Tax simplified, better Philippines…

“A parent forgot to donate his property to his children during his lifetime, the latter need not worry because they will pay the same rate for estate taxes sans the complicated computations.”

Understanding how taxation works is not easy in the same way that paying taxes is not easy. While we can all agree that taxes are the lifeblood of the nation, accepting the immediate impact of any tax reform is definitely like swallowing a bitter pill.

Take, for instance, the journey to TRAIN. Prior to the journey, we were all anticipatory, excited about the prospect that it will pave the way for lower taxes and more equitable tax treatment. Now that we are in the middle of it, it does not seem so exciting after all. And that is how tax reforms normally work; our economists see the big picture, make certain assumptions and hope that all the elements work together over time.

Let me focus on a very particular case – transactions involving real estate, the most common of which are sale, donation and inheritance. These transactions used to be governed by different tax rates. If it is a sale, the seller would pay 6 percent capital gains tax; if it is a donation, the donor would pay a different rate depending on whether the donation is made to a stranger or not; if one inherits real estate, another rate applies depending on the value of the entire estate. For donations and inheritance, more often than not, one pays ultimately a tax higher than 6 percent.

This tax regime resulted in present-day problems where properties are still in the names of deceased ancestors. I have encountered cases wherein grandchildren want to dispose of land they inherited, but the estate tax due, including interest, penalties and surcharges to be paid, is just so steep that they end up just deciding to leave the property as is. Also, parents who wish to transfer real property to their children prior to their death are prevented from just simply declaring a donation because of the high donor’s tax. Some who insist would devise a sale.

The result is that properties lay dormant and do not exchange hands. This is detrimental in many ways. One, the heirs or owners are unable to dispose of them the way they want. Second, some real properties remain idle or not made useful. Third, donor’s or estate taxes are not paid, affecting the government in that it is not receiving what is due it. In the larger scheme of things, that is one uncollected tax that should have been contributed to the government’s coffers.

So I consider one good thing about the TRAIN or Tax Reform for Acceleration and Inclusion, the rationalization of the tax due on transactions involving real estate. The TRAIN simplifies the rates on the sale, donation and inheritance involving real property.

Another good thing is that now, it’s pretty simple. And owners or families can do the transfers themselves without consulting advisors like myself. That is tax simplified. So if, for instance, a parent forgot to donate his property to his children during his lifetime, the latter need not worry because they will pay the same rate for estate taxes sans the complicated computations. There is no other formula to follow.

And here’s the much bigger picture. A simplified and efficient tax system hopefully equals more taxes paid. Our government, then, will have a much bigger budget to allocate for our basic needs. As these needs are addressed, better lives are lived. Soon enough, and again hopefully, there will be projects not only for the country’s basic needs, but more for its advancement and beautification.