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

Table of Contents I. Methods of estate tax evasion Non-filing of return: “staying alive” Reducing taxable estate Simulating transactions. BIR Form 1801 Appendix 3. Description of the study Introduction Objective. 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. forgery and falsification in the transfer of real property Corruption Evasion in the estate tax process (diagram) 21 23 28 31 34 IV. 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. scope and methodology of the study Theoretical framework A summary of the premises of the study 1 4 7 11 II. Certificate Authorizing Registration References . Recommendations 51 Appendix 1. The Law on Estate Taxes Appendix 2.

has gone down consistently since 1997.12 9. While analysts identify the assumed liabilities of. as a percentage of gross national product.01 13. from 13% in that year to 9.739.904 3.505 4.09 12.421. the government’s deteriorating revenue performance remains the principal factor that contributes to the chronic fiscal deficit.976. In 2004 and 2005 the fiscal problem was regarded to be of crisis proportions.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.177 GDP (In Million Pesos) P1.16 10.060 2. 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 PhP0.462 260. Bureau of Internal Revenue In response to the crisis.177 341.9798/kWh.00 12. inefficient government corporations as a substantial source of fiscal pressure.328 2.883. The Bureau of Internal Revenue’s (BIR) tax effort.906.010 468.76 10.549 426. in September 2004.922 2.230 4.306 2.70 10.697 337.727 3. Table 1.47 10.171.320 360.774 314.88% in 2004.210.140 11.802 388. Tax Effort of the BIR (1995-2004) Year BIR Collections (In Million Pesos) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 P211.474 3.631.65 11. and lending to.679 394.665.354.88 Tax Effort Source: Annual Reports 1995-2004. and to 1 .

the BIR Commissioner. Congress passed several revenue legislations. along with the easing-up of NPC losses arising from the electricity rate increase. At the start of the year. This was intended to ease the fiscal pressure from the losses of government owned and controlled corporations. 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. (Manansan.15%. (BIR Annual Reports) The small relative share of Philippine estate taxes to total tax collections finds resonance in other countries. among others.0353/kWh by April 2005. 0. In April 2006.PhP1. provided for the increase in the Value Added Tax rate from 10% to 12% as well as a wider coverage for the tax. On the revenue side. released Revenue Memorandum Order 11 identifying priorities. 2002 and 2004 respectively. somewhat improved the economic outlook for 2006. A Run After Tax Evaders (RATE) program was initiated by former BIR Commissioner Guillermo Parayno in 2005. accounted for 0. The VAT increase. Moody’s credit rating for the Philippines remained negative. 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. the declining tax effort clearly indicates evasion. Even as legislated tax measures increasd tax rates and coverage. Estate taxes contribute a small portion of total tax revenue. (Fiscal Studies Group.13% and 0. procedures and policies 2 .16% of total tax revenue in 2001. Aggregated transfer taxes (estate and donors taxes). These include RA 9334 (An Act Increasing the Excise Tax Rates on Alcohol and Tobacco Products) and RA 9337 that. 2003) Evasion rates on domestic sales (VAT) and income for 1999 are estimated to be roughly 63% and 62%. for the auditing of 2005 tax returns. but Standard & Poor as well as Fitch Ratings both upgraded the country’s sovereign credit rating from “negative” to “stable”. 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. A Tax Computerization Program (TCP) was begun in 1994 to improve the BIRs capacity to verify income information and facilitate taxpayer compliance.

20%) and much lower for some countries where one would expect an effective tax effort. revenues from estate taxes in the United Kingdom and the US respectively were only 0. get a list of landowners and their properties. the Bureau of Internal Revenue appears to view estate taxes as a significant area in which collection efforts can be improved. et. 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).265.66%) and Korea ( (James. 1992) For the Philippines.213. was 0. 2001) A record yield of estate taxes in the UK was reached in 1977. in 1992.1 6. the record yield. between 1990 to 2004.65 59.75 100 Total Source: Annual Report 2004.529. he recommended that the BIR “ identify potential estate taxpayers.21 22. taxes Collection (in million Pesos) 278.4 12. doc. Bureau of Internal Revenue For instance.58 % of total 59. 0. estate taxes would still account for not much more than 2% of total tax revenue.62 80.216.952.56% and 1.21% was reached in 1997.01% for New Zealand and 0. Assuming that tax collection efforts could improve estate tax revenues tenfold. 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.176.7 17. stamp and misc. Percentage shares were higher for Japan (1..12% of total taxes. (Gale. where they are and what kind of policy of attraction must be 3 . amounting to 3% of total tax revenue. Nevertheless.30% for Germany.0 4.03 27.Table 2. travel.06 468.

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.09 0. 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”. It also misallocates resources into unproductive activities for the purpose of cheating.12 0.Table 3. it can seriously undermine the legal and economic system.13 0. NTRC.08 0.14 % of Total Tax Collected 0.16 0.28 344. TRJ) Objective.89 301.12 0.13 0.03 143.67 435.69 417. 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.13 0. 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 180.12 0. The main objective of this report is to 4 .06 676.17 0.10 0.54 143.09 0.17 467.85 317.10 0.69 217.28 180. If rampant and unchecked.50 393. (Tax News Digest.21 0.55 518.10 Source: Statistical Division.03 280.

the detection of evasion by the tax authority should result. 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. describes the roles of other actors. Understandably. Being unlawful. for example by exploiting loopholes in the Tax Code. From interviews with various economic actors. 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. none of the lawyers interviewed admitted to ever participating in. rights and obligations to the extent of the value of the inheritance. Corresponding recommendations on how to prevent or mitigate evasion are a result of these findings.contribute to the efforts towards the reduction of tax evasion in the Philippines by uncovering and documenting practices of estate tax evasion. and under certain circumstances. To reiterate. As an example of this guardedness. 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 1 were strictly followed. the imposition of civil penalties. even if at least one of them was well-known to be adept at unscrupulously going around the law. Illegality distinguishes tax evasion from avoidance which covers legal acts committed to reduce tax liabilities. It is beyond the scope of this study to inquire into the extent of as well as the economic costs of estate tax evasion. gains insights into taxpayer’s attitudes. the imposition of criminal liability. 1 5 . abetting or facilitating tax evasion. The study provides a summary of estate tax law as well as a brief discussion on the characteristics of estate taxes. in the assessment of the proper tax. the opportunities for persuading respondents to candidly share commission or even knowledge of illegal acts were extremely limited. under the rules. 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. 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. and identifies flaws in the administration and enforcement of estate taxes. of a person are transmitted through his death to another or others either by his will or by operation of law. the study identifies methods of estate tax evasion.

they employed other persons (their own friends. forty-six persons were interviewed: 11 Department of Finance and Bureau of Internal Revenue personnel (former and current). the interviews revealed that evasion is far from difficult and there is ample opportunity to evade estate taxes. the respondents revealed their attitudes towards estate and other taxes. who flatly stated that. For example. admitting to having committed acts that clearly constituted evasion. 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. In total. one of these was the relative share of BIR personnel to the tax received by the government. so that prospective subjects would agree to be interviewed. The other 50% placed their trust in the researchers’ assurance of confidentiality. which verged on the incredible had to be validated. it became obvious that the trail of evasion had to be followed and many statements. 6 . In contrast to tax practitioners. 1 accountant that specialized in taxes. and that when clients made that decision. 5 lawyers. Assessors and Civil Registry). 4 bank officers. Another instance of respondent’s lack of candor was that of a BIR officer. About 50% of those interviewed (mostly government personnel and tax practitioners) were unaware of the specific objective of the study. However as the research progressed. 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. 2 fixers cum real estate brokers. 4 local government personnel (Register of Deeds Officer. “It is impossible to evade estate taxes. The study had originally intended to interview only a few key informants. and 19 taxpayers. This omission was necessary in some cases. they sometimes lent guarded disclosure but oftentimes their full cooperation. heirs were more forthright. contacts) and only returned to their lawyers when the act of evasion was completed.” 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. However. Most respondents expressed a desire to contribute to the improvement of the tax system. Aware of the purpose of the study. While they explained the reasons for committing acts of evasion or participating in the commission of evade was made by clients.

In this case. against future medical expenses. 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. who depending on their circumstances. Thus. Legal as well as economic literature on estate taxation state that since the tax is levied on the estate. 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. may or may not be in a position to respond in a manner that will decrease the disutility of bearing the tax burden. theoretically the burden of the tax is on the estate itself and carries no personal incidence. 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. for example. In the altruistic model. The preference leads the creator of an estate to save for precautionary reasons. This burden depends on the motivations and perceptions of the parties involved with respect to the estate. estate creators may engage either in outright tax evasion or undertake 7 . 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. In circumstances where this model applies the incidence of the tax inevitably falls entirely on the accidental beneficiaries. 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. However. However. 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.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. 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.

Furthermore. this cooperative behavior may be more evident because Filipino parents are more able to 8 . In this case. frequent visits are exchanged on the basis of a delayed payment. 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. in Filipino culture the exchange relationship between generations is generally observed. retaining only the assets that yield an income sufficient to ensure them some level of comfort. driving. it is necessary to consider the affective relationships within the Filipino family and the way that wealth is commonly regarded in Filipino culture. 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. it may be too facile to attribute just one of the above-mentioned motivations to the creators of estates. Barring a conflict within the family with respect to the distribution and control of these assets.e.appropriate estate planning measures to decrease the tax liability and maximize the benefits received by their intended beneficiaries. In addition. the bequest. 2001) Acknowledging the possibility of rare exceptions. there is the added dimension of family members regarding these assets as family wealth. For example. In the meantime bequest makers have the added advantage of having some measure of control over their future beneficiaries’ actions and activities. 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. Exchange models treat transfers and bequests as payments for services from their children. and the like or more personal services such as enjoyable company. It may be more realistic to recognize that the makers of bequests derive utility from different combinations of all three motivations. Exchanges in the form of goods that can be ordinarily secured through the market such as housekeeping assistance.. Other altruistic bequest makers may cede control over assets in favor of the next generation. (Gale et. While assets acquired by parents are recognized by law and by tradition as private property. 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..

al. (Alm. 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. and may engage in tax avoidance or evasion activities. 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. If decedents. undated.command cooperation and have greater authority even over adult and economically independent children than would parents in western economies. 1994. 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. 2000) 9 . altruistic motives towards the next generation as well as cooperative behavior will be exhibited within the family group in coping with. 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. (Santos et. 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. higher tax rates and lower probability of incurring penalties increase incentives for evasion. given some risk of being discovered and paying a penalty. tax evasion is similar to a portfolio choice where a utility-maximizing taxpayer decides how much income or assets to report for tax purposes. On the other hand. in their lifetimes. avoiding or evading estate taxation. if they so desire. In the AllinghamSandmo model. Thus for purposes of this study it is hypothesized that with the exception of an unambiguously accidental bequest. 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. Gale et. But since the creators of estates have no direct tax liability until they Manansan. This results in the prediction that a higher penalty rate or a higher probability of detection discourages tax evasion.

2003) Erard (1993) found that the use of a lawyer or a certified public accountant is significantly associated with increased noncompliance. Identifying alternative modes of income tax evasion. largely wage-based. 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. al. income understatement and overstatement of deductions. James (2004) relates increases in tax liability. The lower income levels exhibit greater compliance since their incomes. However. The tax collector takes into consideration the 10 . that information and education were inversely related to tax delinquency. who may or may not conspire to evade tax liability. are generally subject to 3rd party reporting. 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. lack of financial capability increases the relative opportunity cost of compliance. Asserting that increased income inequality increases noncompliance. The taxpayer factors in the possibility of bribery which increases the probability that successful evasion can be accomplished.Bloomquist (2003) examines the relationship between income levels and the opportunity cost of compliance to income tax evasion. that lack of funds was the most common reason for the initial delinquency and that prior state contact. Martinez-Velasquez (2003) found that increased enforcement in deterring one mode decreases compliance in the form of the alternative mode of evasion. (Ritsema et. Ritsema’s study (2003) based on the results of a tax amnesty program in Arkansas. such as receiving a letter from the state were significant factors for taxpayers’ participation in the amnesty program. 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. 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.. found that tax delinquency was more evident among single and younger persons.

friends and acquaintances. 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. 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. A basic premise of this study is that tax evasion will be greater as opportunities for evasion are perceived present. Erard and Feinstein (1994) discuss the effects of ethical and social factors. 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. 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. prevalent non-compliance.utility of receiving a bribe against the disutility of penalties that may be imposed upon him if the malfeasance is discovered. Etzioni (1986) found that public perception that the tax structure or system of enforcement is unfair increased the likelihood of evasion. such that it is more the norm than the exception will encourage and exacerbate noncompliance or evasion even more. there exists a motivation for estate tax evasion. A summary of the premises of this study Since taxpayers’ utility is decreased by the presence of an estate tax. Thus. However. such as guilt and shame on the taxpayer’s decision-making. The Filipino propensity for employing informal networks among family. Finally. The decision to evade will be considerably influenced by their awareness of this possibility. Taxpayers will be much less likely to take the course of evasion if they do not believe that it is possible to escape detection. 11 . 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. Ritsema’s above-mentioned study found that morality was not a significant factor in the decision to avail of the tax amnesty.

12 . e. it can be hypothesized that it is difficult for the very wealthy to hide their wealth. aid in the evasion of estate taxes. Therefore. particularly with respect to asset valuation. they are conceivably in a better position to engage professional and expert assistance for tax evasion. no conclusions as to the propensity of different income or demographic groups to evade estate taxation are possible within the scope of this study. methods and opportunities for estate tax evasion will differ according to the different types of assets included in 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.Although. the deterioration of real income provides a greater opportunity cost in complying with estate tax liabilities.g. While wage-earners have less opportunities for evasion. It is also presumed that existing evasion methods undertaken with respect to other taxes. However. which is largely formal sector and more obvious to all. keeping 2 sets of books for the purpose of evading income taxes. Assets differ in the ease or difficulty with which their existence can escape detection as part of an estate.

e. being a once per generation tax. Advantages that members of the family once enjoyed are also reduced by the loss of the decedent’s human capital . Another argument is that the taxing of estates can contribute substantially to the degradation of small businesses and family farms. Overall.II. experience and network or personal connections. it is argued that estate taxation influences changes in the allocation of resources. i. there is no clear evidence that estate taxation affects the allocation of resources any more or less than do income or other taxes. estate taxation exacerbates these losses. 2001) Efficiency On the grounds of economic efficiency.. encourage spendthrift behavior. we briefly discuss the arguments against it. Studies are unable to reach unambiguous results with respect to the effect of estate taxation on labor supply. 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. With respect to the effects of estate taxation on family endeavors. it is surmised that the tax has different effects according to 13 . (Gale and Slemrod. penalize effective entrepreneurship and reduce the amount of saving and additional investments made by the creators of estates. it may have smaller disincentive effects than income taxes. In fact. savings and investment. Essentially a tax on wealth.knowledge. and thus impair economic growth. Moral arguments It is argued that that taxing the dead is morally repugnant. Estate taxation Acknowledging some negative arguments Before stating the various grounds that justify the imposition of estate taxes. it may affect labor supply decisions.

is also be transmitted to some degree but it is not taxed. It provides for and ensures the maintenance of the legal and social infrastructure within a given economy. it is argued that estate taxation yields relatively smaller revenues when compared to other taxes. without assisting the remainder. The low revenue yields from estate taxation raise questions as to the effectivity of estate taxes in achieving a redistribution of wealth. Furthermore. (Slemrod. has on the other hand. large compliance costs. As corollary to the above. 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. it is a rightful claimant in the distribution of the estates of decedents.” Finally. 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. There is also the argument that estate taxes are inequitable and discriminate against physical capital because human capital. (Wagner. (Santos et. that which rightfully belongs to state cannot be given away by the decedent. it provides the service of ensuring that the distribution of estates is in accordance with a decedent’s wishes.1998) Since the government is a citizen’s partner in the creation and preservation of value and size and nature of the enterprise as well as the degree to which the endeavor was dependent on the decedent. However. 1994) 14 . 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 existence of a lower limit for the value of net estates to which the tax applies may partially address this concern.

al. Although difficult to value accurately. (James. which would entail much greater administrative costs .” (Gale et. and the ability to dis-save. 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. An instrument for the redistribution of wealth The most commonly acknowledged rationale for the imposition of estate taxes is the redistribution of wealth. Furthermore. It confers on individuals a relatively higher social status. So many other factors affect asset and income distributions that it is not surprising if the 15 . a greater ability to take advantage of economic opportunities. 2001) When a decedent has accumulated wealth that is more than for his personal needs. 1994) Estate taxation can be viewed as a substitute for an annual tax on wealth. (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 A greater ability to pay is likewise acquired by beneficiaries upon receiving an inheritance. it is an unearned ability. 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.particularly in terms of achieving annual valuations of net worth. it is difficult to attribute a redistribution of wealth or income to the effects of this tax alone. unless estate taxes carry tax rates that verge on conficscatory.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. a taxable estate is created and this is indicative of an ability to pay. This is based on the perception that the possession of wealth more easily begets wealth and therefore decreases equality of opportunity within an economy. which provides them with economic security for old age or for unexpected economic downturns. However...

in isolation from these other income determinants. 1973) to these assets and possibly otherwise overlooked and forgotten. if not singly. being progressive. if it can be reasonably posited that without estate taxation inherited wealth decreases economic equality then there is an economic justification for its imposition. as part of the entire system of taxation in an economy. In particular. 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. In fact. on the other hand. all taxes purport to carry redistributive objectives and effects. which can be considered emotionally stressful for most families and of reducing the value of expected wealth that intended beneficiaries of an estate receive. Still. partake of this redistributive effect. aside from contributing to the potential of a progressive tax system to 16 . In effect. Rationale for the imposition of estate taxes: Summary For taxpayers. In addition. They are. Thus one can rationally claim that estate taxes. assets of value that may or may not yield a significant income stream may easily escape annual income taxation. 1994). a convenient instrument for the revelation of taxable unless regressive in character. The “back-tax theory … looks to death taxes as a means of collecting taxes due from…the decedent during his lifetime.” (Santos et. An assessment of their value at current market prices in order to effect their transfer reveals the appreciation of these assets.redistribution of either cannot be attributed to the imposition of estate taxes . Thus. Since they have not been transferred these assets escape capital gains taxation on their appreciation over the years. capital gains has been “locked in” (Wagner. estate taxation embodies the undesirable qualities of being levied at a time. 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.

tangible or intangible. Transfers by the estate to the government for exclusively public purposes. Basic features of the law on estate tax Title III. or an amount equal to 5% of the gross estate. since the state can consider itself to partake in the creation and preservation of wealth. Finally.000. 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 deduction follows a schedule of diminishing deduction depending on how farther back the gift/inheritance took place.000. wherever situated. estate taxation likewise serves to patch loopholes in the tax system.000. A standard deduction of P1. or as an inheritance. Chapter I. without which there might not be any estate at all. up to P1. These are the following: Actual funeral expenses. Indebtedness. real or personal. (See Appendix 1) A gross estate includes the value at the time of death of all the decedent’s property. The estate tax is levied upon the transfer of a net estate arrived at by subtracting from the gross estate certain allowable deductions. it can likewise claim to partake in the wealth created and preserved that is embodied in an estate. The fair market value of the decedent’s family home.00.000.achieve greater equality of opportunity. of the National Internal Revenue Code of 1997 governs the payment of estate taxes. Judicial expenses of the testamentary or intestate proceedings. where a donor’s tax or estate tax had been paid. 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. Sections 84 to 97. 17 . whichever is lower. but not to exceed P200. Property included in the gross estate is generally appraised at its fair market value at the time of death.000.

franchise.. partnership profits. 1998) 18 . tangible personal property and intangible personal property. and the tax paid. within six months from the decedent’s death. bank deposits.000. or if no executor or administrator has been appointed or is qualified. The liability to pay the tax falls upon the executor or administrator of the decedent. then the liability falls upon any person in actual or constructive possession of any property of the decedent.e. promissory notes. Coverage of estate tax Assuming that the decedent is a Filipino citizen or an alien residing in the Philippines. 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. receivables. but not to exceed P500. these taxes characteristically apply to transfers above some minimum value and apply progressively greater tax rates as the value of the transfers increase. wherever situated. the gross estate of a decedent includes real or immovable property. bonds. Intangible personal property includes credits.(de Leon. rights of usufruct and any other interests. any right in the nature of property but less than title”. Interest is “ a general term used to denote a right to have the advantage accruing from anything. The return must be filed. dividends. 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. i. The Philippines levies an estate tax. In all modern tax systems.Medical expenses incurred by the decedent within one year prior to his death. corporate stock.

The principle of horizontal equity applies to 19 . Deductions for judicial expenses. and war damage payments. 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 for funeral expenses add up to P 2.000 or more that were conveyed for less than their full consideration).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).000 are also allowed. 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. estate taxes will be applicable only to estates bequeathed by a single or widowed individual with a gross valuation of over P 3 Million. accrual from SSS. Specific exemptions are granted to certain components of the decedent’s assets such as GSIS proceeds/benefits. For married couples. plus the additional allowable deductions of P 500. one half of community property is deemed to belong to the spouse of a decedent and does not form part of the gross estate. the deduction for own residence of up to P 1 Million.000 for medical expenses and up to P 200. Applicability In practical terms. proceeds of group life insurance policies taken by employers.000. which can conceivably be greater than P 100. The standard deduction of P 1 Million. Together these deductions will leave a net estate valued at less than P 200. and automatically escape estate tax liability.7 Million.

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. valuation and collection. Additional difficulties in valuation arise when there are problems or lags in the division of the estate. However.beneficiaries only in so far as they share equally or proportionally in the amount that will be foregone to taxes. 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. An estate tax is desirable for its relative simplicity in terms of administration. from an administrative point of view. 20 . the valuation of individual inheritances among a number of heirs is much more difficult to achieve than the valuation of an entire estate. without differential consideration for their varying economic positions or relationship to the decedent. Even if lower tax rates apply to a tax based on individual inheritances. which can cause lags in tax collection as well. Individual inheritances from an estate become subject to relatively lower tax rates as the number of beneficiaries increases. an inheritance tax displays the desirable quality of horizontal equity. On the other hand.

These basic methods take many forms. While deaths are registered with the local Civil Registry Office. The local Civil Registry sends monthly reports of deaths (along with other civil registrations) to the National Statistics Office. though exempt from tax.III. the executor. shall give a written notice thereof to the Commissioner. and we discuss them as they were revealed by the interviews. . or administrators/executors of the estate.In all cases of transfers subject to tax. 21 . The obligation of notifying the BIR of the fact of death falls instead upon the heirs of the deceased. such fact does not automatically reach the BIR.000). 89. or within a like period after qualifying as such executor or administrator. within two (2) months after the decedent's death. and that an estate exists for transfer to heirs. but also because there is no administrative link for this purpose between the Civil Registry/NSO and the BIR. and by under-valuation of the estate assets. Section 89 of the National Internal Revenue Code states: SEC. there are three basic methods by which estate taxes can be evaded: by non-declaration of all or part of the gross estate. the gross value of the estate exceeds Twenty thousand pesos (P20. by over-declaration of estate liabilities and other allowable deductions. 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. The BIR is not furnished a copy not only because a small proportion of decedents leave estates large enough to incur estate tax liability. Methods of estate tax evasion Conceptually. administrator or any of the legal heirs. which is the central depository of all civil registry documents. or where. Notice of Death to be Filed. as the case may be.

806 23.206 28. ** Philippine Yearbook. as one BIR official put it.581 241.373 Number of Deaths (50 yrs. etc.Heirs that do not have the intention of filing an estate tax return expectedly do not file such notice.272 191.211 22..765 24.919 30. 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. Table 4. NSO.043 206. *** NSO **** 2003 Vital Statistics Report.270 222. 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. “It is possible 22 .541 21. 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.312 23.144 219. From the lawyers interviewed.759 205. The field research indicates that the non-filing of returns is a problem. NSO While we did not encounter an interviewee who had personally committed it.089 **** not available Sources: *BIR Annual Report.487 27.510 22. 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. A death certificate is required for transactions such as the claiming of insurance and death benefits. old and above)** 178. Still.816 258.070 23.896 216. an extreme measure to hide the fact of death is the non-registration of death with the Civil Registry.233 189. transfers are mostly by sale and donation. 2004.786 26. permits for burial.458*** 258. 2005.

there was a time when they would visit funeral parlors to see who had died.2 Million in revenue. 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. through methods discussed below. According to one BIR person.for a person to live for hundreds of years. the BIR and other government agencies can be unaware that an estate has been distributed.” A Civil Registry officer agreed that a person can remain alive for as long as his death is not registered with them. 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. The registration of death can also be registered at a later time. However. They also looked at obituaries. This program yielded P2.6 Million ( 2. Reducing taxable estate When heirs or administrators of estates decide to file an estate tax return. 23 . jewelry. this practice is not an institutional program. declared in the gross estate.065.8%) was from estate taxes. 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. and inform the heirs that they had to file estate tax returns. If information on the fact of death is not forthcoming to the BIR. Effective until January 2006. art work and other valuables are seldom. if at all. of which P 57. 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. clearly it is its responsibility to exert efforts to get such information. taxpayers that availed of this form of administrative amnesty were assured of being the last priority in audit and investigation. Heirs can wait for a more propitious time to sell real property.

are registered with the Land Transportation Office and a change of the registered owner requires documentation. legacy or inheritance. for instance. the Land Transportation Office has no way of knowing if the supposed seller of a vehicle is alive or deceased. Under the Internal Revenue Code. it shall not allow any withdrawal from the said deposit account. they acknowledge that the enforcement is lax and it is seldom complied with by family and other non-listed corporations. A BIR official noted that in the late 1980s. it is prohibited to transfer to any new owner in the books of any corporation.e. however.It is expected that non-declaration will be harder for personal property subject to some form of registration. unless a certification from the BIR Commissioner that the estate/donors tax has been paid is presented. or jointly with another. obligation. or industry organized or established in the Philippines any share. The Internal Revenue Code provides that if a bank has knowledge of the death of a person. However. business. 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. Shares of stocks in corporations are another personal property with some form of registration. Heirs simply continue to renew the registration under the name of the deceased. In addition. sociedad anonima. is easily subverted. held jointly with another. i. Non-declaration is even easier if the bank accounts are “and/or” accounts. partnership. unless the Commissioner has certified that the estate tax has been paid. bond or right by way of gift inter vivos or mortis causa. While tax lawyers say that this is enforced in publicly listed companies. cars are also more often not declared. Cash on hand is another form of personal property generally not declared but there exists a statutory restriction on monies deposited in the bank. Several heirs 24 . but the policy was withdrawn sometime in the 1990s. 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. Such restriction.. who maintained a bank deposit account alone. Even when they are sold. Cars. 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. tax clearances from the BIR were required for all second hand car sales.

This can take a few weeks. the heir/joint account holder first issued checks to consolidate the various foreign accounts into one.e. Then one check was issued to a Philippine account. even in foreign accounts simply by issuing checks. 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. 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. 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. 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. recounted that the bank allowed them to withdraw the cash for fear of offending them. Banks have a strong motivation to maintain friendly and helpful relations with their clients. In cases where the decedent has a Trust Account with a bank. 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. losing them as clients.. One respondent whose parent suffered an accidental death. According to a bank lawyer. Friendly accommodations by bank personnel are not surprising. In some cases. 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. heirs were advised to do so by “helpful” bank personnel. In practice. i.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. Since telegraphic transfer has amount limits. the withdrawal or transfer of accounts can be done without the requisite BIR certification. Even after the death of a joint-account holder. 25 . The latter check took a number of weeks to clear but the transfer was accomplished without incident. 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. 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”. The bank then required the presentation of a tax clearance before allowing withdrawal. This happened after one of the heirs informed the bank of the decedent’s death and requested the freezing of his accounts. a Certificate of Aggregate Landholdings from city and provincial Assessor’s offices. 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. The only instance we encountered when the account was frozen by the bank was in a case where the estate was contested. However. Still. 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. 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. In addition to other documentation. 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.000 and greater are specifically reported. Revenue District Offices also require. since the enactment of the Anti-Money Laundering Law. individual withdrawals of P 500. 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. 26 . to get a listing of the property in the name of the decedent. real property does not escape non-declaration. They believed that this was theoretically possible and legal but stated that the BIR was unlikely to know which bank to inquire from.

the BIRs zonal valuation is generally much higher.Under-valuation of Assets The law on estate taxes states that real property should be valued at its fair market value. legally or otherwise. The zonal valuation system of the BIR makes it difficult for the taxpayer to undervalue the land itself. However. the approval rate of these applications for lower land valuations was between 80% to 90%. the local Assessors and the Revenue District Officers (RDOs) in estimating the value of real property. according to another BIR officer. for as long as an estate is not contested. a tax return can undervalue a property or seek reconsideration for a lower valuation of a property by several means. But. According to one lawyer. In some areas it is over 50% greater. or that it is likely to be in the path of an infrastructure project in the near future. not necessarily in relation to estate taxation. He added that the number of applications is relatively small because people are not generally aware that they have this option. According to one BIR officer. 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. their examiners seldom take the trouble to make ocular inspections of the properties declared in a tax form. 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. Presumably. Table 6 shows the number of applications for reconsiderations from 2001 to 2005. Improvements on the property can be omitted. 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. the BIRs zonal valuations minimize discretion by taxpayers. 27 . whichever is higher. the under-valuation of property is relatively easy to achieve. However.

000 respectively. Applications for Reconsideration of Land Valuation Year 2001 2002 2003 2004 2005 Source: Statistics Division. indebtedness. claims against insolvent persons are among the other deductions from a gross estate that an estate tax return can maximize. using various methods. This may be when property is sold to a third party. the cost of legal proceedings related to the disposition of an estate. Lawyers’ fees. In other instances. These are credible for as long as they can be made to look fairly worn. one set of heirs declared a condominium unit as the decedent’s residence. forgery and falsification in the transfer of real property For real property that was not declared. not the family home where he actually resided. In order to claim the P1 Million deduction for a decedent’s residence. or when the heirs finally decide to transfer the title to their own names. 28 . There are instances when the estate tax return is eventually filed and estate taxes paid are paid accompanied by penalties. Simulating transactions. According to one lawyer. taxpayers evade the payment of estate taxes altogether.000 and P 200. either because no estate tax return was filed or because there was non-declaration in the return.Table 5. taxpayers face the problem of how to effect the transfer of title when the need for such arises. 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. it is fairly easy to fabricate IOUs (to the decedent). The latter had been transferred inter vivos to the youngest heir.

or the capital gains tax in case of a sale. It merely accepts documents required to register a transfer of title. it is clear that the heirs are able to delay the payment of the tax to a later date without payment of penalties. The transaction is a real transaction of sale. particularly the donor’s tax in case of a donation. 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). such as the fact that the seller is dead and the actual date of the transaction. Typically this is resorted to in transferring the title of ownership to heirs. 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. a person appropriately nicknamed “The Golden Hand” is known to apply his talents to providing this particular service. 29 . Certain facts are also falsified. but by some other transfer transaction such as sale or donation. “Simulated” or fake tax clearances are even available there. 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. but it bypasses the transfer of property to the heirs by inheritance. Through their lawyer the majority of his real assets were transferred to a family corporation after he had died. The BIR is one step ahead in this case since it requires that buyers and sellers have a Tax Account Numbers (TIN). the estate tax is evaded altogether by transferring the title directly from the name of the decedent to the buyer.One method used is the simulation of a transaction. But while some tax replaces the estate tax. In one city government office. In instances where the property is sold to a third party. 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 transfer appears not to be one that is effected by inheritance. but can instead be confined to the particular property which the heirs desired to transfer. The function of the Register of Deeds is purely ministerial. The signature of the decedent needs to be forged. Note that a tax may still be paid for the simulated transaction. Also. One wealthy decedent left specific instructions with his heirs that there should be no obituary published upon his death. It does not investigate the validity of information presented to it. Several tax practitioners/lawyers.

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. 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. they just say that there is no such form. 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.” In contrast. If this is correct. But. Combining this fact with the inability of the RD to know the legal status of property sellers and buyers. we only have one and it is our bread and butter. there is a form in the RD addressed to the LRA with a copy furnished to the Revenue District Officers of the BIR.” He also stated that in the provincial areas.” In this opinion. this taxpayer had very “good” relations with the city government offices. It is always important for them to facilitate the transfer of property in as little time as possible and they cultivate these relationships. even capital gains and donees taxes. 30 . such as the local Register of Deeds and the BIR. But the RDs respond with “You people have many different taxes from which to make money from. so that he virtually escaped other taxes as well. these were occasional and not regular visits. one can safely conclude that inter vivos transfers can easily escape almost all tax liabilities. even if the purported buyer is a minor. a good relationship with the government offices that process property transfers. In addition. According to him. so no one will find out. 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.According to a real estate broker. for the last ten years. But in the NCR “if you ask the RD. it is possible to register a property to a potential heir upon purchase. is a necessary part of their stock in trade. BIR Commissioners have been talking with the RDs to coordinate with the BIR. this is relatively safe to do.

000. 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. A week later they were advised that all the papers were ready. “package deals” which include documents. the RD.000. this was substantially reduced to P4. a well-known business that had substantial real estate. government officials have no 31 . we ask them if they plan to sell the property. although it was unclear how these are recorded. is not free but is completed within a week. One set of heirs inherited.000 in cash. They paid the BIR P 2.” Several respondents. After negotiations. not to pay the tax. forgery of signatures if necessary. and they paid an additional P2.000. If they don’t we just advice them not to transfer it. A BIR officer admitted that “sometimes when we see that the taxpayer really cannot afford to pay the tax. This transaction. They said that they did so because they received assurances from their lawyers that there was no chance of detection.000 in cash as a sign of good faith. and other government offices stated that “corruption is systemic. and “professional fees” for persons in the Registry of Deeds. They saved “more than 50%” in estate taxes by giving BIR officials a bribe. The real estate agent who regularly dealt with the BIR. 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. of course. etc. are available from the BIR in their area. Another set of heirs had an estate tax liability of P14. Another lawyer stated that penalties and surcharges are negotiable.000. They were shocked to discover that the receipt from the BIR was only for P1. among other things. one could secure these “package deals” in other localities.000! According to the real estate broker. admitted that they paid a substantial amount to BIR officials.000. with large inheritances.000.000. documentary stamps.Corruption 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.

‘Ito lang ang kaya namin. but he acceded that when the top management of the BIR is sincere. i. This lawyer also had a client who inherited an estate worth P1. One wealthy taxpayer/client paid the right amount of capital gains tax.. which amounted to P3. He recounted that upon taking on the post.” However this statement is taken. the BIR refused to recognize the diminishing deduction due to an estate that was worth less than P10.e.” A lawyer stated the obvious that it is to the advantage of BIR personnel that taxpayers do not pay the right amount of taxes. Because of the delay the client’s legal and other fees were piling up because the sale of the property could not be completed.6 million but it took the lawyer more than 9 months to secure the tax clearance from the BIR. but by 2006 the BIR had not yet released the tax clearance. it is at the very least an open admission that BIR personnel do have the capacity to “negotiate” tax liabilities.interest in making the right tax assessments. one BIR Commissioner met with the examiners and told them. even at the highest levels of government. His reply was that corruption was prevalent at all.000 even if an estate of that size should have been tax-exempt. kayo na ang bahala gumawa ng paraan. “The salary of BIR personnel is so low that no one can survive on it.000 for heirs whose parents died within a month of each other. We inquired of a BIR officer whether it was possible to reduce or eliminate corruption. examiners will be less corrupt. The heirs had paid P100. Another lawyer recounted that it is sometimes more difficult to pay the correct taxes since BIR personnel have nothing to gain from this. the client went to the BIR to inquire about the estate’s tax liability. It is practically a statement from the government saying. The lawyer recounted several instances in which the BIR would not assist taxpayers who had paid the correct taxes. One BIR officer frankly stated that. All told.)’ I know many examiners na hindi nangangwarta nang higit sa pangangailangan nila (do not extort more than the money they need to live).000 in estate taxes in 2002. The BIR made her pay P30. (This is all we can afford. increase or decrease them as it suits them. it would have profited the taxpayer to just bribe the BIR. “In the past. you took 70% for 32 . In another case.000. it is up to you to find the balance. Before consulting the lawyer.5 M.

In particular. you will reverse the shares and give 70% to the government. From now on.yourselves and gave 30% to the government. In relation to politicians he added that the BIR was saddled with political appointees who had no interest in serving government goals. he mentioned members of Congress. 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. 33 .

decide to settle estate tax Penalties/ surcharges can be “negotiated” BIR issues CAR (Certificate Authorizing Registration) 34 . 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.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 Death 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. Audit results can be “negotiated” Heirs need to transfer property.

but all of them claimed to have been caught by surprise at having to deal with estate taxes. inter vivos transfers are rare because the creators of bequests are afraid to lose control of their assets while they are still alive. unless there 35 . parents’ lack of confidence in the manner their children will manage assets (especially married children) and delicadeza on the part of heirs. Several lawyers and BIR officers expressed the view that many individuals were unaware of the need to file and pay estate taxes. Thus.. 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. the strong authoritarian character or secretiveness of the decedents. According to them. 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. 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. Among the reasons they mentioned for this lack of preparedness were: ignorance. The heirs interviewed were generally from wealthy families. In addition. highly educated and several of them were involved in running the family businesses. which came much later in time and long after the period for settling estate taxes had lapsed. Although life insurance policies can be purchased towards meeting estate tax liabilities. In some cases.e. Others are superstitious about making provisions that are related to their deaths. i. not wanting to display an interest in the property and in the death of their parents. heirs settled the estate only upon the death of their remaining parent. beyond providing heirs with individual residences. none of the heirs interviewed mentioned having received substantial life insurance proceeds.IV. families did not want to distribute the estate while the deceased was still survived by a spouse. In deference to the surviving spouse.

In those circumstances. liquidity gains were threatened with being reduced by the estate tax. in their lifetimes. One 88-year old respondent had transferred all his assets to his children and kept only his cash assets. none of the taxpayers mentioned administrative difficulty in the settlement of estate taxes as a disincentive to compliance. and it was unjust to further tax the transfer of their property to members of their own families. However. been paying their fair share of income. Heirs believed that decedents had. Several taxpayers who were aware of future estate tax obligations were taking steps to escape it. all of the heirs interviewed were engaged in taking steps to gradually make inter vivos transfers to their children. all the taxpayers interviewed expressed the view that the estate tax rate was distressingly high. Incidentally. 36 . Having made some calculations of his expected lifespan. another respondent in her 80’s was gradually selling all her property and dividing the cash proceeds among her children. after having dealt with estate taxes. they find themselves particularly averse to estate taxes. 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. Stressing that it was a tax that was required of them over and above other taxes. he planned to spend as much as possible before he died. Attitudes towards estate taxes Surprisingly. property and other taxes. For the same reason. and fear of penalties can lead taxpayers to resort to evasion. even more so when it was subject to interest charges and administrative penalties. In sum. lack of awareness. They expressed strong feelings of unfairness in the imposition of estate taxes. lack of liquidity. 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. unpreparedness. “rather than give it to the government”. it has to be acknowledged that when heirs have to sell inherited property just to meet estate tax obligations.was a perceived urgency in transferring titles of property taxpayers chose not to promptly file the return.

The effectiveness of the government in eradicating corruption was perceived by 27% of the population as “hardly effective”. many other factors act to strengthen the motivation to evade estate taxes. 66% of them believed that there is a “lot of corruption in the public sector. 2001) Enterprise managers were surveyed by SWS in 2005. In addition. 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”. There was a strong feeling that evading taxes was excused since tax revenues would only go to corruption and not to improved government services. However. In the same survey. Taxpayers felt that corruption in government was prevalent and that government officials were not rendering service to the public. 75% of survey respondents stated that “if they knew more about where the taxes they pay go. 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”. Therefore. they would pay more readily”. 37 . However. even taxpayers who normally comply with their tax obligations may be tempted to evade estate taxation. SWS Surveys on corruption corroborate the views expressed by respondents. as will be shown below. (SWS. 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. by 16% as “not at all effective” and 4% believed that the government “was not doing anything at all” about corruption. the motivation to evade is strengthened by the fact that the evasion being contemplated is a one-time act not a chronic one.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.

In fact. the incentive lies in the clearance requirement in order to transfer the title of such property. who “negotiated” with and eventually paid a hefty sum to BIR personnel. and lends credence to their estimation that tax evasion can safely be achieved. if they thought that the BIR would eventually go after them. 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 general perception of all those interviewed was that the probability of detection. Where the heirs see no immediate need to effect the transfer of title of ownership. Rather. was very low. heirs realized that the actual probability of detection was extremely low. said that they would probably have paid the tax in full. it does not appear that the principal incentive lies in a higher probability of detection. They were given an assurance by the lawyer that there was little or no possibility that their evasion would be detected. particularly with the collusion of BIR personnel. The taxpayers only have a general idea that there is some penalty on evasion. The paper trail as well as personal knowledge by cooperators in the evasion somehow increases the probability assigned by the heirs to detection. On the part 38 . It influences taxpayers’ decisions about the probability of success in tax evasion activities. the BIR officer would not enter their estimated estate tax liability into the computer until “negotiations” had been completed. the penalty factor does not appear to be very important. Correctly. Since the general perception is that the probability of detecting tax in estate taxes is very low. even in the classes of property generally declared when an estate tax return is filed. but there is no high level of knowledge of the specific penalties and of related factors such as remedies. they also see no compelling reason to file the estate tax return. forging the signature of the deceased).Taxpayer’s perception of the probability of detection The perception of corruption in the BIR strengthens the motivation for engaging in tax evasion activities. This heir mentioned that in order to escape detection. In fact. This is partly subjective. One taxpayer. 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. when both parties (tax collector and tax payer) had an interest in effecting the evasion. so that certain heirs will be bolder than others in regard to the evasion method used (say.

but in order to close the sale. It is common that they encounter property for sale. Some lawyers gave heirs advice on which properties to declare and not to declare. and have regular dealings with all the government agencies (BIR. the estate tax of which has yet to be settled.of the taxpayer. Register of Deeds. 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. have hardly had to declare their true incomes. Their primary objective is the sale of property. Some of them acknowledged the existence of “unscrupulous” practitioners. 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. it can be surmised that their lawyers. Local Assessors) involved in these transfers. then. They have developed a network of contacts in these offices to facilitate the prompt transfer of title for a fee. Some facilitated the bribery of the BIR personnel and took care of paying the bribes. It is they who offer to “take care of all the legal requirements” and thus. who historically. more so than accountants. However. Facilitators: lawyers and other actors Lawyers. facilitate the evasion of the estate tax by directly transferring the title from the deceased to the 39 . the taxpayers interviewed stated that their lawyers played an active role in the settlement of estate taxes. These are real estate brokers (not necessarily licensed) that over time have developed expertise in the different requirements of transfers of title. denied any participation in acts of evasion and asserted that they were instrumental in explaining estate tax obligations to clients. bribery is seen as a means to both obtain a measure of savings and reduce the threat of detection of evasion. They said that their lawyers advised them and helped facilitate the method of evasion undertaken. All the heirs that admitted to evasion were assisted by lawyers in the settlement of their estate taxes. if they evaded the tax. Others said that they advised against evasion. the transfer of title of ownership at the least cost becomes part of the service they offer. used their knowledge of the law to advise them and in some cases.

honored. not to accommodate requests made by family (extended). The effect is that when someone seeks help to cope with a problem. None had prior dealings or contacts with the BIR. Cultural factors The only circumstance that lawyers and BIR officers mentioned. These brokers have an interest in nurturing their contacts in pertinent government offices. Although it is an effective social institution for survival. “walang pakikisama”. as a deterrent to acts of evasion. This confluence of economic interests facilitates and perpetuates evasion. Cooperation in evading the tax was extended to heirs by relatives.vendee through the various methods earlier cultivate good relations with their clients they turn a 40 . all of them somehow found the connections they needed to successfully evade part of their estate tax liabilities. Yet. as balato. Favors. former classmate. was the presence of conflict among heirs to an estate. government officers. The Filipino has strong community ties. this trait works just as effectively to evade taxes. family friends and friends of friends. generous gifts were given to these contacts. as far as practicable. a whole network of assistance becomes available. even when they are remunerated. Claims made on one by family. Accommodation is considered to be an act of kindness and generosity and it is generally considered very bad form. are treated as social investments by those who grant them and as social debts by their recipients. private business institutions such as banks (by ignoring the timing or circumstances of withdrawals/transfers) and other business persons such as brokers/ fixers. e. the cooperative relations within the family are operative. when a big land transaction was completed. lawyers and other connections. stated that the decision to evade was discussed and agreed upon among siblings. clan. The methods of evasion described above are effected by the confluence of financial interests of various economic actors – the taxpayer. Otherwise. kababayan and acquaintances from other networks are.. such as how to reduce one’s tax liability. The broker interviewed stated that in addition to direct bribes for particular transfers of title. Even bank officers unofficially grant these favors . All of the heirs that paid bribes or evaded estate taxes in other ways.g.

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. The only movable property often declared is shares of stock. 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. especially when these are held in a publicly listed company. to cultivate good relations. Thus. Certain classes of property are not declared at all in estate tax returns. Without justifying the use of this strong community bond for undesirable and unproductive ends. Filipino culture shuns persons with power or opportunity who do not use it to “help” their communities.blind eye to the death of an account holder “for as long as no obituary has yet been published. 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. paintings.” While the motive is pecuniary. not dissimilar to the confluence of economic incentives. Tax administration officers have no 41 . 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. and cars. jewelry. 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. the practice is prevalent at all levels of the political and social spectrums. one can hardly blame the Filipino public. There is truth to this. it is nevertheless important for policy makers to acknowledge its importance in economic decision-making. Professionalism in public office is a rarity and not as appreciated as it should be. without paying estate taxes.” In its worst form. whose experience with government is that it does pay to have connections and in general. These are movable property such as cash. At best only a minimal amount is declared.

which according to the Tax Code. is daunting. when the information is with the Civil Registries. As pointed out above. Cedulas can be had for P50 from the cigarette vendors in front of the National Bureau of Investigation offices. But there is no effective cooperation agreement between the Civil Registry and the BIR nor the National Statistics Office and the BIR. they can even be unaware that the opportunity for transfer of an estate has been created by the death of a taxpayer. In this sense. the task of tracing a decedent’s real assets on a national level. constitute part of the taxable assets of an estate. This asymmetry of information between taxpayers and tax enforcers presents an opportunity for taxpayers to at least partially evade estate taxes. Since there is no reliable national listing of real property. 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. that apparently has its own information problems. 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. 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. 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. is well known as a source of fake diplomas and other documents. notarizations. for example. Documentation requirements for the transfer of estate assets include certifications. The ease with which fake documentation can be manufactured is a serious information loophole for tax enforcers. Recto Ave. 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.knowledge of the existence or the extent of personal assets. In the City of Manila. and receipts. 42 . Information gaps and loopholes The information asymmetry between taxpayers and the government is further aggravated by the lack of information sharing among government agencies. While estate taxes are paid at a given Revenue District.

“simulated”. In addition. and the covered properties themselves are also susceptible to different forms of evasion. the lawyers interviewed said that judges rarely require BIR certification of payment of estate taxes before authorizing delivery of distributive shares of an estate. BIR’s zonal values. In practice. are by far the main statutory safeguards that induce compliance. documentary requirements are easily complied with but do not necessarily truthfully and accurately reflect the substance of such documentation. 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. Statutory safeguards The discussion of the law on estate taxes (See Appendix 1). as well as tax practitioners assured us that receipts and tax clearances could be secured easily enough. which are detailed to the street level and are supposed to reflect market values. 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. lawyers. one BIR officer 43 . 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. Again. more than 50% greater than local government’s estimates of the value of real property.The researchers did not discover exactly how BIR tax payment receipts can be manufactured or as one lawyer referred to it. enumerates the statutory safeguards to ensure the payment of estate taxes. Discrepancies in valuation The difference of valuations for real property between the BIR and Municipal and City Assessors is striking. But respondents from the BIR. In these circumstances. For instance. the effect is only partial. some of these statutory safeguards are not enforced. Also. If Registers of Deeds can produce “simulated” tax clearances. are in many cases.

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. Each of the three presents their estimates and the BIR takes the mean of the two highest estimates as its approximation of market value. If not arbitrary. usually represented by a bank officer. When alleged or detected.informed us that the BIR was planning to “double zonal valuations in order to boost revenue collection”. The mayor and local government assessor stated that the new zonal valuations in their area were made unilaterally. For example. Zonal valuations for a Revenue District are supposedly estimated by a committee of three – one each from the BIR. are unfair. local government assessors make their estimates of real property values and present these to local Sanggunians for approval. the BIR sends a notice of tax liability to taxpayers and eventually can file cases against them. In one municipality. At least one BIR officer stated that the most common method of evasion was the under-declaration of real property values. 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. 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. the RDO of a Metro Manila city estimated that in his district no more than 4 44 . The existence of a different and lower estimate for the market value of real property aggravates taxpayer’s perceptions that estate taxes. According to the RDOs interviewed. the mayor himself. BIR officers stated that zonal valuations are selectively adjusted approximately every five years. tedious and it is doubtful if the prescribed process is assiduously followed. which can be as high as 20%. the BIR’s method of estimation seems peculiar. the local government unit and the private sector. the former is the more common action taken. The valuations are supposed to be presented at public hearings. In contrast.

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. A lawyer from said division estimated that no more than one out of ten tax evasion cases were for estate taxes. these are returns for gross estates of P 10 Million and above for Revenue Regions 5. They can result in improved collection or in increased harassment of taxpayers. audits are a double-edged. Arrangements to pay these on an installment basis are not uncommon. this may result in the BIR being swamped with audit work. At the time of these interviews. The other RDOs explained that unless there was a glaring error in the declared value of an estate. Furthermore.7 and 8 and returns for gross estates of P 5 Million and above for all other regions.6. Given the current level of property values. 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. 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. Surcharges and interest charges are also an effective penalty without having to resort to litigation. The two other RDOs from Metro Manila stated that they had no pending cases against estate tax evaders. For estate taxes. 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. 45 . Another BIR officer explained that cases were seldom filed at the RDO level because they lacked legal personnel. It may be wise tax enforcement policy to avoid long and costly litigation and preferable to advice taxpayers of their liabilities. RMO 11-2006 establishes priorities for the audit of returns. Cases of tax evasion were usually referred to the national offices. the National Investigation Division had only 2 pending cases of estate tax evasion.cases (for estates worth P 50 Million and above) are filed annually. 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.

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. In his view. in his more than 20 years in the BIR.. the BIR organization had too few examiners and far too many administrative personnel. i. according to the above-mentioned BIR officer. or certification of no improvements in real property (which reduces the tax liability) attached to a property. the ratio is reversed. for instance. According to him. He also complained that it was extremely difficult to meet collection targets when virtually half of his staff were political appointees. who did not allow themselves to be pressured by politicians. they could not be motivated to improve collection efforts..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. stating that they knew of BIR personnel who handled the books of private companies and individuals. competence included the trait of honesty. he had only encountered 2 credible Commissioners. The extent of personal participation we encountered was 46 . lack of professionalism was also nurtured by the Bureau’s political environment. In his estimate the latter outnumbered the former three times over. who felt so sure of their tenure. Finally.e. Some local assessors. He particularly mentioned that members of Congress often called Commissioners to ask for favors for their companies or “friends”. Not a few respondents reported that Registers of Deeds provided fake BIR Certificates of Authority to Register (CAR) and BIR tax payment receipts. we did not find any respondent that admitted direct personal participation in these anomalies. However. have been reported to participate in the underdeclaration of.e. According to him. in other countries 75% of internal revenue personnel were examiners. Two tax practitioners identified this lack of professionalism. A former BIR Commissioner also identified the lack of competence among BIR personnel. By his definition. i.

it may still be rendered ineffective to the extent that corrupt networks exist within the BIR. But make sure there is no scandal or I will go after you.” The anecdote seemed at first hard to believe. we will reverse the shares and I won’t ask any questions. While this is administratively correct and it is high time that such a policy should be put into practice. or to heighten the threat of detection among BIR personnel. But later figures quoted by one taxpayer confirmed that the income incentive of corruption is by no means minor and therefore very strong. the BIR personnel should be able to employ methods that decrease the probability of detection and increases the difficulty of legally establishing the wrongdoing. forbids cases for investigation from being handled by the same Revenue Office. Being knowledgeable of the tax laws and informed of internal policies. the taxpayer got an official receipt for only 25% of the amount he had paid to the BIR. One BIR officer recounted how a new Commissioner who wished to improve the tax effort met with BIR examiners and said. To limit this interaction.. Such hefty incentives when weighed against the probability of getting caught and facing the penalties for such action are certain to remain positive. Furthermore. corruption was alleged to occur in other government offices such as the Securities and Exchange Commission. indicates a far smaller probability of detection and a much more serious and deeply rooted problem. However. the situation where corruption exists across related government agencies. RMO 11-2006. there is obviously the income incentive to bribery. where collusion is possible among them. There are internal administrative mechanisms intended to either reduce the opportunity for bribery. A similar conclusion can be inferred of local government units’ Assessors and Registries of Deeds with respect to their own areas of jurisdiction.e. “From now the paying of bribes to secure these documents directly from the Register of Deeds or from the BIR. On the part of government agents. for the “package deals” mentioned above. if you pocketed 70% and gave 30% to the government. It was observed that constant interaction between the BIR and agents of taxpayers could evolve into the systematization of bribery. In exchange for a 70% reduction of his estate tax liability. i. the Internal Revenue Code has provided that Revenue Officers assigned to perform assessment or collection 47 .

Furthermore. Second. This. RMO 11-2006 prioritizes estate tax returns where the gross estate exceeds P 10 Million. 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. These audits review and appraise the internal controls of existing systems and procedures. The downside of having a known prioritization system is that the restraining effect of randomness and the element of surprise is lost. the real estate agent we interviewed laughed and said that whenever a new BIR person was assigned. While this may mean that the returns of some estates that are known to be large will be audited. only those with sensitive positions undergo audit. Title I. One reason cited for the need to prioritize is budget constraint. however. When asked about this. 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. It does appear that internal audit is not being used as an effective detection mechanism. a respondent from the Department of Finance dismissed these audits as an ineffectual tool for curbing corruption citing several reasons. has not put much dent in the bribery practice. There is also an internal security division that conducts fact finding investigations and handles the prosecution of administrative cases filed against revenue personnel. administrative. performance and computer audits based on reports and denunciations. as well as those where charges or complaints have been filed against BIR personnel.function shall not remain in the same assignment for more than three (3) years (Sec 17. “the auditors are also BIR personnel 48 . revenue regions that have not been audited for a long time are prioritized. however. knowing this upper limit taxpayers. Curiously. it only took a few weeks of “pakiramdaman” (wait and see) after which it was business as usual. “evidence of illicit transactions cannot be found because the documents have been altered”. First. For example. Audits are based on a prioritization system. NIRC). and spotchecks cash and property accountabilities of all collection. Not all BIR collection agents or personnel are audited. and other accountable officers. a former high-ranking official of the BIR asserts that there is hardly any system of internal accountability. There is also an internal audit division in the BIR that conducts fiscal. specifically.

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


the family of the deceased is also given a form letter from the BIR containing information on the payment on estate taxes. Formalize sources of documentary requirements related to the filing of taxes. Similar to the above. donor’s and estate taxes. Penalties for the failure to meet these requirements increase their opportunity costs for facilitating and assisting in evasion. at the present time. The immediate result should be an increase in the incidence of filing of estate tax returns among estates. For the hard to track property. at least. can be included in the classes of registered property requiring BIR clearance to transfer title by way of inheritance. 4. as indicated earlier this will be difficult given the strong perception of unfairness of the tax. and poor government service. corruption in government. If incoming information is computerized. lawyers. 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.records of taxes paid for property transfers. capital gains. The estate will be put on notice of the need to pay estate taxes. Enforce existing reporting requirements of other actors that assist or partake in the redistribution or transfer of property. (combining recommendations 1 and 3) one can conceive of an arrangement with the local civil registers where. thereby increasing the effective tax base for such. The BIR also gets information that can be a basis for going after the taxpayers. and should cause a reduction in these activities. Better still. 52 . 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. 5. The notice of death form will ask for relevant information on the personal circumstances of the deceased and her/his property. in addition to the form to be accomplished to get a death certificate. the BIR will have to rely on ethical motivations to induce proper declaration. this information can also be crossreferenced with records of deaths. They also receive information on the settlement of estate taxes. courts. vehicles. However. While it is difficult to track other personal property. Such a mechanism will accomplish several things. banks.

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. 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. under-declaration of assets. the research should device methods to capture major shifts in the market values of real property. Furthermore.) 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. Formalizing these activities should make the production of fake documentation more difficult. 6. Increase taxpayer awareness of the penalties aspect and improve the general perception on the probability of evasion being detected and proceeded against. Asked what will be 53 . Rationalize and unify the valuations of market values for real property across government agencies. The BIR can also adopt a filing form or at the very least a tax clearance form that is more difficult to duplicate. In the interest of fairness. etc. A well-informed public should also decrease taxpayer reliance on fixers and/or tax practitioners to assist them.Much of the accompanying requirements in the filing and payment of estate taxes is sourced from the informal sector. The large disparity gives the impression that the BIR valuation is unreasonable and arbitrary. public participation in arriving at these values may promote greater taxpayer compliance and substantially reduce the perception that they are unfair and arbitrary. etc. 8. 7. Arriving at values that are realistic and used by both national and local government units is a possible area for research. The present program of going after high profile tax evaders does not seem to change the general perception of the low probability of detection. Legislate stiffer penalties for the falsification of public documents. If the observation that taxpayer’s perception of the unfairness of a tax (its rate. base.

a number of the taxpayers said that the BIR would have to go after them personally. their malfeasance may be less chronic than that of the BIR personnel that enable such evasion. improvement of the audit program of in the BIR.the most compelling factor that will increase their taxcompliance. Accountability mechanisms such as the lifestyle checks need to be credible. in general. Politician’s access to BIR personnel for the purpose of influencing tax assessments/rules should be curtailed and penalized. 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. Institute procedures to detect the exercise of unlawful discretion and acts of misinformation by BIR personnel and other government personnel. 9. 10. One limitation is that the corrupt practice can be well hidden. the BIR should seek exemption from current civil service regulations that tie its hands with respect to taking action against corrupt personnel. Among other procedures. but cross-referencing. should limit the field from which taxpayers can be selected for random audits. political will is necessary to achieve a clean-up of corruption in the BIR and other government agencies. unless conducted by an impartial external party. a program of replacing current 54 . The BIR’s entire audit system requires a separate in-depth study. may bring appreciable results. Stiffer legal penalties and administrative measures can be imposed on erring BIR and other government personnel. particularly at the revenue district level. However. Trite as the statement may seem. Thus. overseen by an honest Commissioner. The government. If possible. Going after all taxpayers is clearly impracticable. and the effectiveness of an audit to detect and establish evasion will be inadequate. has to take drastic steps to address the problem of corruption. 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. It is important to point out that while it is taxpayers who commit acts of evasion.

Filipinos will do so. increase revenue collection. in the medium term. Thus. The longer that this perception of corruption is lodged in the public mind. given the opportunity to evade estate or any other tax. 55 . The BIR might find that re-staffing might.personnel with personnel that are competent and honest can be achieved in a few years. despite its short-term costs. the more it takes on the character of a socio-economic institution.

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

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

000 500.000. Unpaid mortgages on.000. but not to exceed P200. but not to exceed P500. whichever is lower.000.000.000 1. tangible or intangible. real or personal. up to P1. if such claim was included in the gross estate. The estate tax is levied upon the transfer of the net estate of every decedent 1 .000 But Not Over: P 200.000. Property received by the decedent within five years as a gift.000.000 10. Indebtedness.000 135. The net estate is taxed following this schedule: Net Estate Over: P0 200. wherever situated. From this will be deducted the following: Actual funeral expenses.000 2. or indebtedness with respect to.000.215.000 500.000 5. 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. whether residing or not in the country. where a donor’s tax or estate tax had been paid. Judicial expenses of the testamentary or intestate proceedings. The fair market value of the decedent’s family home. Chapter I (Sections 84 to 97) of the National Internal Revenue Code of 1997 governs the payment of estate taxes. For a citizen or foreign resident the gross estate includes the value at the time of death of all the decedent’s property.000 2.000 10.000. or an amount equal to 5% of the gross estate.00.000.000. The deduction follows a schedule of diminishing deduction depending on how far back the gift/inheritance took place. For real property.000.000. Medical expenses incurred by the decedent within one year prior to his death. property when the value of such property undiminished by the mortgage/indebtedness is included in the gross estate. or a non-resident foreigner with respect to estate situated in the Philippines. A standard deduction of P1.Appendix 1. .000.000 5.000 465.000 5. or as an inheritance.000.000 5% 8% 11% 15% 20% 1 A citizen. Transfers by the estate to the government for exclusively public purposes.000 And Over Tax Shall Be: Exempt P0 15.000. a resident foreigner. determined by subtracting from the gross estate certain allowable deductions.000 10. Property included in the gross estate is generally appraised at its fair market value at the time of death. The law on estate taxes Title III.000 Plus: Of the Excess Over: P 200.000 2.000 500. Claims of the deceased against insolvent persons.

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

unless a certification from the Commissioner that the estate/donors tax has been paid is shown. b) Deed of Extrajudicial Settlement of the Estate. legacy. 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. with copies of such documents and any information whatsoever which may facilitate the collection of the estate or donors tax. c) Court order if settled judicially. If a bank has knowledge of the death of a person. A debtor of the deceased may not pay his debts to the heirs. 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 . intervenes in the preparation or acknowledging of documents regarding partition or disposal of donation inter vivos or mortis causa. the Commissioner may require the executor. 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. or inheritance.of the city or municipality where their taxes are located. 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. business. sociedad anonima. the BIR requires the following attachments. if the estate had been settled extrajudicially. administrator or beneficiary to furnish a bond. partnership. notary public. or any government officer who. unless the certification of the Commissioner that the estate tax has been paid is shown. In case an extension of the period to pay the tax is granted. shall have the duty of furnishing the Commissioner. legacy or inheritance. unless the Commissioner has certified that the estate tax has been paid. Regional Director. Revenue District Officer or Revenue Collection Officer of the place where he may have principal office. of the nonpayment of tax discovered by them. legatee. or industry organized or established in the Philippines any share. obligation. Documentary requirements In the filing of estate tax returns. executor or administrator of his creditor. or jointly with another. it shall not allow any withdrawal from the said deposit account. not exceeding double the amount of tax and with such sureties as the Commissioners deem necessary. bond or right by way of gift inter vivos or mortis causa. who maintained a bank deposit account alone. by reason of his official duties. It is prohibited to transfer to any new owner in the books of any corporation. Any lawyer.

the BIR may also file a civil or criminal action for the collection of such taxes. or not acted upon within 180 days from the submission of documents. Penalties and Remedies There are provisions of the National Interview Revenue Code that apply equally to all internal revenue taxes.000. The more important ones are found under Title VIII (Remedies) and Title X (Statutory Offenses and Penalties). with a right on the part of the taxpayer to redeem the property within one year from the date of sale. Additional documents may be required. Such property or portion thereof shall be sold to satisfy the tax liability. and to file documents in support of such protest within 60 days from filing of the protest..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. including estate taxes. and other personal property of whatever character. If the protest is denied in whole or in part.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. whenever the BIR finds that a tax should be assessed. and by levy upon real property. itemized deductions from gross estate and the amount due if the gross value of the estate exceeds P2. it may be protested administratively by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment. If an assessment is made. 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. it may collect delinquent taxes. fees or charges and any increment resulting from the delinquency by distraint of goods. . On the part of the BIR. he has a right to a preassessment notice. to which he may respond. chattels. On the part of the taxpayer. In addition to distraint and levy of property.

or penalties imposed without authority.Also on remedies. 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. a report on the exercise of these powers. keep any record. Civil penalties and interest are imposed for certain violations. Where the basic tax involved exceeds P1. a minimum compromise rate of 10% of basic assessed tax. subject to some minimum compromise rate 3 . A compromise is allowed when there is a reasonable doubt as to the validity of the claim against the taxpayer. 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. file a return. a minimum compromise rate of 40% of assessed tax. 3 For cases of financial incapacity. such as willfully attempting to evade or defeat any tax. The penalty shall be 50% of the tax in case of willful neglect to file the return within the period prescribed. or supply correct and accurate information when such are required by the code. every six months. 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.000. In addition to the civil penalties. or willfully failing to pay tax. Abatement or cancellation of tax liability may be done when the tax or any portion thereof appears to be unjustly or excessively assessed. or those involving fraud.000 or where the settlement is less than the prescribed compromise rate. or when the financial position of the taxpayer demonstrated clear inability to pay the assessed tax. provided the taxpayer files a claim of credit or refund in writing within two years after the payment of the said tax or penalty. files with an internal revenue officer other that those with whom the return is required to be filed. the BIR Commissioner has authority to compromise. all criminal violations may be compromised except those already filed in court. or of the deficiency tax if in case a false or fraudulent returned is willfully made. However. it must be approved by an evaluation board composed of the Commissioner and four Deputy Commissioners. or fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. not being authorized by the Commissioner. abate and refund or credit taxes. for other cases. . certain acts are punishable criminal offenses. He is required to submit to the Chairmen of the House and Senate Committees on Ways and Means.

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