progressive, partake of this redistributive effect, if not singly, as part of the entire system of taxation in an economy.

Complimentarity to other taxes

The occurrence of a death in the family and the consequent creation of an estate destined for transfer creates an opportunity for the state to get a closer look at taxable assets that may have escaped taxation during a decedents lifetime. In particular, assets of value that may or may not yield a significant income stream may easily escape annual income taxation. Since they have not been transferred these assets escape capital gains taxation on their appreciation over the years. In effect, capital gains has been “locked in” (Wagner, 1973) to these assets and possibly otherwise overlooked and forgotten. An assessment of their value at current market prices in order to effect their transfer reveals the appreciation of these assets. The “back-tax theory … looks to death taxes as a means of collecting taxes due from…the decedent during his lifetime.” (Santos, 1994). In addition, this forced revelation of taxable assets and potential ability to pay yields valuable information for future income tax collection from those to whom the assets have been transferred.

Rationale for the imposition of estate taxes: Summary

For taxpayers, estate taxation embodies the undesirable qualities of being levied at a time, which can be considered emotionally stressful for most families and of reducing the value of expected wealth that intended beneficiaries of an estate receive. They are, on the other hand, a convenient instrument for the revelation of taxable assets. Thus, aside from contributing to the potential of a progressive tax system to


achieve greater equality of opportunity, estate taxation likewise serves to patch loopholes in the tax system. Finally, since the state can consider itself to partake in the creation and preservation of wealth, without which there might not be any estate at all, it can likewise claim to partake in the wealth created and preserved that is embodied in an estate.

Basic features of the law on estate tax

Title III, Chapter I, Sections 84 to 97, of the National Internal Revenue Code of 1997 governs the payment of estate taxes. (See Appendix 1) A gross estate includes the value at the time of death of all the decedent’s property, real or personal, tangible or intangible, wherever situated. Property included in the gross estate is generally appraised at its fair market value at the time of death. For real property, market value is ascertained by selecting the higher value between the zonal valuation of the BIR and the values fixed by the provincial and city Assessors. The estate tax is levied upon the transfer of a net estate arrived at by subtracting from the gross estate certain allowable deductions. These are the following: Actual funeral expenses, or an amount equal to 5% of the gross estate, whichever is lower, but not to exceed P200,000.00. Judicial expenses of the testamentary or intestate proceedings. Indebtedness. Claims of the deceased against insolvent persons Unpaid mortgages on or indebtedness with respect to property Property received by the decedent within five years as a gift, or as an inheritance, where a donor’s tax or estate tax had been paid. The deduction follows a schedule of diminishing deduction depending on how farther back the gift/inheritance took place. Transfers by the estate to the government for exclusively public purposes. The fair market value of the decedent’s family home, up to P1,000,000. A standard deduction of P1,000,000.


Medical expenses incurred by the decedent within one year prior to his death, but not to exceed P500,000. The liability to pay the tax falls upon the executor or administrator of the decedent, or if no executor or administrator has been appointed or is qualified, then the liability falls upon any person in actual or constructive possession of any property of the decedent. The return must be filed, and the tax paid, within six months from the decedent’s death. Some characteristics of estate taxes

Base of the tax

Estate and inheritance taxes become operative upon the death of an individual that creates a potential transfer of assets from a decedent to some set of beneficiaries. In all modern tax systems, these taxes characteristically apply to transfers above some minimum value and apply progressively greater tax rates as the value of the transfers increase. An estate tax differs from an inheritance tax in that the former is levied on the net value of the bequest or estate left by a decedent whereas the latter is based on the value received by heirs or beneficiaries. The Philippines levies an estate tax.

Coverage of estate tax Assuming that the decedent is a Filipino citizen or an alien residing in the Philippines, the gross estate of a decedent includes real or immovable property, tangible personal property and intangible personal property, wherever situated. Intangible personal property includes credits, receivables, bank deposits, promissory notes, corporate stock, dividends, partnership profits, bonds, franchise, rights of usufruct and any other interests. Interest is “ a general term used to denote a right to have the advantage accruing from anything; i.e., any right in the nature of property but less than title”.(de Leon, 1998) 18

Full disclosure of the assets of an estate would include interests that have value even if they that may yield no income (such as club memberships) as well as rights that will entitle the successor to future pecuniary benefits (such as trust income or rights of usufruct). Full discovery of the assets of an estate would include inter vivos donations and transfers that were made “ in contemplation of death” and/or those which can be interpreted to be in the nature of testamentary dispositions (such as net transfers or gifts with a value of P100,000 or more that were conveyed for less than their full consideration). Specific exemptions are granted to certain components of the decedent’s assets such as GSIS proceeds/benefits, accrual from SSS, proceeds of group life insurance policies taken by employers, and war damage payments.


In practical terms, estate taxes will be applicable only to estates bequeathed by a single or widowed individual with a gross valuation of over P 3 Million. The standard deduction of P 1 Million, the deduction for own residence of up to P 1 Million, plus the additional allowable deductions of P 500,000 for medical expenses and up to P 200,000 for funeral expenses add up to P 2.7 Million. Deductions for judicial expenses, which can conceivably be greater than P 100,000 are also allowed. Together these deductions will leave a net estate valued at less than P 200,000, and automatically escape estate tax liability. For married couples, one half of community property is deemed to belong to the spouse of a decedent and does not form part of the gross estate.

Equity and ease of administration

Estate taxes apply the principle of horizontal equity (treating similar individuals equally and dissimilar individuals differentially) only in so far as estates in the same value bracket have the same tax rates. The principle of horizontal equity applies to 19

beneficiaries only in so far as they share equally or proportionally in the amount that will be foregone to taxes, without differential consideration for their varying economic positions or relationship to the decedent. On the other hand, an inheritance tax displays the desirable quality of horizontal equity. Inheritance taxes have the advantage of applying tax rates according to the amount received by each beneficiary and can even take into account the different relationships of the beneficiaries to the decedent. Individual inheritances from an estate become subject to relatively lower tax rates as the number of beneficiaries increases. Even if lower tax rates apply to a tax based on individual inheritances, it cannot be asserted that inheritance tax yields are necessarily less than taxes levied on an estate in its entirety since tax rates can be adjusted to yield an equal amount of revenues. However, from an administrative point of view, the valuation of individual inheritances among a number of heirs is much more difficult to achieve than the valuation of an entire estate. Additional difficulties in valuation arise when there are problems or lags in the division of the estate, which can cause lags in tax collection as well. An estate tax is desirable for its relative simplicity in terms of administration, valuation and collection.


III. Methods of estate tax evasion

Conceptually, there are three basic methods by which estate taxes can be evaded: by non-declaration of all or part of the gross estate, by over-declaration of estate liabilities and other allowable deductions, and by under-valuation of the estate assets. These basic methods take many forms, and we discuss them as they were revealed by the interviews.

Non-filing of return: “staying alive”

The first requirement for levying a tax on an estate is for the BIR to be aware that a person died, and that an estate exists for transfer to heirs. While deaths are registered with the local Civil Registry Office, such fact does not automatically reach the BIR. The local Civil Registry sends monthly reports of deaths (along with other civil registrations) to the National Statistics Office, which is the central depository of all civil registry documents. The BIR is not furnished a copy not only because a small proportion of decedents leave estates large enough to incur estate tax liability, but also because there is no administrative link for this purpose between the Civil Registry/NSO and the BIR. The obligation of notifying the BIR of the fact of death falls instead upon the heirs of the deceased, or administrators/executors of the estate. Section 89 of the National Internal Revenue Code states:

SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.


Heirs that do not have the intention of filing an estate tax return expectedly do not file such notice. The field research indicates that the non-filing of returns is a problem. From the lawyers interviewed, many of the problems they encounter in the transfer of title of real property of their clients have to do with not having paid estate tax within the period required by law. A local register of deeds interviewed also said that he gets only an average of two transfers of title per month by way of inheritance; transfers are mostly by sale and donation. Tables 4 gives a rough comparison of the number of estate tax returns filed nationwide to the record of deaths in the country as summarized by the National Statistics Office.

Table 4. Number of Estate Tax Returns Filed Nationwide
Year Number of Estate Tax Returns Filed* 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 22,541 21,806 23,765 24,206 28,312 23,211 22,510 22,070 23,786 26,487 27,919 30,373 Number of Deaths (50 yrs. old and above)** 178,233 189,272 191,759 205,043 206,896 216,144 219,270 222,581 241,816 258,458*** 258,089 **** not available

Sources: *BIR Annual Report, 2004; ** Philippine Yearbook, NSO, 2005; *** NSO **** 2003 Vital Statistics Report, NSO

While we did not encounter an interviewee who had personally committed it, an extreme measure to hide the fact of death is the non-registration of death with the Civil Registry. A death certificate is required for transactions such as the claiming of insurance and death benefits, permits for burial, etc., Still, as one BIR official put it, “It is possible


for a person to live for hundreds of years.” A Civil Registry officer agreed that a person can remain alive for as long as his death is not registered with them. The registration of death can also be registered at a later time, subject to a minimal fine for late registration Since there is no automatic transmittal of information from a Civil Registry Office to the local Register of Deeds, the BIR and other government agencies can be unaware that an estate has been distributed. Heirs can wait for a more propitious time to sell real property. In the meantime, they can continue to pay realty taxes on estate properties without declaring the decedent’s death because realty taxes are attributed to the property not the owner of the property. A number of other transactions can also be accomplished in the name of the deceased, through methods discussed below. If information on the fact of death is not forthcoming to the BIR, clearly it is its responsibility to exert efforts to get such information. According to one BIR person, there was a time when they would visit funeral parlors to see who had died, and inform the heirs that they had to file estate tax returns. They also looked at obituaries. However, this practice is not an institutional program. One recent program to induce filing and payment not just of estate and other taxes was the Enhanced Voluntary Assessment Program (EVAP) mentioned in the early part of this study. Effective until January 2006, taxpayers that availed of this form of administrative amnesty were assured of being the last priority in audit and investigation. This program yielded P2,065.2 Million in revenue, of which P 57.6 Million ( 2.8%) was from estate taxes.

Reducing taxable estate

When heirs or administrators of estates decide to file an estate tax return, they also engage in various evasion methods to reduce tax liability.

Non-declaration of personal property

Personal property not subject to any form of registration such as cash, jewelry, art work and other valuables are seldom, if at all, declared in the gross estate.


It is expected that non-declaration will be harder for personal property subject to some form of registration. Cars, for instance, are registered with the Land Transportation Office and a change of the registered owner requires documentation. However, cars are also more often not declared. Heirs simply continue to renew the registration under the name of the deceased. Even when they are sold, the Land Transportation Office has no way of knowing if the supposed seller of a vehicle is alive or deceased. A BIR official noted that in the late 1980s, tax clearances from the BIR were required for all second hand car sales, but the policy was withdrawn sometime in the 1990s. Shares of stocks in corporations are another personal property with some form of registration. Under the Internal Revenue Code, it is prohibited to transfer to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the BIR Commissioner that the estate/donors tax has been paid is presented. While tax lawyers say that this is enforced in publicly listed companies, they acknowledge that the enforcement is lax and it is seldom complied with by family and other non-listed corporations. In addition, a BIR Officer stated that it is also possible to “fix” the Stock and Transfer Books of family corporations even without a tax clearance because there is also corruption in the SEC. We also encountered at least one case where blue chip stock was not declared in the return but BIR certification was successfully used to transfer the stock held by the decedent. Cash on hand is another form of personal property generally not declared but there exists a statutory restriction on monies deposited in the bank. The Internal Revenue Code provides that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the estate tax has been paid. All bank withdrawal slips are required to contain a statement to the effect that all of the joint depositors are still living at the time of the withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. Such restriction, however, is easily subverted. Non-declaration is even easier if the bank accounts are “and/or” accounts, i.e., held jointly with another. Several heirs


stated that they were able to withdraw the bulk of the decedent’s cash held in banks when it became obvious that death was imminent. In some cases, heirs were advised to do so by “helpful” bank personnel. In cases where the decedent has a Trust Account with a bank, securities in the account can be sold or transferred upon instructions from any one of the joint account holders to sell the securities and deposit the money in another account. This can take a few weeks. It is also possible for any one of the joint account holders to give the bank instructions to transfer the entire trust arrangement to another name. Even after the death of a joint-account holder, the withdrawal or transfer of accounts can be done without the requisite BIR certification. Bank officers stated that they allow any of the holders of “and/or” accounts to withdraw any amount for as long as the bank is unaware that one of them has passed away. One respondent who held the accounts jointly with the deceased was able to transfer and withdraw cash from all the “and/or” accounts of the decedent, even in foreign accounts simply by issuing checks. Since telegraphic transfer has amount limits, the heir/joint account holder first issued checks to consolidate the various foreign accounts into one. Then one check was issued to a Philippine account. The latter check took a number of weeks to clear but the transfer was accomplished without incident. In practice, a bank officer is a trusted “friend” of clients (especially those with large accounts) and would conceivably be aware that a death in the family is imminent or has occurred. But as long as no obituary has been published there is no way of proving that a bank officer was actually aware of the decedent’s death. According to a bank lawyer, heirs are legally liable for any anomaly in effecting these withdrawals but beyond being reprimanded for “lack of prudence” the banks themselves do not incur legal liability for allowing them. Friendly accommodations by bank personnel are not surprising. Banks have a strong motivation to maintain friendly and helpful relations with their clients. One respondent whose parent suffered an accidental death, recounted that the bank allowed them to withdraw the cash for fear of offending them, i.e., losing them as clients. Another respondent recounted that the bank simply gave them 2 days from the decedent’s death to withdraw all the cash from the decedent’s accounts.


One interviewee revealed that bribery is also possible. The respondent recounted an incident where a decedent’s account held about P10 Million and a bank officer allowed the heir to withdraw it for a “consideration”. It is also possible to ante-date withdrawals without much chance of detection since reports to the Central Bank are on the total or bulk of transactions and do not state the specifics of these transactions. However, since the enactment of the Anti-Money Laundering Law, individual withdrawals of P 500,000 and greater are specifically reported. The bank officers interviewed stated that to their knowledge it had never happened that the BIR had inquired from them if a specific person had held an account there. They believed that this was theoretically possible and legal but stated that the BIR was unlikely to know which bank to inquire from. The only instance we encountered when the account was frozen by the bank was in a case where the estate was contested. This happened after one of the heirs informed the bank of the decedent’s death and requested the freezing of his accounts. The bank then required the presentation of a tax clearance before allowing withdrawal.

Non-declaration of real property

A BIR officer said that it is an unspoken policy that they do not really bother with other types of property as long as the taxpayer declares all the real property. It is more difficult not to declare real property given the requirement of the BIR clearance for the transfer of title in the Register of Deeds and for the change of name in the property’s tax declaration in the local Assessor’s office. In addition to other documentation, Revenue District Offices also require, a Certificate of Aggregate Landholdings from city and provincial Assessor’s offices, to get a listing of the property in the name of the decedent. Still, real property does not escape non-declaration. Several sets of heirs did not declare all the real assets of the decedent. The properties declared were those located within or close to the Revenue District where the estate tax return was filed. Real property located elsewhere were not declared as part of the estate.


Under-valuation of Assets

The law on estate taxes states that real property should be valued at its fair market value. Fair market value is established by selecting between the BIRs zonal valuation or the value assigned to it by the Municipal Assessors in the Tax Declaration of the property, whichever is higher. Presumably, the BIRs zonal valuations minimize discretion by taxpayers, the local Assessors and the Revenue District Officers (RDOs) in estimating the value of real property. However, the BIRs zonal valuation is generally much higher. In some areas it is over 50% greater. The zonal valuation system of the BIR makes it difficult for the taxpayer to undervalue the land itself. However, a tax return can undervalue a property or seek reconsideration for a lower valuation of a property by several means. Improvements on the property can be omitted. This can be done by getting a Certificate of No Improvement issued by the Assessors Office and signed by the City or Local Engineer. Other ways to declare a lower value for land are to claim that there are squatters or informal settlements occupying it, or that it is likely to be in the path of an infrastructure project in the near future. According to one lawyer, the under-valuation of property is relatively easy to achieve, legally or otherwise, for as long as an estate is not contested. The Assets Valuation Division of the BIR claimed that they conduct ocular inspections of property to verify the claims of applicants that seek reconsideration for property valuations. But, according to another BIR officer, their examiners seldom take the trouble to make ocular inspections of the properties declared in a tax form. Table 6 shows the number of applications for reconsiderations from 2001 to 2005, not necessarily in relation to estate taxation. According to one BIR officer, the approval rate of these applications for lower land valuations was between 80% to 90%. He added that the number of applications is relatively small because people are not generally aware that they have this option.


Table 5. Applications for Reconsideration of Land Valuation Year 2001 2002 2003 2004 2005
Source: Statistics Division, BIR

Number 38 75 75 102 96

Overstating Deductions

Medical and funeral expenses are allowable deductions from a gross estate but subject to a maximum of P 500,000 and P 200,000 respectively. Lawyers’ fees, the cost of legal proceedings related to the disposition of an estate, indebtedness, claims against insolvent persons are among the other deductions from a gross estate that an estate tax return can maximize. According to one lawyer, it is fairly easy to fabricate IOUs (to the decedent). These are credible for as long as they can be made to look fairly worn. In order to claim the P1 Million deduction for a decedent’s residence, one set of heirs declared a condominium unit as the decedent’s residence, not the family home where he actually resided. The latter had been transferred inter vivos to the youngest heir.

Simulating transactions, forgery and falsification in the transfer of real property

For real property that was not declared, either because no estate tax return was filed or because there was non-declaration in the return, taxpayers face the problem of how to effect the transfer of title when the need for such arises. This may be when property is sold to a third party, or when the heirs finally decide to transfer the title to their own names. There are instances when the estate tax return is eventually filed and estate taxes paid are paid accompanied by penalties. In other instances, using various methods, taxpayers evade the payment of estate taxes altogether.


One method used is the simulation of a transaction. Typically this is resorted to in transferring the title of ownership to heirs. The transfer appears not to be one that is effected by inheritance, but by some other transfer transaction such as sale or donation. Note that a tax may still be paid for the simulated transaction, particularly the donor’s tax in case of a donation, or the capital gains tax in case of a sale. But while some tax replaces the estate tax, it is clear that the heirs are able to delay the payment of the tax to a later date without payment of penalties. Also, the transfer need not cover all of the real property in the estate (as would have been the case if an estate tax return was filed), but can instead be confined to the particular property which the heirs desired to transfer. In instances where the property is sold to a third party, the estate tax is evaded altogether by transferring the title directly from the name of the decedent to the buyer. The transaction is a real transaction of sale, but it bypasses the transfer of property to the heirs by inheritance. Both simulation of transaction and sale by heirs in the name of the deceased directly to a buyer require some form of forgery and falsification. The signature of the decedent needs to be forged. In one city government office, a person appropriately nicknamed “The Golden Hand” is known to apply his talents to providing this particular service. Certain facts are also falsified, such as the fact that the seller is dead and the actual date of the transaction. A Register of Deeds Officer stated that they have no way of knowing if the seller of a property is deceased or if the buyer of a property is a child or a person incapable of buying it. The function of the Register of Deeds is purely ministerial. It does not investigate the validity of information presented to it. It merely accepts documents required to register a transfer of title. The BIR is one step ahead in this case since it requires that buyers and sellers have a Tax Account Numbers (TIN). One wealthy decedent left specific instructions with his heirs that there should be no obituary published upon his death. Through their lawyer the majority of his real assets were transferred to a family corporation after he had died. Several tax practitioners/lawyers, a BIR officer and a real estate broker explained that it is possible to transfer real property through the Register of Deeds without going through the BIR. “Simulated” or fake tax clearances are even available there.


According to a real estate broker, a good relationship with the government offices that process property transfers, such as the local Register of Deeds and the BIR, is a necessary part of their stock in trade. It is always important for them to facilitate the transfer of property in as little time as possible and they cultivate these relationships. If this is correct, one can safely conclude that inter vivos transfers can easily escape almost all tax liabilities, even capital gains and donees taxes. Combining this fact with the inability of the RD to know the legal status of property sellers and buyers, it is possible to register a property to a potential heir upon purchase, even if the purported buyer is a minor. One of the respondents to this study claimed that he who would have no estate tax liabilities because it was his practice to register all purchases of property directly in his children’s names. In addition, this taxpayer had very “good” relations with the city government offices, so that he virtually escaped other taxes as well. A BIR officer explained that the BIR is aware of this problem and recounts that there have been instances in the past when BIR personnel would visit the Registry of Deeds to compare the list of transfers with their own list of those that had paid capital gains taxes. But, these were occasional and not regular visits. He agreed that even if the Register of Deeds allows the transfer of a property without the CAR, “it is not likely that anyone will check those files, so no one will find out.” In this opinion, this is relatively safe to do. According to him, for the last ten years, BIR Commissioners have been talking with the RDs to coordinate with the BIR. But the RDs respond with “You people have many different taxes from which to make money from, we only have one and it is our bread and butter.” He also stated that in the provincial areas, there is a form in the RD addressed to the LRA with a copy furnished to the Revenue District Officers of the BIR. But in the NCR “if you ask the RD, they just say that there is no such form.” In contrast, one lawyer opined that this is probably a more common practice in the provincial context where communities are more tightly knit and almost everyone knows everyone else.



Several lawyers stated that it is always possible to negotiate with the BIR and that oftentimes it is BIR personnel themselves who advice taxpayers that it is possible to pay less taxes. Another lawyer stated that penalties and surcharges are negotiable, although it was unclear how these are recorded. Several heirs also stated that they succeeded in asking for a reduction of their tax liabilities but were not sure how this was achieved since negotiations were through their lawyers. A BIR officer admitted that “sometimes when we see that the taxpayer really cannot afford to pay the tax, we ask them if they plan to sell the property. If they don’t we just advice them not to transfer it, not to pay the tax.” Several respondents, with large inheritances, admitted that they paid a substantial amount to BIR officials. They said that they did so because they received assurances from their lawyers that there was no chance of detection. One set of heirs inherited, among other things, a well-known business that had substantial real estate. They saved “more than 50%” in estate taxes by giving BIR officials a bribe. Another set of heirs had an estate tax liability of P14,000,000. After negotiations, this was substantially reduced to P4,000,000. They paid the BIR P 2,000,000 in cash as a sign of good faith. A week later they were advised that all the papers were ready, and they paid an additional P2,000,000 in cash. They were shocked to discover that the receipt from the BIR was only for P1,000,000! According to the real estate broker, “package deals” which include documents, forgery of signatures if necessary, documentary stamps, and “professional fees” for persons in the Registry of Deeds, etc. are available from the BIR in their area. This transaction, of course, is not free but is completed within a week. This real estate agent who was based in a provincial municipality explained that there was in fact a referral system (among real estate agents as well as among BIR personnel) and that through it, one could secure these “package deals” in other localities. The real estate agent who regularly dealt with the BIR, the RD, and other government offices stated that “corruption is systemic, government officials have no


interest in making the right tax assessments.” A lawyer stated the obvious that it is to the advantage of BIR personnel that taxpayers do not pay the right amount of taxes. Another lawyer recounted that it is sometimes more difficult to pay the correct taxes since BIR personnel have nothing to gain from this. The lawyer recounted several instances in which the BIR would not assist taxpayers who had paid the correct taxes. One wealthy taxpayer/client paid the right amount of capital gains tax, which amounted to P3.6 million but it took the lawyer more than 9 months to secure the tax clearance from the BIR. Because of the delay the client’s legal and other fees were piling up because the sale of the property could not be completed. All told, it would have profited the taxpayer to just bribe the BIR. In another case, the BIR refused to recognize the diminishing deduction due to an estate that was worth less than P10,000,000 for heirs whose parents died within a month of each other. The heirs had paid P100,000 in estate taxes in 2002, but by 2006 the BIR had not yet released the tax clearance. This lawyer also had a client who inherited an estate worth P1.5 M. Before consulting the lawyer, the client went to the BIR to inquire about the estate’s tax liability. The BIR made her pay P30,000 even if an estate of that size should have been tax-exempt. One BIR officer frankly stated that, “The salary of BIR personnel is so low that no one can survive on it. It is practically a statement from the government saying, ‘Ito lang ang kaya namin, kayo na ang bahala gumawa ng paraan. (This is all we can afford, it is up to you to find the balance.)’ I know many examiners na hindi nangangwarta nang higit sa pangangailangan nila (do not extort more than the money they need to live).” However this statement is taken, it is at the very least an open admission that BIR personnel do have the capacity to “negotiate” tax liabilities, i.e., increase or decrease them as it suits them. We inquired of a BIR officer whether it was possible to reduce or eliminate corruption. His reply was that corruption was prevalent at all, even at the highest levels of government, but he acceded that when the top management of the BIR is sincere, examiners will be less corrupt. He recounted that upon taking on the post, one BIR Commissioner met with the examiners and told them, “In the past, you took 70% for


yourselves and gave 30% to the government. From now on, you will reverse the shares and give 70% to the government. But there should be no scandals or you are out.” He also warned that it can be dangerous for a BIR examiner to levy the correct taxes when taxpayers have friends in high places. In particular, he mentioned members of Congress. In relation to politicians he added that the BIR was saddled with political appointees who had no interest in serving government goals.


Evasion in Estate Tax Process
May engage in estate planning Transfers to heirs through simulated transactions Bank deposits withdrawn before death

Heirs/executors decide to file estate tax return/pay estate taxes within the required period


Heirs/executors do not file return on time deliberately or by reason of ignorance of the requirement

Filing of Notice of Death (NIRC 89) Reducing taxable estate Non-declaration of personal property Some pieces of real property are not declared Undervaluation of assets Overstating deductions Can involve corruption of personnel in the BIR local assessors office Filing of Return (NIRC 90) Detection by BIR. Penalties /surcharges can be “negotiated” Value of tax paid reduced > Personal property simply distributed among heirs > Fraudulent transfer of real property to evade estate taxes Simulation of transactions Falsification Forgery May involve corruption of government personnel Payment of Estate Tax (NIRC 91) Returns may be audited before CAR is issued. Audit results can be “negotiated”

Heirs need to transfer property, decide to settle estate tax Penalties/ surcharges can be “negotiated”

BIR issues CAR (Certificate Authorizing Registration)


IV. Factors that affect estate tax evasion

The taxpayer

Evasion and the lack of readiness to cope with estate taxes

Heirs as well as tax practitioners that were interviewed expressed the belief that there is a strong cultural taboo against estate planning. According to them, beyond providing heirs with individual residences, inter vivos transfers are rare because the creators of bequests are afraid to lose control of their assets while they are still alive. Others are superstitious about making provisions that are related to their deaths. Although life insurance policies can be purchased towards meeting estate tax liabilities, none of the heirs interviewed mentioned having received substantial life insurance proceeds. The heirs interviewed were generally from wealthy families, highly educated and several of them were involved in running the family businesses, but all of them claimed to have been caught by surprise at having to deal with estate taxes. They expressed surprise at the enormity of their estate tax liabilities as well as regret that their families had not made preparations to meet it. Among the reasons they mentioned for this lack of preparedness were: ignorance, the strong authoritarian character or secretiveness of the decedents, parents’ lack of confidence in the manner their children will manage assets (especially married children) and delicadeza on the part of heirs, i.e., not wanting to display an interest in the property and in the death of their parents. In some cases, families did not want to distribute the estate while the deceased was still survived by a spouse. In deference to the surviving spouse, heirs settled the estate only upon the death of their remaining parent, which came much later in time and long after the period for settling estate taxes had lapsed. Several lawyers and BIR officers expressed the view that many individuals were unaware of the need to file and pay estate taxes. In addition, they stated that it was often the case that heirs did not have the liquidity to pay the tax and would have to sell some of the property just to obtain the means to meet estate tax obligations. Thus, unless there


was a perceived urgency in transferring titles of property taxpayers chose not to promptly file the return. Lawyers claimed that many of their clients’ problems in the transferring of titles of real property had to do with clients not having paid estate taxes within the period required by law. In those circumstances, liquidity gains were threatened with being reduced by the estate tax, even more so when it was subject to interest charges and administrative penalties. In sum, lack of awareness, unpreparedness, lack of liquidity, and fear of penalties can lead taxpayers to resort to evasion.

Attitudes towards estate taxes

Surprisingly, none of the taxpayers mentioned administrative difficulty in the settlement of estate taxes as a disincentive to compliance. They expressed strong feelings of unfairness in the imposition of estate taxes. Heirs believed that decedents had, in their lifetimes, been paying their fair share of income, property and other taxes, and it was unjust to further tax the transfer of their property to members of their own families. Stressing that it was a tax that was required of them over and above other taxes, all the taxpayers interviewed expressed the view that the estate tax rate was distressingly high. It is unclear if the distress they expressed was related to the occasion upon which the tax was levied or to their lack of preparedness to cope with it. However, it has to be acknowledged that when heirs have to sell inherited property just to meet estate tax obligations, they find themselves particularly averse to estate taxes. Several taxpayers who were aware of future estate tax obligations were taking steps to escape it. One 88-year old respondent had transferred all his assets to his children and kept only his cash assets. Having made some calculations of his expected lifespan, he planned to spend as much as possible before he died, “rather than give it to the government”. For the same reason, another respondent in her 80’s was gradually selling all her property and dividing the cash proceeds among her children. Incidentally, after having dealt with estate taxes, all of the heirs interviewed were engaged in taking steps to gradually make inter vivos transfers to their children.


It is the opinion of the researchers that even as taxpayers find estate taxes less acceptable than other taxes this view does not by itself constitute sufficient motivation to evade estate taxes. However, the motivation to evade is strengthened by the fact that the evasion being contemplated is a one-time act not a chronic one. Therefore, even taxpayers who normally comply with their tax obligations may be tempted to evade estate taxation. In addition, as will be shown below, many other factors act to strengthen the motivation to evade estate taxes.

Ethical considerations and perceptions of fairness

There was no feeling of guilt or shame among taxpayers that admitted to having evaded estate taxes. Their rationalization was “Everybody does it”. Taxpayers felt that corruption in government was prevalent and that government officials were not rendering service to the public. There was a strong feeling that evading taxes was excused since tax revenues would only go to corruption and not to improved government services. SWS Surveys on corruption corroborate the views expressed by respondents. The effectiveness of the government in eradicating corruption was perceived by 27% of the population as “hardly effective”, by 16% as “not at all effective” and 4% believed that the government “was not doing anything at all” about corruption. (SWS, 2001) Enterprise managers were surveyed by SWS in 2005. 66% of them believed that there is a “lot of corruption in the public sector, 52% believed that “Filipinos are highly taxed” and 46% stated that it is useless to pay more taxes to the government because “the money will just be wasted or stolen”. In the same survey, the BIR was perceived to be among the top 3 most corrupt government agencies and one of those that had become more corrupt in the last 5 years. However, 75% of survey respondents stated that “if they knew more about where the taxes they pay go, they would pay more readily”.


Taxpayer’s perception of the probability of detection

The perception of corruption in the BIR strengthens the motivation for engaging in tax evasion activities. It influences taxpayers’ decisions about the probability of success in tax evasion activities, and lends credence to their estimation that tax evasion can safely be achieved. The general perception of all those interviewed was that the probability of detection, particularly with the collusion of BIR personnel, was very low. In fact, even in the classes of property generally declared when an estate tax return is filed, it does not appear that the principal incentive lies in a higher probability of detection. Rather, the incentive lies in the clearance requirement in order to transfer the title of such property. Where the heirs see no immediate need to effect the transfer of title of ownership, they also see no compelling reason to file the estate tax return. It is only when the heirs do decide to file the return and declare registered properties that a higher probability of detection comes into play. The paper trail as well as personal knowledge by cooperators in the evasion somehow increases the probability assigned by the heirs to detection. This is partly subjective, so that certain heirs will be bolder than others in regard to the evasion method used (say, forging the signature of the deceased). One taxpayer, who “negotiated” with and eventually paid a hefty sum to BIR personnel, said that they would probably have paid the tax in full, if they thought that the BIR would eventually go after them. In fact, this was one of the questions they discussed with their lawyers before making the decision to evade paying the full amount of their estate tax liability. They were given an assurance by the lawyer that there was little or no possibility that their evasion would be detected. This heir mentioned that in order to escape detection, the BIR officer would not enter their estimated estate tax liability into the computer until “negotiations” had been completed. Correctly, heirs realized that the actual probability of detection was extremely low, when both parties (tax collector and tax payer) had an interest in effecting the evasion. Since the general perception is that the probability of detecting tax in estate taxes is very low, the penalty factor does not appear to be very important. The taxpayers only have a general idea that there is some penalty on evasion, but there is no high level of knowledge of the specific penalties and of related factors such as remedies. On the part


of the taxpayer, bribery is seen as a means to both obtain a measure of savings and reduce the threat of detection of evasion.

Facilitators: lawyers and other actors

Lawyers, who historically, have hardly had to declare their true incomes, denied any participation in acts of evasion and asserted that they were instrumental in explaining estate tax obligations to clients. Some of them acknowledged the existence of “unscrupulous” practitioners. Others said that they advised against evasion. However, the taxpayers interviewed stated that their lawyers played an active role in the settlement of estate taxes, more so than accountants. All the heirs that admitted to evasion were assisted by lawyers in the settlement of their estate taxes. They said that their lawyers advised them and helped facilitate the method of evasion undertaken. Some lawyers gave heirs advice on which properties to declare and not to declare. Some facilitated the bribery of the BIR personnel and took care of paying the bribes. If it is true that most taxpayers are ignorant of the provisions of the Tax Code on estate taxes and therefore needed lawyers to assist them; then, if they evaded the tax, it can be surmised that their lawyers, used their knowledge of the law to advise them and in some cases, to facilitate tax evasion. Another layer of actors appears to play a substantial role in the evasion of estate and other taxes related to the transfer of real property. These are real estate brokers (not necessarily licensed) that over time have developed expertise in the different requirements of transfers of title, and have regular dealings with all the government agencies (BIR, Register of Deeds, Local Assessors) involved in these transfers. They have developed a network of contacts in these offices to facilitate the prompt transfer of title for a fee. Their primary objective is the sale of property, but in order to close the sale, the transfer of title of ownership at the least cost becomes part of the service they offer. It is common that they encounter property for sale, the estate tax of which has yet to be settled. It is they who offer to “take care of all the legal requirements” and thus, facilitate the evasion of the estate tax by directly transferring the title from the deceased to the


vendee through the various methods earlier discussed. These brokers have an interest in nurturing their contacts in pertinent government offices. The broker interviewed stated that in addition to direct bribes for particular transfers of title, generous gifts were given to these contacts, e.g., as balato, when a big land transaction was completed. The methods of evasion described above are effected by the confluence of financial interests of various economic actors – the taxpayer, government officers, private business institutions such as banks (by ignoring the timing or circumstances of withdrawals/transfers) and other business persons such as brokers/ fixers. This confluence of economic interests facilitates and perpetuates evasion.

Cultural factors

The only circumstance that lawyers and BIR officers mentioned, as a deterrent to acts of evasion, was the presence of conflict among heirs to an estate. Otherwise, the cooperative relations within the family are operative. All of the heirs that paid bribes or evaded estate taxes in other ways, stated that the decision to evade was discussed and agreed upon among siblings. None had prior dealings or contacts with the BIR. Yet, all of them somehow found the connections they needed to successfully evade part of their estate tax liabilities. Cooperation in evading the tax was extended to heirs by relatives, lawyers and other connections. The Filipino has strong community ties. Accommodation is considered to be an act of kindness and generosity and it is generally considered very bad form, “walang pakikisama”, not to accommodate requests made by family (extended), family friends and friends of friends. Claims made on one by family, clan, former classmate, kababayan and acquaintances from other networks are, as far as practicable, honored. The effect is that when someone seeks help to cope with a problem, such as how to reduce one’s tax liability, a whole network of assistance becomes available. Although it is an effective social institution for survival, this trait works just as effectively to evade taxes. Favors, even when they are remunerated, are treated as social investments by those who grant them and as social debts by their recipients. Even bank officers unofficially grant these favors - to cultivate good relations with their clients they turn a


blind eye to the death of an account holder “for as long as no obituary has yet been published.” While the motive is pecuniary, it is obvious that the pecuniary gain of the client’s continued patronage is earned via the client’s perception of the bank’s “friendliness.” In its worst form, the practice is prevalent at all levels of the political and social spectrums. Professionalism in public office is a rarity and not as appreciated as it should be. Filipino culture shuns persons with power or opportunity who do not use it to “help” their communities. Without justifying the use of this strong community bond for undesirable and unproductive ends, one can hardly blame the Filipino public, whose experience with government is that it does pay to have connections and in general, to cultivate good relations. Thus, not dissimilar to the confluence of economic incentives, there is likewise a confluence of social incentives in assisting a taxpayer to transfer a property’s title, sell an inherited asset or withdraw cash from an account, without paying estate taxes. Without asserting that this particular form of cooperation that is an intrinsic element of the Filipino’s sense of community is a decisive factor in tax evasion, it is nevertheless important for policy makers to acknowledge its importance in economic decision-making.

Obstacles to effective tax administration

Information asymmetry

One can hardly expect to achieve the efficient enforcement of estate taxes when the BIR itself has blind spots. Certain classes of property are not declared at all in estate tax returns. At best only a minimal amount is declared. These are movable property such as cash, jewelry, paintings, and cars. The only movable property often declared is shares of stock, especially when these are held in a publicly listed company. Several Revenue District Officers (RDOs) interviewed stated that it was difficult to detect the evasion of estate tax liability because they had no choice but to depend on taxpayers’ declarations. There is truth to this. Tax administration officers have no


knowledge of the existence or the extent of personal assets, which according to the Tax Code, constitute part of the taxable assets of an estate. As pointed out above, they can even be unaware that the opportunity for transfer of an estate has been created by the death of a taxpayer. This asymmetry of information between taxpayers and tax enforcers presents an opportunity for taxpayers to at least partially evade estate taxes. The practice of BIR officers to focus their enforcement efforts for estate taxes largely on the basis of real property is the practical result of acknowledging this asymmetry.

Information gaps and loopholes

The information asymmetry between taxpayers and the government is further aggravated by the lack of information sharing among government agencies. It is ludicrous that tax officers should have to depend on reading obituaries and visiting funeral parlors in order to identify potential transfers of estate assets, when the information is with the Civil Registries. But there is no effective cooperation agreement between the Civil Registry and the BIR nor the National Statistics Office and the BIR. While estate taxes are paid at a given Revenue District, usually where the deceased taxpayer formerly filed income and other taxes, the extent of the taxpayer’s real property is not limited to the Revenue District. Since there is no reliable national listing of real property, the task of tracing a decedent’s real assets on a national level, is daunting. In this sense, the RDO as discussed above is unnecessarily disadvantaged by information asymmetry vis a vis the taxpayer and this asymmetry cannot be addressed by the Land Registration Authority, that apparently has its own information problems. The ease with which fake documentation can be manufactured is a serious information loophole for tax enforcers. Documentation requirements for the transfer of estate assets include certifications, notarizations, and receipts. In the City of Manila, for example, Recto Ave. is well known as a source of fake diplomas and other documents. Cedulas can be had for P50 from the cigarette vendors in front of the National Bureau of Investigation offices. Notarizations can be had at almost any street corner and documentary stamps can be bought from the cigarette vendors in the vicinity of City Hall.


The researchers did not discover exactly how BIR tax payment receipts can be manufactured or as one lawyer referred to it, “simulated”. But respondents from the BIR, as well as tax practitioners assured us that receipts and tax clearances could be secured easily enough. If Registers of Deeds can produce “simulated” tax clearances, it is not unlikely that they have a supplier of these documents who could possibly supply other individuals and offices with other similarly “simulated” documents. In these circumstances, documentary requirements are easily complied with but do not necessarily truthfully and accurately reflect the substance of such documentation.

Statutory safeguards

The discussion of the law on estate taxes (See Appendix 1), enumerates the statutory safeguards to ensure the payment of estate taxes. In practice, some of these statutory safeguards are not enforced. For instance, the lawyers interviewed said that judges rarely require BIR certification of payment of estate taxes before authorizing delivery of distributive shares of an estate. Also, lawyers, notaries public, or government officers intervening in the preparation or acknowledging documents relating to partition of inheritance are required to but generally do not furnish the BIR with copies of such documents despite the statutory requirement. The requirement for BIR certification of estate tax payments for the transfer of title by inheritance in the Registry of Property and in the books of corporations, are by far the main statutory safeguards that induce compliance. Again, the effect is only partial, and the covered properties themselves are also susceptible to different forms of evasion.

Discrepancies in valuation

The difference of valuations for real property between the BIR and Municipal and City Assessors is striking. BIR’s zonal values, which are detailed to the street level and are supposed to reflect market values, are in many cases, more than 50% greater than local government’s estimates of the value of real property. In addition, one BIR officer


informed us that the BIR was planning to “double zonal valuations in order to boost revenue collection”. In one municipality, the mayor himself, when he learned that we were doing a study on estate taxes asked us to tell the BIR that their newly issued zonal valuations were unreasonably high and did not reflect market prices. BIR officers stated that zonal valuations are selectively adjusted approximately every five years. Zonal valuations for a Revenue District are supposedly estimated by a committee of three – one each from the BIR, the local government unit and the private sector, usually represented by a bank officer. Each of the three presents their estimates and the BIR takes the mean of the two highest estimates as its approximation of market value. The valuations are supposed to be presented at public hearings. If not arbitrary, the BIR’s method of estimation seems peculiar, tedious and it is doubtful if the prescribed process is assiduously followed. The mayor and local government assessor stated that the new zonal valuations in their area were made unilaterally. In contrast, local government assessors make their estimates of real property values and present these to local Sanggunians for approval. At least one BIR officer stated that the most common method of evasion was the under-declaration of real property values. The existence of a different and lower estimate for the market value of real property aggravates taxpayer’s perceptions that estate taxes, which can be as high as 20%, are unfair. The gap between the two estimates of market value encourages a shopping mentality among taxpayers and is a disincentive for taxpayer compliance with estate taxes.

Enforcement of tax compliance

The impunity with which estate taxes are evaded is linked to the very low probability that taxpayers assign to the detection of evasion in estate taxes. When alleged or detected, the BIR sends a notice of tax liability to taxpayers and eventually can file cases against them. According to the RDOs interviewed, the former is the more common action taken. For example, the RDO of a Metro Manila city estimated that in his district no more than 4


cases (for estates worth P 50 Million and above) are filed annually. The two other RDOs from Metro Manila stated that they had no pending cases against estate tax evaders. One of them said that the reason few cases are filed against estate tax evaders is that they had to prove malice and most taxpayers claimed ignorance of estate tax liabilities. The other RDOs explained that unless there was a glaring error in the declared value of an estate, the opportunity to file cases against evaders arose only when there were family feuds and one faction in the feud provided the BIR with information. Another BIR officer explained that cases were seldom filed at the RDO level because they lacked legal personnel. Cases of tax evasion were usually referred to the national offices. At the time of these interviews, the National Investigation Division had only 2 pending cases of estate tax evasion. A lawyer from said division estimated that no more than one out of ten tax evasion cases were for estate taxes. The same officer said that it was probably the regional offices that handled the filing of these cases because their office had not handled any estate tax evasion cases in recent memory. It is beyond the scope of this study to fully analyze the BIRs enforcement policies but some insights can be gained from the interviews described above. It may be wise tax enforcement policy to avoid long and costly litigation and preferable to advice taxpayers of their liabilities. Arrangements to pay these on an installment basis are not uncommon. Surcharges and interest charges are also an effective penalty without having to resort to litigation. The advantages of litigation are that of sending out a clear message of determined tax enforcement on the part of the BIR and reducing the possibility for discretionary action on the part of BIR personnel. RMO 11-2006 establishes priorities for the audit of returns. For estate taxes, these are returns for gross estates of P 10 Million and above for Revenue Regions 5,6,7 and 8 and returns for gross estates of P 5 Million and above for all other regions. Given the current level of property values, this may result in the BIR being swamped with audit work. Furthermore, audits are a double-edged. They can result in improved collection or in increased harassment of taxpayers.


Lack of professionalism

Among the obstacles identified by one BIR official was the lack of professional competence among BIR personnel and in BIR’s organizational plantilla. In his view, the BIR organization had too few examiners and far too many administrative personnel. In his estimate the latter outnumbered the former three times over. According to him, in other countries 75% of internal revenue personnel were examiners, i.e., the ratio is reversed. He also complained that it was extremely difficult to meet collection targets when virtually half of his staff were political appointees, who felt so sure of their tenure, they could not be motivated to improve collection efforts. A former BIR Commissioner also identified the lack of competence among BIR personnel. By his definition, competence included the trait of honesty. Two tax practitioners identified this lack of professionalism, stating that they knew of BIR personnel who handled the books of private companies and individuals. Finally, according to the above-mentioned BIR officer, lack of professionalism was also nurtured by the Bureau’s political environment. According to him, in his more than 20 years in the BIR, he had only encountered 2 credible Commissioners, i.e., who did not allow themselves to be pressured by politicians. He particularly mentioned that members of Congress often called Commissioners to ask for favors for their companies or “friends”.

Corruption: par for the course

Detection mechanisms directed at taxpayers lose their effectiveness in the face of corruption in the revenue agency as well as in other government agencies. Some local assessors, for instance, have been reported to participate in the underdeclaration of, or certification of no improvements in real property (which reduces the tax liability) attached to a property. Not a few respondents reported that Registers of Deeds provided fake BIR Certificates of Authority to Register (CAR) and BIR tax payment receipts. However, we did not find any respondent that admitted direct personal participation in these anomalies. The extent of personal participation we encountered was


in the paying of bribes to secure these documents directly from the Register of Deeds or from the BIR, for the “package deals” mentioned above. Furthermore, corruption was alleged to occur in other government offices such as the Securities and Exchange Commission. On the part of government agents, there is obviously the income incentive to bribery. One BIR officer recounted how a new Commissioner who wished to improve the tax effort met with BIR examiners and said, “From now on, if you pocketed 70% and gave 30% to the government, we will reverse the shares and I won’t ask any questions. But make sure there is no scandal or I will go after you.” The anecdote seemed at first hard to believe. But later figures quoted by one taxpayer confirmed that the income incentive of corruption is by no means minor and therefore very strong. In exchange for a 70% reduction of his estate tax liability, the taxpayer got an official receipt for only 25% of the amount he had paid to the BIR. Such hefty incentives when weighed against the probability of getting caught and facing the penalties for such action are certain to remain positive. RMO 11-2006, forbids cases for investigation from being handled by the same Revenue Office. While this is administratively correct and it is high time that such a policy should be put into practice, it may still be rendered ineffective to the extent that corrupt networks exist within the BIR. Being knowledgeable of the tax laws and informed of internal policies, the BIR personnel should be able to employ methods that decrease the probability of detection and increases the difficulty of legally establishing the wrongdoing. A similar conclusion can be inferred of local government units’

Assessors and Registries of Deeds with respect to their own areas of jurisdiction. However, the situation where corruption exists across related government agencies, i.e., where collusion is possible among them, indicates a far smaller probability of detection and a much more serious and deeply rooted problem. There are internal administrative mechanisms intended to either reduce the opportunity for bribery, or to heighten the threat of detection among BIR personnel. It was observed that constant interaction between the BIR and agents of taxpayers could evolve into the systematization of bribery. To limit this interaction, the Internal Revenue Code has provided that Revenue Officers assigned to perform assessment or collection


function shall not remain in the same assignment for more than three (3) years (Sec 17, Title I, NIRC). This, however, has not put much dent in the bribery practice. When asked about this, the real estate agent we interviewed laughed and said that whenever a new BIR person was assigned, it only took a few weeks of “pakiramdaman” (wait and see) after which it was business as usual. She also stated that even if her BIR contact was in another area she could do business anywhere because an efficient referral system was in place. There is also an internal audit division in the BIR that conducts fiscal, performance and computer audits based on reports and denunciations. These audits review and appraise the internal controls of existing systems and procedures; and spotchecks cash and property accountabilities of all collection, administrative, and other accountable officers. There is also an internal security division that conducts fact finding investigations and handles the prosecution of administrative cases filed against revenue personnel. Curiously, however, a former high-ranking official of the BIR asserts that there is hardly any system of internal accountability. It does appear that internal audit is not being used as an effective detection mechanism. Not all BIR collection agents or personnel are audited; only those with sensitive positions undergo audit. Audits are based on a prioritization system; specifically, revenue regions that have not been audited for a long time are prioritized, as well as those where charges or complaints have been filed against BIR personnel. One reason cited for the need to prioritize is budget constraint. The downside of having a known prioritization system is that the restraining effect of randomness and the element of surprise is lost. For example, RMO 11-2006 prioritizes estate tax returns where the gross estate exceeds P 10 Million. While this may mean that the returns of some estates that are known to be large will be audited, knowing this upper limit taxpayers, tax practitioners and corrupt BIR personnel can escape audit by ensuring that they limit the value of an estate to less than P 10 Million. Furthermore, a respondent from the Department of Finance dismissed these audits as an ineffectual tool for curbing corruption citing several reasons. First, “evidence of illicit transactions cannot be found because the documents have been altered”. Second, “the auditors are also BIR personnel


who make their own arrangements with the collectors”. According to him, “No one to my knowledge has ever been caught through the internal audit. To catch corrupt personnel, the BIR has to rely on 3rd party information (bookkeepers, accountants) and it does give out rewards for this information. ” The problem is that if both taxpayers and their agent(s) earn more or forego less income by paying off government personnel, and government personnel have an income incentive to take these payments, the circumstances that will occasion the provision of information on corruption will be very few and far between. Recently the Department of Finance has adopted lifestyle checks as a mechanism for detecting corruption of BIR and other personnel. Aside from the fact that this system only indirectly establishes corruption, BIR personnel interviewed said that the program had no credibility among them. One respondent alleged that the program is used as harassment against those who did not play ball or stepped on sensitive toes and worse for extortion by the investigators. The gravity of the problem of corruption perceived by the public was confirmed by the respondents of our field research. This problem has been the subject of many policy studies and reform measures in the past, but given its complexity and the institutional constraints involved in addressing it, we confine ourselves to enumerating insights that can be considered in a more in-depth, comprehensive, and inclusive treatment of this problem: • The corruption is systematic, institutionalized, and involves a critical mass of actors both within and outside the BIR. This is borne by both the economic incentives and the cultural underpinnings of Philippine society, and its perceived prevalence in all sections of government. There is a breakdown in the system of accountability when taxpayers willingly evade taxes, when personnel in the BIR cooperate in this evasion, and when there are other actors (such as tax practitioners, real estate brokers) that have evolved a system of facilitating evasion. • Given the institutionalized character of corruption, no less than a complete change-up of core personnel may be needed. This, however, is nearly impossible given the huge transactions cost involved. Also, a complete


change-up in personnel will have to be accompanied by an overhaul in the incentives, such as drastically improving compensation. • Given the institutional character of the corruption, the impracticability of a complete personnel overhaul, and the difficulty of tracking evidence or finding whistleblowers, no less than an intelligence operation may be needed to establish a case that can be prosecuted. But this will be difficult to do. The costs will be high, the results can take time, and the capability and integrity of the intelligence institutions are also highly suspect.


V. Recommendations

The inquiry into evasion practices has identified several factors that enable and/or encourage taxpayer’s noncompliance with estate taxes. Summarizing, these are lack of awareness and preparedness to meet estate tax obligations; gaps and loopholes in the tax administration system; assistance from tax practitioners and other actors that facilitate tax evasion; taxpayers’ perceptions of the low probability that evasion will be detected; taxpayers’ perceptions of unfairness towards estate and other taxes in general; taxpayers’ disapproval of how tax revenues are spent; and corruption. The recommendations below are addressed towards improving greater estate tax compliance in light of these factors, both as encouragement towards greater compliance and deterrents to evasion. The effects of some of the recommendations should contribute to greater taxpayer compliance in general.

1. Increase taxpayer awareness and preparedness. An information campaign to promote greater awareness of estate tax obligations on the part of the taxpayer may substantially reduce non-compliance. In addition, revenue agencies can create programs that may be coordinated with the private sector to promote greater preparedness to meet estate tax obligations. For example, for insurance companies to market life insurance policies as means to meet estate tax obligations. 2. Create computerized information systems in related government agencies. The disadvantage of information asymmetry of the revenue agency can be partly addressed if records in related agencies are computerized and therefore available. With respect to information for estate tax collection, these related agencies are, in particular, the Civil Registry, the Land Transportation Office, the Register of Deeds and the Land Registration Authority. 3. Enforce coordination and the sharing of relevant information among government agencies. Registers of Deeds should report all transfers of real property to the BIR on a regular basis. This information can be cross referenced by the BIR with their own


records of taxes paid for property transfers, capital gains, donor’s and estate taxes. If incoming information is computerized, this information can also be crossreferenced with records of deaths. While it is difficult to track other personal property, vehicles, at least, can be included in the classes of registered property requiring BIR clearance to transfer title by way of inheritance. Better still, (combining recommendations 1 and 3) one can conceive of an arrangement with the local civil registers where, in addition to the form to be accomplished to get a death certificate, the family of the deceased is also given a form letter from the BIR containing information on the payment on estate taxes, as well as a BIR notice of death form that needs to be accomplished by the family members and submitted to the local civil registers along with the form for the death certificate. The notice of death form will ask for relevant information on the personal circumstances of the deceased and her/his property. Such a mechanism will accomplish several things. The estate will be put on notice of the need to pay estate taxes. They also receive information on the settlement of estate taxes. The BIR also gets information that can be a basis for going after the taxpayers. The immediate result should be an increase in the incidence of filing of estate tax returns among estates, thereby increasing the effective tax base for such. For the hard to track property, at the present time, the BIR will have to rely on ethical motivations to induce proper declaration. However, as indicated earlier this will be difficult given the strong perception of unfairness of the tax, corruption in government, and poor government service. 4. Enforce existing reporting requirements of other actors that assist or partake in the redistribution or transfer of property. Similar to the above, courts, lawyers, banks, stock brokers and real estate brokers can be made responsible for informing taxpayers of the requirement to file estate taxes and for reporting property transfers to the BIR. Penalties for the failure to meet these requirements increase their opportunity costs for facilitating and assisting in evasion, and should cause a reduction in these activities. 5. Formalize sources of documentary requirements related to the filing of taxes.


Much of the accompanying requirements in the filing and payment of estate taxes is sourced from the informal sector. Formalizing these activities should make the production of fake documentation more difficult. The BIR can also adopt a filing form or at the very least a tax clearance form that is more difficult to duplicate. 6. Legislate stiffer penalties for the falsification of public documents. 7. Rationalize and unify the valuations of market values for real property across government agencies. If the observation that taxpayer’s perception of the unfairness of a tax (its rate, base, etc.) motivate them to evade it, then the BIR should re-evaluate its use of zonal valuations to establish market value in the light of their great disparity with that of local Assessors. The large disparity gives the impression that the BIR valuation is unreasonable and arbitrary. There is no reason why one government should use different valuations for the market value of the property in applying two different taxes to the same property. Arriving at values that are realistic and used by both national and local government units is a possible area for research. In the interest of fairness, the research should device methods to capture major shifts in the market values of real property. Furthermore, public participation in arriving at these values may promote greater taxpayer compliance and substantially reduce the perception that they are unfair and arbitrary. 8. Increase taxpayer awareness of the penalties aspect and improve the general perception on the probability of evasion being detected and proceeded against. Making the public more aware of a greater probability of detection and its accompanying penalties decreases the temptation to engage in acts of evasion. Public information programs to achieve this can specify the various forms of noncompliance such as non-filing of returns, under-declaration of assets, etc. A well-informed public should also decrease taxpayer reliance on fixers and/or tax practitioners to assist them. The present program of going after high profile tax evaders does not seem to change the general perception of the low probability of detection. Asked what will be


the most compelling factor that will increase their taxcompliance, a number of the taxpayers said that the BIR would have to go after them personally. Going after all taxpayers is clearly impracticable, but cross-referencing, particularly at the revenue district level, should limit the field from which taxpayers can be selected for random audits. However, it should be stressed that the BIR should take great pains to ensure that these audits do not take on the character of taxpayer harassment and further aggravate taxpayer’s perception of corruption in the agency. 9. Institute procedures to detect the exercise of unlawful discretion and acts of misinformation by BIR personnel and other government personnel. The BIR’s entire audit system requires a separate in-depth study. Accountability mechanisms such as the lifestyle checks need to be credible. Among other procedures, improvement of the audit program of in the BIR, overseen by an honest Commissioner, may bring appreciable results. Trite as the statement may seem, political will is necessary to achieve a clean-up of corruption in the BIR and other government agencies. One limitation is that the corrupt practice can be well hidden, and the effectiveness of an audit to detect and establish evasion will be inadequate, unless conducted by an impartial external party. It is important to point out that while it is taxpayers who commit acts of evasion, their malfeasance may be less chronic than that of the BIR personnel that enable such evasion. Stiffer legal penalties and administrative measures can be imposed on erring BIR and other government personnel. Sanctions against BIR personnel should be such that they are perceived by the public to be commensurate in scale to public perception of corruption in the agency. 10. The government, in general, has to take drastic steps to address the problem of corruption. Politician’s access to BIR personnel for the purpose of influencing tax assessments/rules should be curtailed and penalized. If possible, the BIR should seek exemption from current civil service regulations that tie its hands with respect to taking action against corrupt personnel. Thus, a program of replacing current


personnel with personnel that are competent and honest can be achieved in a few years. The BIR might find that re-staffing might, in the medium term, increase revenue collection, despite its short-term costs. The longer that this perception of corruption is lodged in the public mind, the more it takes on the character of a socio-economic institution. Thus, given the opportunity to evade estate or any other tax, Filipinos will do so.


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Fiscal Studies Group, Congressional Planning & Budget Office (2003) “Reforming Tax Administration” Policy Advisory (Quezon City: House of Representatives) Franzoni, Luigi Alberto (1998) “Tax evasion and tax compliance” in Bouckaert, B. and de Geest, G., (Eds.) Encyclopedia of Law and Economics (Eward Elgar and University of Ghent) Gale,Wiliam G.; Hines, James R. Jr.; and Slemrod, Joel (Eds.) (2001) Rethinking Estate and Gift Taxation (Washington D.C.: The Brookings Institution)

James, Simon R.; Nobes, Christopher (1992) The Economics of Taxation (United Kingdom: Prentice Hall) James, Simon R.; Alley, Clinton (2004) “Tax Compliance, Self-Assessment and Tax Administration” Journal of Finance and Management in Public Services Vol. 2, No. 2 Makati Business Club Taxation Reform Tax Force (2001) Position Papers on BIR’s Voluntary Assessment Program and Gross Income Taxation (Makati: Author) Manansan, Rosario G. (2000) “Improving Tax Administration: A New View from the Theory of tax Evasion in a Corrupt Regime” Policy Notes (Manila: PIDS) Marshall, G.P., (1980) Social Goals and Economic Perspectives (United Kingdom: Penguin Books) Martinez-Vasquez, Jorge and Rider, Mark (2003) Multiple Modes of Tax Evasion: Theory and Evidence from the TCMP (Atlanta: Andrew Young School of Policy Studies, Georgia State University) National Tax Research Center (2002) “Anti-Corruption Measures in Tax Administration” National Tax Research Journal Vol. 14, Issue 5, 1-7 National Tax Research Center (2005) “Profile of Large Taxpayers: CY 2003” National Tax Research Journal Vol. 27, Issue 3, 1-11 National Tax Research Center (2005) “Review of the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Properties” National Tax Research Journal Vol. 27, Issue 5, 1-14 Social Weather Station (2001) “Special Issue on Corruption” SWS Survey Snapshots Vol. 11, Issue 94 National Tax Research Center (2005) “Study on Tax Evasion and Avoidance Schemes on the Transfer of Real Properties” National Tax Research Journal Vol. 27, Issue 4, 1-18 National Tax Research Center (2002) “Tax News Digest” National Tax Research Journal Vol. 14, Issue 6, 26-30 National Tax Research Center (2004) “Theories and principles of Real Property Tax Incidence” National Tax Research Journal Vol. 17, Issue 2, 1-15 Poterba, James (1998) Estate and Gift Taxes and Incentives for InterVivos Giving in the United States (Cambridge, Massachusetts: National Bureau of Economic Research)

Ritsema, Christina M.; Thomas, Deborah W.; Ferrier, Gary D (2003) Economic and Behavioral Determinants of Tax Compliance: Evidence from the 1997 Arkansas Tax Penalty Amnesty Program (United States: IRS Research Conference) Saandmo, Agnar (2004) The Theory of Tax Evasion: A Retrospective View (Helsinki: Nordic Workshop on Tax Policy and Public Economics) Santos, Gonzalo T.; Santos, Emmanuel; Sy, Dante (1994) Taxation: Concepts, Principles, Practices and Trends (Makati: International Academy of Management and Economics) SGATAR- Study Group on Asian Tax Administration and Research (1987) Confronting the Problems of Tax Avoidance and Evasion: Selected Countries in Asia and the Pacific (Manila: National Tax Research Center) SGV & Co., (June 2005) Tax Watch, 1-3 Slemrod, Joel (1998) The Economics of Taxing the Rich (Cambridge, Massachusetts: National Bureau of Economic Research) Social Weather Station (2005) The 2005 SWS Survey of Enterprises on Corruption, Number 5 Stiglitz, Joseph E. (2000) Economics of the Public Sector (New York: W.W. Norton & Co.) Stamp, Josiah Sir (1923) The Fundamental Principles of Taxation (London: Macmillan & Co.) Wagner, Richard E. (1973) Death and Taxes: Some Perspectives on Inheritance, Inequality and Progressive Taxation (Washington: American Enterprise Institute for Public Policy Research) Yoingco, Angel Q., Recente, Lourdes B. (2003) “Is There Double Taxation in the Philippine Tax System?” Asia-Pacific Tax Bulletin (Manila: International Bureau of Fiscal Documentation)

Appendix 1. The law on estate taxes

Title III, Chapter I (Sections 84 to 97) of the National Internal Revenue Code of 1997 governs the payment of estate taxes. The estate tax is levied upon the transfer of the net estate of every decedent 1 , determined by subtracting from the gross estate certain allowable deductions. For a citizen or foreign resident the gross estate includes the value at the time of death of all the decedent’s property, real or personal, tangible or intangible, wherever situated. From this will be deducted the following: Actual funeral expenses, or an amount equal to 5% of the gross estate, whichever is lower, but not to exceed P200,000.00. Judicial expenses of the testamentary or intestate proceedings. Indebtedness. Claims of the deceased against insolvent persons, if such claim was included in the gross estate. Unpaid mortgages on, or indebtedness with respect to, property when the value of such property undiminished by the mortgage/indebtedness is included in the gross estate. Property received by the decedent within five years as a gift, or as an inheritance, where a donor’s tax or estate tax had been paid. The deduction follows a schedule of diminishing deduction depending on how far back the gift/inheritance took place. Transfers by the estate to the government for exclusively public purposes. The fair market value of the decedent’s family home, up to P1,000,000. A standard deduction of P1,000,000. Medical expenses incurred by the decedent within one year prior to his death, but not to exceed P500,000. Property included in the gross estate is generally appraised at its fair market value at the time of death. For real property, it is the higher between the fair market value as determined by the Commissioner and the fair market value as shown in the schedule of values fixed by the provincial and city assessors. The net estate is taxed following this schedule: Net Estate Over: P0 200,000 500,000 2,000,000 5,000,000 10,000,000 But Not Over: P 200,000 500,000 2,000,000 5,000,000 10,000,000 And Over Tax Shall Be: Exempt P0 15,000 135,000 465,000 1,215,000 Plus: Of the Excess Over: P 200,000 500,000 2,000,000 5,000,000 10,000,000

5% 8% 11% 15% 20%


A citizen, whether residing or not in the country; a resident foreigner; or a non-resident foreigner with respect to estate situated in the Philippines.

The liability to pay the tax falls upon the executor or administrator of the decedent, or if no executor or administrator has been appointed or qualified, then upon any person in actual or constructive possession of any property of the decedent. Where the gross value of the estate exceeds P20,000, the executor, administrator or any legal heir shall file with the BIR a written notice of the death of the decedent within two months thereof 2 . For all transfers subject to estate tax, or though exempt, the gross value of the estate exceeds P200,000, or includes registered or registrable property for which a clearance from the BIR is needed for the transfer of the registered owner, the executor, administrator, or any of the legal heirs, shall file an estate tax return (BIR Form 1801). The return must be filed, and the tax paid, within six months from the decedent’s death. It may be filed with any authorized agent bank (AAB), or Revenue District Officer or Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death. However, when the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of their heirs, he may extend the time for payment of such tax or any part thereof not to exceed five years, in case the estate is settled through the courts, or 2 years in case the estate is settled extra-judicially. Statutory Safeguards Among the statutory safeguards to ensure payment of the correct taxes are the following: For claims against the estate, the debt instrument should be duly notarized at the time the indebtedness was incurred, and if it was contracted within three years before the death, the administrator or executor must submit a statement showing the disposition of the proceeds of the loan. The family home must be certified by the barangay captain of the locality. Medical expenses claimed must be substantiated by receipts. The return is filed under oath. Returns showing gross value exceeding P2,000,000 must be supported by a statement duly certified by a certified public accountant containing itemized assets, itemized deductions, and tax due. Judges are prohibited from authorizing the executor or administrator to deliver a distributive share of the estate to any party unless a certification from the BIR that the tax has been paid is shown. Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the estate or donors tax had been paid is shown. Registers of Deeds shall immediately notify the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer or Treasurer


Or within two months after the qualification of the executor or administrator.

of the city or municipality where their taxes are located, of the nonpayment of tax discovered by them. Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledging of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy, or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the estate or donors tax. A debtor of the deceased may not pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the estate tax has been paid is shown, but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. It is prohibited to transfer to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the estate/donors tax has been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the estate tax has been paid. All bank withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of the withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. In case an extension of the period to pay the tax is granted, the Commissioner may require the executor, administrator or beneficiary to furnish a bond, not exceeding double the amount of tax and with such sureties as the Commissioners deem necessary. Documentary requirements In the filing of estate tax returns, the BIR requires the following attachments, as they may be applicable: Certified true copy of the death certificate Notice of death duly received by the BIR Any of the following: a) Affidavit of Self Adjudication; b) Deed of Extrajudicial Settlement of the Estate, if the estate had been settled extrajudicially; c) Court order if settled judicially; d) Sworn declaration of all properties of the estate A certified copy of the schedule of partition of the estate and order of the court approving the same Certified true copy of the title of real properties, front and back pages

Certified true copy of the latest tax declaration of real properties at the time of death “Certificate of No Improvement” issued by the Assessor’s Office where declared properties have no declared improvement Certificate of deposit/investment/indebtedness Photocopy of Certificate of Registration of vehicles and other proofs showing the correct value of the same Proof of valuation of shares of stocks at the time of death Xerox copy of certificates of stock Proof of valuation of other types of personal property Proof of claimed tax credit CPA statement on the itemized assets of the decedent, itemized deductions from gross estate and the amount due if the gross value of the estate exceeds P2,000,000 Certification of the Barangay Captain for the claimed Family Home Notarized promissory note for claims against the estate arising from contract of loan Accounting of the proceeds of loan contracted within 3 years prior to the death of the decedent Proof of the claimed “Property Previously Taxed” Proof of the claimed “Transfer for Public Use” These documents must be submitted upon field or office audit of the tax before the Tax Clearance/Certificate Authorizing Registration can be released to the taxpayer. Additional documents may be required. Penalties and Remedies There are provisions of the National Interview Revenue Code that apply equally to all internal revenue taxes, including estate taxes. The more important ones are found under Title VIII (Remedies) and Title X (Statutory Offenses and Penalties). On the part of the BIR, it may collect delinquent taxes, fees or charges and any increment resulting from the delinquency by distraint of goods, chattels, and other personal property of whatever character, and by levy upon real property. Such property or portion thereof shall be sold to satisfy the tax liability, with a right on the part of the taxpayer to redeem the property within one year from the date of sale. In addition to distraint and levy of property, the BIR may also file a civil or criminal action for the collection of such taxes. On the part of the taxpayer, whenever the BIR finds that a tax should be assessed, he has a right to a preassessment notice, to which he may respond. If an assessment is made, it may be protested administratively by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and to file documents in support of such protest within 60 days from filing of the protest.. If the protest is denied in whole or in part, or not acted upon within 180 days from the submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within 30 days from receipt of the decision or from the lapse of the 180-day period.

Also on remedies, the BIR Commissioner has authority to compromise, abate and refund or credit taxes. He is required to submit to the Chairmen of the House and Senate Committees on Ways and Means, every six months, a report on the exercise of these powers. A compromise is allowed when there is a reasonable doubt as to the validity of the claim against the taxpayer, or when the financial position of the taxpayer demonstrated clear inability to pay the assessed tax, subject to some minimum compromise rate 3 . Where the basic tax involved exceeds P1,000,000 or where the settlement is less than the prescribed compromise rate, it must be approved by an evaluation board composed of the Commissioner and four Deputy Commissioners. Abatement or cancellation of tax liability may be done when the tax or any portion thereof appears to be unjustly or excessively assessed, or when the administration and collection costs involved do not justify the collection of the amount due. The Commissioner is also authorized to credit or refund taxes that have been erroneously or illegally received, or penalties imposed without authority, provided the taxpayer files a claim of credit or refund in writing within two years after the payment of the said tax or penalty. Civil penalties and interest are imposed for certain violations. The BIR imposes a penalty of 25% of the amount due whenever the taxpayer: fails to file any return and pay the tax on the date prescribed; not being authorized by the Commissioner, files with an internal revenue officer other that those with whom the return is required to be filed; or fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. The penalty shall be 50% of the tax in case of willful neglect to file the return within the period prescribed, or of the deficiency tax if in case a false or fraudulent returned is willfully made. The BIR also assesses and collects interest at the rate of 20% per annum on for any unpaid tax from the date prescribed for its payment until full payment thereof. In addition to the civil penalties, certain acts are punishable criminal offenses, such as willfully attempting to evade or defeat any tax, or willfully failing to pay tax, file a return, keep any record, or supply correct and accurate information when such are required by the code. However, all criminal violations may be compromised except those already filed in court, or those involving fraud.


For cases of financial incapacity, a minimum compromise rate of 10% of basic assessed tax; for other cases, a minimum compromise rate of 40% of assessed tax.