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Margarita Gomez
Nepomuceno Malaluan

November 2006

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

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

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

I. Description of the study

Introduction 1
Objective, scope and methodology of the study 4
Theoretical framework 7
A summary of the premises of the study 11

II. Estate taxation

Acknowledging some negative arguments 13
Justifications for estate tax 14
Basic features on the law on estate tax 17
Some characteristics of estate taxes 18

III. Methods of estate tax evasion

Non-filing of return: “staying alive” 21
Reducing taxable estate 23
Simulating transactions, forgery and falsification
in the transfer of real property 28
Corruption 31
Evasion in the estate tax process (diagram) 34

IV. Factors that affect estate tax evasion

The taxpayer 35
Facilitators: lawyers and other actors 39
Cultural Factors 40
Obstacles to effective tax administration 41
Corruption: par for the course 46

V. Recommendations 51

Appendix 1. The Law on Estate Taxes

Appendix 2. BIR Form 1801
Appendix 3. Certificate Authorizing Registration

I: Description of the study


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

Table 1. Tax Effort of the BIR (1995-2004)

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

In response to the crisis, in September 2004, the Energy Regulatory Commission

had to make the unpopular decision to allow the National Power Corporation (NPC)
provisional authority to increase its electricity charges by PhP0.9798/kWh, and to

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

Table 2. Revenue Share by Type of Tax (2004)
Classification Collection % of total
(in million Pesos)
Taxes on Net Income and
Profit 278,213.65 59.4
Excise Taxes 59,529.62 12.7
Value-Added Taxes 80,216.03 17.1
Percentage Taxes 27,952.21 6.0
Other Taxes – transfer (w/c
includes estate tax), travel, doc. 22,265.06 4.75
stamp and misc. taxes
Total 468,176.58 100
Source: Annual Report 2004, Bureau of Internal Revenue

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

Table 3. Revenue Contribution of Estate Taxes to Total Taxes (1990 – 2004)
Year Estate Tax Collection % of Total Tax
(in Million Pesos) Collected
1990 180.03 0.17
1991 143.28 0.12
1992 180.54 0.13
1993 143.69 0.10
1994 217.03 0.12
1995 280.69 0.13
1996 417.06 0.16
1997 676.85 0.21
1998 317.67 0.09
1999 435.89 0.13
2000 301.50 0.08
2001 393.28 0.10
2002 344.55 0.09
2003 518.17 0.12
2004 467.14 0.10
Source: Statistical Division, Bureau of Internal Revenue
provided to let them surface and legitimize their property records so that the Bureau will
be able to trace properties inherited from parents and ancestors that are not yet transferred
into the name of the new owners”. This will also allow the BIR to collect other taxes such
as donor’s taxes on properties purchased in the names of minors and capital gains taxes
for other transfers of property through sale. (Tax News Digest, NTRC, TRJ)

Objective, scope and methodology of the study

Tax evasion reduces the potential revenues of the state and the goods and services
that it can provide to the citizenry. It also misallocates resources into unproductive
activities for the purpose of cheating. If rampant and unchecked, it can seriously
undermine the legal and economic system. The main objective of this report is to

contribute to the efforts towards the reduction of tax evasion in the Philippines by
uncovering and documenting practices of estate tax evasion.
Estate tax evasion refers to unlawful acts that reduce an estate’s tax liability from
what would otherwise be due if the rules for effecting transfers of ownership by way of
succession were strictly followed. Illegality distinguishes tax evasion from avoidance
which covers legal acts committed to reduce tax liabilities, for example by exploiting
loopholes in the Tax Code. Being unlawful, the detection of evasion by the tax authority
should result, under the rules, in the assessment of the proper tax, the imposition of civil
penalties, and under certain circumstances, the imposition of criminal liability.
The study provides a summary of estate tax law as well as a brief discussion on
the characteristics of estate taxes. From interviews with various economic actors, the
study identifies methods of estate tax evasion, describes the roles of other actors, gains
insights into taxpayer’s attitudes, and identifies flaws in the administration and
enforcement of estate taxes. Corresponding recommendations on how to prevent or
mitigate evasion are a result of these findings. The field survey as well as the analysis and
recommendations in the study are guided by some of the key theories on tax evasion as
applied to estate and other taxes and by the factors that have been identified by past
research as relevant to deterring or abetting evasion.
It is beyond the scope of this study to inquire into the extent of as well as the
economic costs of estate tax evasion. To reiterate, this study is an investigative inquiry
into the roles of different economic actors at different points of the estate tax process and
the methods employed by them to evade estate taxes. The method employed in the study
is that of interviewing key informants and no claim is made as to having conducted any
kind of random sampling survey.
Understandably, the opportunities for persuading respondents to candidly share
commission or even knowledge of illegal acts were extremely limited. As an example of
this guardedness, none of the lawyers interviewed admitted to ever participating in,
abetting or facilitating tax evasion, even if at least one of them was well-known to be
adept at unscrupulously going around the law. Some lawyers explained that the decision

Art 774 of the Civil Code of the Philippines: Succession is a mode of acquisition by virtue of which property, rights
and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or
others either by his will or by operation of law.

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

Theoretical framework

Motivations for estate creation and their incidence implications

The question of incidence is important since it determines which of the parties

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

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

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

Factors that affect evasion

Current literature on tax evasion acknowledges the seminal journal article of

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

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

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

A summary of the premises of this study

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

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

II. Estate taxation

Acknowledging some negative arguments

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

Moral arguments

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


On the grounds of economic efficiency, it is argued that estate taxation influences

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

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

Justifications for estate taxation

State partnership and citizen’s benefit

Government undertakes programs that affect the creation and distribution of

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

Possession of wealth and the ability to pay

The possession of wealth conveys advantages to individuals over and above the
income that can be derived from that wealth. It confers on individuals a relatively higher
social status, a greater ability to take advantage of economic opportunities, and the ability
to dis-save, which provides them with economic security for old age or for unexpected
economic downturns. Although difficult to value accurately, the possession of wealth
confers power and control over economic resources such as command over goods and
services that derive from the ownership of property. (James, 1992) These added
privileges associated with wealth are untaxed by the state and yet confer on the individual
possessor or recipient of wealth an added ability to pay as well as a greater ability to
contribute to the government’s needs. (Santos et.al., 1994)
Estate taxation can be viewed as a substitute for an annual tax on wealth, which
would entail much greater administrative costs - particularly in terms of achieving annual
valuations of net worth. (James, 1992) Eugene Sterle refers to it as “a rough method of
taxing ability to pay on a lifetime rather than an annual basis” or “a once a generation tax
based on ability to pay.” (Gale et.al., 2001) When a decedent has accumulated wealth that
is more than for his personal needs, a taxable estate is created and this is indicative of an
ability to pay. A greater ability to pay is likewise acquired by beneficiaries upon
receiving an inheritance. Furthermore, it is an unearned ability.

An instrument for the redistribution of wealth

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

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

Complimentarity to other taxes

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

Rationale for the imposition of estate taxes: Summary

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

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

Basic features of the law on estate tax

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

ƒ Medical expenses incurred by the decedent within one year prior to his death,
but not to exceed P500,000.

The liability to pay the tax falls upon the executor or administrator of the
decedent, or if no executor or administrator has been appointed or is qualified, then the
liability falls upon any person in actual or constructive possession of any property of the
decedent. The return must be filed, and the tax paid, within six months from the
decedent’s death.

Some characteristics of estate taxes

Base of the tax

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

Coverage of estate tax

Assuming that the decedent is a Filipino citizen or an alien residing in the

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

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

Full discovery of the assets of an estate would include inter vivos donations and
transfers that were made “ in contemplation of death” and/or those which can be
interpreted to be in the nature of testamentary dispositions (such as net transfers or gifts
with a value of P100,000 or more that were conveyed for less than their full
Specific exemptions are granted to certain components of the decedent’s assets
such as GSIS proceeds/benefits, accrual from SSS, proceeds of group life insurance
policies taken by employers, and war damage payments.


In practical terms, estate taxes will be applicable only to estates bequeathed by a

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

Equity and ease of administration

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

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

III. Methods of estate tax evasion

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

Non-filing of return: “staying alive”

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

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

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

Table 4. Number of Estate Tax Returns Filed Nationwide

Year Number of Estate Tax Returns Number of Deaths
Filed* (50 yrs. old and above)**
1993 22,541 178,233
1994 21,806 189,272
1995 23,765 191,759
1996 24,206 205,043
1997 28,312 206,896
1998 23,211 216,144
1999 22,510 219,270
2000 22,070 222,581
2001 23,786 241,816
2002 26,487 258,458***
2003 27,919 258,089 ****
2004 30,373 not available
Sources: *BIR Annual Report, 2004; ** Philippine Yearbook, NSO, 2005; *** NSO
**** 2003 Vital Statistics Report, NSO

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

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

Reducing taxable estate

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

Non-declaration of personal property

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

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

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

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

Non-declaration of real property

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

Under-valuation of Assets

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

Table 5. Applications for Reconsideration of Land Valuation
Year Number
2001 38
2002 75
2003 75
2004 102
2005 96
Source: Statistics Division, BIR

Overstating Deductions

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

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

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

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

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


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

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

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

Evasion in Estate Tax Process

ƒ May engage in estate planning

ƒ Transfers to heirs through simulated
ƒ Bank deposits withdrawn before death

Heirs/executors decide to file estate tax

Death Heirs/executors do not file return on time
return/pay estate taxes within the required deliberately or by reason of ignorance of the
period requirement

Filing of Notice of Death

(NIRC 89)

Reducing taxable estate

ƒ Non-declaration of personal Detection by BIR. > Personal property
property Penalties /surcharges Heirs need to simply distributed
ƒ Some pieces of real property can be “negotiated” transfer among heirs
are not declared Value of tax paid property, decide > Fraudulent transfer
ƒ Undervaluation of assets reduced to settle estate of real property to
ƒ Overstating deductions tax evade estate taxes
ƒ Simulation of
Can involve corruption of personnel in Penalties/ transactions
the BIR local assessors office surcharges can ƒ Falsification
be “negotiated” ƒ Forgery
Filing of Return
(NIRC 90)
May involve
corruption of
government personnel

Payment of Estate Tax

(NIRC 91)

Returns may be audited before CAR

is issued.
Audit results can be “negotiated”

BIR issues CAR

(Certificate Authorizing 34
IV. Factors that affect estate tax evasion

The taxpayer

Evasion and the lack of readiness to cope with estate taxes

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

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

Attitudes towards estate taxes

Surprisingly, none of the taxpayers mentioned administrative difficulty in the

settlement of estate taxes as a disincentive to compliance. They expressed strong feelings
of unfairness in the imposition of estate taxes. Heirs believed that decedents had, in their
lifetimes, been paying their fair share of income, property and other taxes, and it was
unjust to further tax the transfer of their property to members of their own families.
Stressing that it was a tax that was required of them over and above other taxes,
all the taxpayers interviewed expressed the view that the estate tax rate was distressingly
high. It is unclear if the distress they expressed was related to the occasion upon which
the tax was levied or to their lack of preparedness to cope with it. However, it has to be
acknowledged that when heirs have to sell inherited property just to meet estate tax
obligations, they find themselves particularly averse to estate taxes.
Several taxpayers who were aware of future estate tax obligations were taking
steps to escape it. One 88-year old respondent had transferred all his assets to his children
and kept only his cash assets. Having made some calculations of his expected lifespan, he
planned to spend as much as possible before he died, “rather than give it to the
government”. For the same reason, another respondent in her 80’s was gradually selling
all her property and dividing the cash proceeds among her children.
Incidentally, after having dealt with estate taxes, all of the heirs interviewed were
engaged in taking steps to gradually make inter vivos transfers to their children.

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

Ethical considerations and perceptions of fairness

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

Taxpayer’s perception of the probability of detection

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

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

Facilitators: lawyers and other actors

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

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

Cultural factors

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

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

Obstacles to effective tax administration

Information asymmetry

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

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

Information gaps and loopholes

The information asymmetry between taxpayers and the government is further

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

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

Statutory safeguards

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

Discrepancies in valuation

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

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

Enforcement of tax compliance

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

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

Lack of professionalism

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

Corruption: par for the course

Detection mechanisms directed at taxpayers lose their effectiveness in the face of

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

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

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

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

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

V. Recommendations

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

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
Registers of Deeds should report all transfers of real property to the BIR on a
regular basis. This information can be cross referenced by the BIR with their own

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

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

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

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


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Appendix 1. The law on estate taxes

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

Net Estate But Not Over: Tax Shall Be: Plus: Of the Excess
Over: Over:
P0 P 200,000 Exempt
200,000 500,000 P0 5% P 200,000
500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 And Over 1,215,000 20% 10,000,000

A citizen, whether residing or not in the country; a resident foreigner; or a non-resident foreigner with respect to
estate situated in the Philippines.
The liability to pay the tax falls upon the executor or administrator of the
decedent, or if no executor or administrator has been appointed or qualified, then upon
any person in actual or constructive possession of any property of the decedent.
Where the gross value of the estate exceeds P20,000, the executor, administrator
or any legal heir shall file with the BIR a written notice of the death of the decedent
within two months thereof 2 .
For all transfers subject to estate tax, or though exempt, the gross value of the
estate exceeds P200,000, or includes registered or registrable property for which a
clearance from the BIR is needed for the transfer of the registered owner, the executor,
administrator, or any of the legal heirs, shall file an estate tax return (BIR Form 1801).
The return must be filed, and the tax paid, within six months from the decedent’s
death. It may be filed with any authorized agent bank (AAB), or Revenue District Officer
or Collection Officer, or duly authorized Treasurer of the city or municipality in which
the decedent was domiciled at the time of his death. However, when the Commissioner
finds that the payment on the due date of the estate tax or of any part thereof would
impose undue hardship upon the estate or any of their heirs, he may extend the time for
payment of such tax or any part thereof not to exceed five years, in case the estate is
settled through the courts, or 2 years in case the estate is settled extra-judicially.

Statutory Safeguards

Among the statutory safeguards to ensure payment of the correct taxes are the
ƒ For claims against the estate, the debt instrument should be duly notarized at
the time the indebtedness was incurred, and if it was contracted within three
years before the death, the administrator or executor must submit a statement
showing the disposition of the proceeds of the loan.
ƒ The family home must be certified by the barangay captain of the locality.
ƒ Medical expenses claimed must be substantiated by receipts.
ƒ The return is filed under oath.
ƒ Returns showing gross value exceeding P2,000,000 must be supported by a
statement duly certified by a certified public accountant containing itemized
assets, itemized deductions, and tax due.
ƒ 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.
ƒ Registers of Deeds shall not register in the Registry of Property any document
transferring real property or real rights therein or any chattel mortgage, by
way of gifts inter vivos or mortis causa, legacy or inheritance, unless a
certification from the Commissioner that the estate or donors tax had been
paid is shown.
ƒ Registers of Deeds shall immediately notify the Commissioner, Regional
Director, Revenue District Officer or Revenue Collection Officer or Treasurer

Or within two months after the qualification of the executor or administrator.
of the city or municipality where their taxes are located, of the nonpayment of
tax discovered by them.
ƒ Any lawyer, notary public, or any government officer who, by reason of his
official duties, intervenes in the preparation or acknowledging of documents
regarding partition or disposal of donation inter vivos or mortis causa, legacy,
or inheritance, shall have the duty of furnishing the Commissioner, Regional
Director, Revenue District Officer or Revenue Collection Officer of the place
where he may have principal office, with copies of such documents and any
information whatsoever which may facilitate the collection of the estate or
donors tax.
ƒ A debtor of the deceased may not pay his debts to the heirs, legatee, executor
or administrator of his creditor, unless the certification of the Commissioner
that the estate tax has been paid is shown, but he may pay the executor or
judicial administrator without said certification if the credit is included in the
inventory of the estate of the deceased.
ƒ It is prohibited to transfer to any new owner in the books of any corporation,
sociedad anonima, partnership, business, or industry organized or established
in the Philippines any share, obligation, bond or right by way of gift inter
vivos or mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the estate/donors tax has been paid is shown.
ƒ If a bank has knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the estate tax has been paid.
ƒ 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.
ƒ In case an extension of the period to pay the tax is granted, the Commissioner
may require the executor, administrator or beneficiary to furnish a bond, not
exceeding double the amount of tax and with such sureties as the
Commissioners deem necessary.

Documentary requirements

In the filing of estate tax returns, the BIR requires the following attachments, as
they may be applicable:
ƒ Certified true copy of the death certificate
ƒ Notice of death duly received by the BIR
ƒ Any of the following: a) Affidavit of Self Adjudication; b) Deed of
Extrajudicial Settlement of the Estate, if the estate had been settled
extrajudicially; c) Court order if settled judicially; d) Sworn declaration of all
properties of the estate
ƒ A certified copy of the schedule of partition of the estate and order of the
court approving the same
ƒ Certified true copy of the title of real properties, front and back pages
ƒ Certified true copy of the latest tax declaration of real properties at the time of
ƒ “Certificate of No Improvement” issued by the Assessor’s Office where
declared properties have no declared improvement
ƒ Certificate of deposit/investment/indebtedness
ƒ Photocopy of Certificate of Registration of vehicles and other proofs showing
the correct value of the same
ƒ Proof of valuation of shares of stocks at the time of death
ƒ Xerox copy of certificates of stock
ƒ Proof of valuation of other types of personal property
ƒ Proof of claimed tax credit
ƒ CPA statement on the itemized assets of the decedent, itemized deductions
from gross estate and the amount due if the gross value of the estate exceeds
ƒ Certification of the Barangay Captain for the claimed Family Home
ƒ Notarized promissory note for claims against the estate arising from contract
of loan
ƒ Accounting of the proceeds of loan contracted within 3 years prior to the
death of the decedent
ƒ Proof of the claimed “Property Previously Taxed”
ƒ Proof of the claimed “Transfer for Public Use”
These documents must be submitted upon field or office audit of the tax before
the Tax Clearance/Certificate Authorizing Registration can be released to the taxpayer.
Additional documents may be required.

Penalties and Remedies

There are provisions of the National Interview Revenue Code that apply equally
to all internal revenue taxes, including estate taxes. The more important ones are found
under Title VIII (Remedies) and Title X (Statutory Offenses and Penalties).
On the part of the BIR, it may collect delinquent taxes, fees or charges and any
increment resulting from the delinquency by distraint of goods, chattels, and other
personal property of whatever character, and by levy upon real property. Such property or
portion thereof shall be sold to satisfy the tax liability, with a right on the part of the
taxpayer to redeem the property within one year from the date of sale. In addition to
distraint and levy of property, the BIR may also file a civil or criminal action for the
collection of such taxes.
On the part of the taxpayer, whenever the BIR finds that a tax should be assessed,
he has a right to a preassessment notice, to which he may respond. If an assessment is
made, it may be protested administratively by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the assessment, and to file documents in
support of such protest within 60 days from filing of the protest.. If the protest is denied
in whole or in part, or not acted upon within 180 days from the submission of documents,
the taxpayer adversely affected by the decision or inaction may appeal to the Court of
Tax Appeals within 30 days from receipt of the decision or from the lapse of the 180-day
Also on remedies, the BIR Commissioner has authority to compromise, abate and
refund or credit taxes. He is required to submit to the Chairmen of the House and Senate
Committees on Ways and Means, every six months, a report on the exercise of these
A compromise is allowed when there is a reasonable doubt as to the validity of
the claim against the taxpayer, or when the financial position of the taxpayer
demonstrated clear inability to pay the assessed tax, subject to some minimum
compromise rate 3 . Where the basic tax involved exceeds P1,000,000 or where the
settlement is less than the prescribed compromise rate, it must be approved by an
evaluation board composed of the Commissioner and four Deputy Commissioners.
Abatement or cancellation of tax liability may be done when the tax or any
portion thereof appears to be unjustly or excessively assessed, or when the administration
and collection costs involved do not justify the collection of the amount due.
The Commissioner is also authorized to credit or refund taxes that have been
erroneously or illegally received, or penalties imposed without authority, provided the
taxpayer files a claim of credit or refund in writing within two years after the payment of
the said tax or penalty.
Civil penalties and interest are imposed for certain violations. The BIR imposes a
penalty of 25% of the amount due whenever the taxpayer: fails to file any return and pay
the tax on the date prescribed; not being authorized by the Commissioner, files with an
internal revenue officer other that those with whom the return is required to be filed; or
fails to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment. The penalty shall be 50% of the tax in case of willful neglect to file the return
within the period prescribed, or of the deficiency tax if in case a false or fraudulent
returned is willfully made. The BIR also assesses and collects interest at the rate of 20%
per annum on for any unpaid tax from the date prescribed for its payment until full
payment thereof.
In addition to the civil penalties, certain acts are punishable criminal offenses,
such as willfully attempting to evade or defeat any tax, or willfully failing to pay tax, file
a return, keep any record, or supply correct and accurate information when such are
required by the code. However, all criminal violations may be compromised except
those already filed in court, or those involving fraud.

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