Adsum Notes--tax Transcript (Donor's Tax)
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ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) DONOR’S TAX (Section 98 – 104 of the Tax Code, as amended) Nature and Purpose of Donor’s Tax DONATION (gift)- an act of liberality whereby a person (donor) disposes gratuitously of a thing or right in favour of another (done) who accepts it. KINDS OF DONATION 1. Donation inter vivos- one made between two living persons, and which is perfected from the moment the donor knows of the acceptance of the done. 2. Donation mortis causa- one which is to take effect upon the death of the donor and, therefore, partake of the nature of testamentary succession. GIFT TAX DEFINED the tax imposed on the transfer without consideration of property between two or more persons who are living at the time the transfer is made. NATURE It is an excise tax, imposed on the privilege of the donor to give or on the privilege of the done to receive it is not a tax on property as such because its imposition does not rest upon general ownership although the amount of the tax is measured by the value of the property donated. Donor’s tax is imposed on gratuitous transfers of rights and property that shall take effect during the lifetime of the donor (donation inter vivos) TIU: The nature of a donor’s tax is that it is not a property tax. It is an excise tax. It is on the privilege of transmitting a property on the liberty of the owner of such property to transfer at will the property such that if a transfer during lifetime is treated as exempt from donor’s tax, do not consider all other taxes as exempt. A property that has been transferred and is considered as exempt is not considered as exempt from property tax. Those are 2 different things. Institutions exempt from property tax are not exempt from donor’s tax. So if exemption from one does not result to the exemption of the other tax even if it pertains to one and the same property. PURPOSE a. To raise revenues – LIFEBLOOD DOCTRINE. b. to supplement the estate (and inheritance) taxes by preventing their avoidance. c. to prevent avoidance of income taxes through the device of splitting income among numerous donees who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income taxation. DONOR’S TAX vs. ESTATE TAX
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) DONOR’S TAX Imposed on donations inter vivos Rate is lower Exemption is only 100K Application of Law in Donor’s Taxation LAW APPLICABLE: law in force at the time of the perfection and completion of the donation. GOVERNING LAW The law governing donations is not strictly limited to the Tax Code. It can expand to other different laws. So say for example, electoral campaign contributions, it will be covered by the Election Code. PERFECTION OF DONATION A donation is perfected when there is acceptance by the donee during lifetime. NOTICE TO THE DONOR OF THE ACCEPTANCE IS REQUIRED There must be knowledge or notice of such acceptance by the donor because prior to the notice of acceptance to the donor, the donor can withdraw the donation – there is no perfected donation. COMPLETION OF DONATION It is completed upon delivery of the donation, either actual or constructive delivery. ILLUSTRATION Under R.A. No. 1, donations to politicians for election purposes are subject to donor’s tax. On Nov. 24, 2009, the law was repealed by R.A. No. 2 making it exempt from donor’s tax. If donation was made Nov. 20, 2009 in a written document (one of the formalities for the validity of donation of personal property valued at more than 5K). The written document was transmitted to the donee-politician through mail. On Nov. 25, 2009, just before the politician took hold of it, he died of heart attack. Will the donation be subject to donor’s tax and under what law? Which law will govern in this case? No law will apply because there was no perfected donation since there was no acceptance by the prospective donee. Now lets say the donee-politician did not die. He accepted the donation on Nov. 26, 2009, which law will apply? R.A. 2 because it is the law at the time that the donation is perfected and completed. TIU: When RA No. 8424, our Tax Code of 1997, took effect on January 1, 1998, it actually revised the rates of donor’s taxes. So donation made, perfected and completed on Dec. 1997 would have to follow the old donor’s tax table rates. Donations which were made prior to the effectivity of RA No. 8424 but the perfection and completion of such donations
ESTATE TAX Imposed on transfer in the nature of testamentary disposition Rate is higher Exemption is 200K
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) happened Jan. 2, 1998, then we follow the new tax code – the new donor’s tax rates. So you have to determine when is there perfection and completion of the gift. III. Kinds of Donors A. Individual Persons 1. Resident citizen 2. Non-resident citizen 3. Resident alien 4. Non-resident alien B.
Juridical Persons Corporation partnership
IV. Kinds of donees, as to relationship to donor A. Stranger STRANGER DEFINED Stranger is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendants; or a relative by consanguinity in the collateral line within the 4th degree of relationship ILLUSTRATION If your great-great-grandfather (GGF) makes a donation to you, can you consider your relationship to your GGF as a stranger or non-stranger relationship? NON-STRANGER relationship because GGF is an ancestor regardless of the number of degrees. B.
NON STRANGER DEFINED Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendants; or a relative by consanguinity (not affinity) in the collateral line within the 4th degree of relationship DEGREE OF RELATIONSHIP IS IMMATERIAL For ancestors or descendants it does not matter how many degrees they are connected to you. Lineal descendants, number of degrees does not matter. Legally Adopted child and illegitimate child also covered by lineal descendants.
NON STRANGERS THAT ARE NOT BLOOD RELATED 1. Spouse 2. Legally Adopted child covered under lineal descendants
EXTENT OF RELATIVE BY CONSANGUINITY Relative by consanguinity in the collateral line within the 4th degree of relationship – up to the extent of your 1st degree cousin.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) IMPORTANCE OF DISTINGUISHING BETWEEN A STRANGER AND A NON STRANGER Because they have different donor’s tax rates when the donee is a stranger or a nonstranger. The more favorable is when the donee is a non-stranger TIU: If the donor to the donee has a relationship of a stranger relationship, the taxability is at a flat rate of 30%. So that’s high. If the relationship between the donor and the donee is that of a non-stranger, it will be covered by the first 100K-exempt and to the first rate of 2% up to the maximum rate of 15%. So as much as possible, you are probably encouraged to donate only to non-stranger. NB: Not all co-non strangers are capacitated to receive a donation. e.g. spouses. Requisites of a taxable gift A. Donative intent, in general DONATIVE INTENT DEFINED Intent of the donor to donate without consideration since it’s a gratuitous transfer. It refers to the proper declaration of the legal owner of a property or right to transfer ownership to another without consideration. TIU: Whenever a transfer is made and together with it, the donor observes all the requisites and elements to make it a valid donation with the execution of the deed of donation, etc. requiring acceptance, then you can really say that there is an intent to donate. TRUE OR FALSE. Only transfers of gifts which are coupled with a donative intent are subject or covered by donor’s taxation. FALSE, because there are gifts wherein donative intent is not necessary but are still subject to donor’s tax, such as transfers for inadequate consideration. TIU: Not all items covered by donor’s taxation always have a donative intent. In some cases, there is such transfer, although you did not have the intent to donate, but still it is subject to donor’s taxation because the transfer, for example, is for an insufficient consideration. INSTANCES WHERE THERE IS NO INTENT TO DONATE BUT STILL CONSIDERED AS DONATION (INDIRECT GIFTS) 1. Transfers for insufficient consideration Our law on donor’s tax provides that the transfer for insufficient consideration is subject to donor’s tax. Example: Mr. A sold a property for 100K even if the FMV is 1.1M. He sold it during his lifetime on Nov. 24, 2009. Is this transfer for insufficient consideration? Is this subject to a tax?
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) It is a transfer for insufficient consideration, and thus, subject to donor’s tax to the extent of the difference between the FMV and the insufficient consideration (1M). When is it subject to estate tax? When the donor (Mr. A) dies because estate taxation as well says that part of the gross estate would be transfers for insufficient consideration. So if it’s subject to donor’s and estate tax, is it not double taxation – taxing the same transfer on the same property? YES, there is double taxation. However, although both estate taxation and donor’s taxation provides that both taxes can be imposed whenever a transfer or a sale is made for an insufficient consideration, only one can be imposed and it depends at what point the discovery is made. If the discovery is made during the lifetime of the person who made the insufficient consideration transfer, then donor’s tax would be imposed. If discovery is made at the time that gross estate is gathered at the time of death, then only estate tax would be imposed. After the transfer for insufficient consideration is paid of donor’s tax, at the time that the donor dies, such transfer is already erased in the gross estate of the donor-decedent. 2. Condonation of debts NOT ALL CONDONATION OF DEBTS WILL BE SUBJECT TO DONOR’S TAX Cancellation or condonation of indebtedness would either result to being subject to income tax or being subject to donor’s tax. It will be subject to donor’s tax when the condonation is not coupled with the requirement of a future service or whether a past service has already been performed. So in the absence of that, it’s subject to income tax, meaning if there is service accompanying the renunciation of the right to collect, then, it becomes subject to income tax because it becomes compensation on the part of the donee.
TRANSFER INTER VIVOS BUT CONSIDERED AS TRANSFER MORTIS CAUSA Transfers inter vivos when ownership still belongs to the donee is considered a disposition mortis causa because the ownership still belongs to the donee despite the existence of the transfer or donor. But if such transfer during lifetime still falls or is classified among the dispositions which is actually a testamentary disposition, a very good example would have to be the revocable transfer, wherein the donor would withhold certain rights in the transfer of the property such that if the transfer during lifetime carries with it the absolute will of the donor to alter, amend, revoke or
If you remember in Tax 1, we have one exception to the rule – condonation of indebtedness that does not result to increase in the patrimony of the donee’s assets will not as well result to donor’s tax and not even income tax according to a SC ruling. [but I don’t remeber anything..hahaha]
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) terminate the transfer or enjoyment of property rights enjoyed by the donee, it will still be considered as disposition mortis causa. It’s not subject to donor’s tax. In cases where these transfers have been considered as donations subject to donor’s tax and later on found out to be testamentary dispositions because of the withholding of certain rights and privileges by the transferor, we have to pay all over a new kind of tax, which is the estate tax and the donor’s tax that have been erroneously paid earlier would have to be a subject of a claim for refund. However, not all transfers inter vivos are subject to donor’s tax, especially if it is coterminous or the transfer of economic benefits would have to be only after death. B.
Capacity of the donor
CAPACITY OF THE DONOR DEFINED Capacity of the donor refers to the condition and legal capacity of the donor to enter into a valid contract. INCAPACITATED TO DONATE a.Insane b. Minor c.Donations between spouses GR: Husbands and wives are not allowed to make donations to each other. EXC: in cases where it tantamount to moderate gifts in times of family rejoicing or distress. TIU: Or another exception, which is not really an exception, you can transfer to your wife and husband at the time of death, which is transfer mortis causa. NB: Moderate gifts depend on the financial capacity of the donor. ILLUSTRATION Let’s say Mr. A gave a diamond ring to his wife and Mr. B gave also a diamond ring to his wife. Mr. A is a multimillionaire and Mr. B is ordinary. What are the tax implications of the 2 gifts? Mr. A’s gift was a valid donation, therefore subject to donor’s tax. But Mr. B’s gift was not a valid donation, therefore not subject to donor’s tax.
On the other hand, if the donation was void because it does not come within the ambit of moderate gifts, it is not subject to donor’s tax. There is no
Although husbands and wives are not allowed to donate in favor of the other as a general rule, there are cases when they are allowed to donate moderate gifts. If and when the gift would come within the meaning of a moderate gift in accordance with the financial capacity of the donor-spouse, it does not mean that it will not be subject to donor’s tax. Husbands and wives will be subject to donor’s tax but only in cases where the donation or a gift was validly made, meaning not excessive.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) donor’s tax in a void donation but there are cases if and when it would result to a valid transfer but not a donation, when in cases it will be considered as increasing the assets of the donee, but not really donee because donation is void, the transferee, it may be subject to another tax, which is income tax. DONEE NEED NOT BE CAPACITATED The donee need not be capacitated to receive the gift to make the donation valid. It is enough that the duly authorized representative of the incapacitated donee received the donation. This refers only to minors and insane persons. INCAPACITATED DONEES a. Those under civil interdiction b. Spouse COMMON LAW SPOUSES COVERED a man and a woman living together as husband and wife without the benefit of a valid marriage cannot donate in favor of the other. The reason behind the law is to avoid undue influence over each other. NB: A lawyer who notarized the will and testament is not incapacitated to accept donation or as a donee or to inherit. HEIR DISINHERITED BUT GIVEN A SHARE IN THE WILL Whenever a person, such as a disinherited heir, who has no legal right to enforce upon the estate of his share, gets something out of it, it may be considered as a gain subject to donor’s tax. In the absence of a legal right to inherit, there can be no inherited property. You call the asset that was given to you as a gift subject to donor’s tax. C.
Reduction in the patrimony of the donor
Acceptance by the done during lifetime
FORMS TO EFFECT A TAXABLE DONATION Personal Property valued at 5K or less 1. Oral/Verbal – where the value of the personal property (movable property) donated is 5K or less, the donation can be made orally. An oral donation requires simultaneous delivery of the thing or of the document representing the right donated.
ACCEPTANCE IS NECESSARY TO MAKE A TAXABLE DONATION ILLISTRATION You made a donation. You informed your seatmate that you are to make a donation in her favor through a letter transmitted to her. She was happy, she made a conforme, she signed, she accepted and she mailed it back to you but before it reached you, something happened, you died. Subject to donor’s tax? NO. Acceptance for it to be a valid acceptance and make the donation valid, it must be made by the donee during the lifetime of the donor. It’s not even during lifetime lng. It must also be made known to the donor himself.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) Personal Property valued at more than 5K 2. Written – where the value of the personal property donated exceeds 5K, the donation and the acceptance shall be made in writing, otherwise donation shall be void Real Property 3. public instrument – in order that a donation of real property (immovable property) shall be valid, it must be made in a public instrument (Deed of donation), specifying the property therein.
ILLUSTRATION Donation of real property valued at 3K is made in a private document. Is the donation valid? NO, it’s void ab initio. The donation is void from the start in cases of real properties donated and not made in a public instrument/document. FORMS OF ACCEPTANCE TO MAKE A TAXABLE DONATION Personal Property valued at 5K or less 1. In order to effect a valid donation of a personal property whose value is not more than 5K, you simply have to make the donation coupled or simultaneous with the physical delivery of that personal property. Personal Property valued at more than 5K 2. Where the value of the personal property donated exceeds 5K, the donation and the acceptance shall be made in writing, otherwise donation shall be void Real Property 3. The acceptance of a donated real property may be made by the donee in the same deed of donation or in a separate public document. If the acceptance is made in a separate document, the donor shall be notified of such acceptance in authentic form. This shall be noted in both instruments.
Increase in the patrimony of the done
Actual or constructive delivery of gift
COMPLETION OF THE DONATION So the delivery of the gift, whether actual or constructive, completes the donation and makes it a taxable donation.
The acceptance must generally be made personally or in some cases, acceptance may be made through an authorized person so long as that person has been authorized to accept that specific donation – it’s actually a special authority of the designated person who is accepting the donation in your behalf. It’s not really all the time personal acceptance. (The donee must accept the donation personally, or through an authorized person with a special power for that purpose; or with a general and sufficient power; otherwise, the donation shall be void – Art. 745, Civil Code)
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) ILLUSTRATION If an heir renounces his share in the estate, then his share will have to accrue to the other heirs. Let’s say there’s an estate shared by A, B, C, D and E as an inheritance from Z. A relinquished his right. B, C, D and E will all share in the portion that A had renounced as part of his inheritance. Is this act of increasing their patrimony or asset as donation subject to donor’s tax? NO, because renouncing the right of one heir of his share would accrue to the others as if the remaining heirs are the ones sharing the property. Is it subject to estate tax? YES, because that is still part of the estate left by Mr. Z and there’s no intent to donate specifically to an identified donee to the exclusion of the other heir, it will become subject to estate tax – the full estate of A – E – even if A renounces his share. NB: The only time when a renunciation by an heir of his inheritance would result to a donor’s tax is when his renunciation is specific and categorical to one or more identified heirs to the exclusion of some other heirs. If everyone will share, either categorically (B, C, D and E) were identified by A to share or no intention of whoever, it’s a general renunciation, it’s still part of the gross estate subject to estate tax. But if A says that C will get his renounced share, everything is subject to estate tax plus A’s share given to C as a gift will be subject to donor’s tax – on top of the estate tax. VI. Properties covered as gifts in general, what is meant by gross gift?, whether the transfer is in trust or otherwise A. Real property B. Personal tangible property C. Personal intangible property Exemptions to non-resident aliens, when available The properties that may be given as a gift in trust or otherwise, directly or indirectly given, are real, personal tangible and intangible properties, wherever situated except in the case a NRA, who can only be subject to donor’s tax on properties that are located within the Phils. Just like estate taxation, even to the extent of the reciprocity clause, we follow the same rule.
Personal Intangible Personal Property
Within and without Within and without Within and without within
Within and without Within and without Within and without within
Within and without Within and without Within and without GR: within EXC: reciprocity Page1
RC/DC NRC RA/RFC NRA/NRFC
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) For RC, NRC, RA – they’re all taxable on properties within and without. But NRA is only taxable for real properties located within the Philippines, personal tangible properties within the Philippines., and personal intangible properties that have situs in the Philippines – will be subject to donor’s tax. However, we still follow the same principle in estate taxation that general rule is that NRA having intangible personal properties in the Philippines will be subject to donor’s tax unless we can apply the reciprocity clause, which simply says that whenever the domicile country of the NRA does not impose a donor’s tax or allows an exemption from donor’s tax to Filipinos who are not residents of their country on personal intangible properties of those Filipinos, we as well don’t impose any tax on personal intangible property of NRA even if it has a situs in the Phils. PERSONAL INTANGIBLE PROPERTIES WITH SITUS IN THE PHILIPPINES 1. Shares of stocks of domestic corporations – due to the Benefits-received theory 2. Shares of stocks of foreign corporation so long as these foreign corporations are operational in the Philippines more than 85% and if 50%, pro rata, having situs in the Philippines But if it’s operational in the Philippines less than 50%, that foreign corporation shares of stocks will not have Philippine situs. 3. Franchises, patents, copyright, royalties so long as it is exercised in the Philippines, it will have Philippine situs. CORPORATIONS For DC – they’re all taxable on properties within and without. But NRFC is only taxable for real properties located within the Philippines, personal tangible properties within the Philippines., and personal intangible properties that have situs in the Philippiness – will be subject to donor’s tax. TRANSFERS MADE IN TRUST (TRANSFERS FROM THE TRUSTEE TO THE TRUSTOR) If the transfer is made in trust for someone else, it is subject to donor’s tax as well. That’s why whether a transfer is made in trust or otherwise, direct or indirect, it is subject to donor’s tax so long as there has been a relinquishment of the control from the donor-trustor. Dba one of the requisites – there is a reduction in the patrimony of the donor which results to the increase in the patrimony of the donee and there is the intent to donate or no intent to donate. Subject to Donor’s Tax there is transfer of ownership and title and passage of control
DONEES ARE THE BENEFICIARY where a gift is made to a trustee for the benefit of one or more beneficiaries, the beneficiaries, and not the trustees, are the donees of the gift.
Subject to Estate Tax there is no passage of control there may be a transfer (revocable) of the ownership and title
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) WHO IS LIABLE FOR PAYING DONOR’S TAX? DONOR, otherwise it will be called donee’s tax. [logic! Haha] GR: Donor’s tax is always the liability of the donor (statutory tax payer) in the eyes of the law. EXC: by agreement, tax is shouldered by the donee.
VII. Transfers for less than an adequate consideration A. Ordinary asset The difference between the FMV and the consideration at the time of the donation shall be subject to donor’s tax. B. Capital asset Not subject to donor’s tax. NB GR: all transfers for inadequate consideration are subject to donor’s tax. EXC: those properties covered by Sec. 24(D) – real properties considered as capital assets and Sec. 27(D) – capital gains from the sale of shares of stock not traded in the stock exchange. ILLUSTRATION A Motor Vehicle FMV= 1M Sold = 100K
B Second residential property FMV = 1M Sold = 1ooK
C Commercial building FMV = 1M Sold = 100K Cost = 50K
In the Illustration above, which is subject to donor’s tax? Transfers A and C. A commercial building used in business and a motor vehicle is an ordinary asset. A 2nd residential property is a capital asset, thus not subject to donor’s tax.
REASON WHY CAPITAL ASSETS LOCATED IN THE PHILIPPINES ARE NOT SUBJECT TO DONOR’S TAX Because they’re already subject to capital gains tax. Capital gains tax is a kind of income tax and in fact, it’s one of the exceptions wherein it is a tax not necessarily on income but on the capital.
TIU: Not all real properties are automatically taken out from the coverage of donor’s tax. In fact, if you look at the general rule, all transfers for inadequate consideration discovered during the lifetime of the donor or the seller is subject to donor’s tax except if that property happens to be a real property classified as a capital asset located within the Philippines.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) ORDINARY ASSET SUBJECT TO INCOME TAX YES, it is subject to income tax. What has been captured in income taxation is only the difference between the selling price and the cost. If the difference is 50K, what is taxed is only the 50K, never on the difference between the FMV and the selling price. But for capital gains tax on capital assets, everything is captured because it’s already on the FMV of the BIR or zonal value of the local assessor, whichever is higher.
NB If real property is used in business, it’s an ordinary asset. If it’s used for personal purposes, it’s a capital asset. PROPERTIES OF CORPORATIONS Properties of Corporations could either be capital or ordinary. But to some extent is has been considered as capital – why would you put in a real property in a business if you don’t intend to use it. The only exception is, under Revenue Regulations, when that property has been held as an investment for so long that it has remained undeveloped, unutilized for a number of year, then, you may ask for an opinion from the BIR that it is already considered as capital asset but that’s a long and tedious process. The BIR is more interested in taxing your property to ordinary tax of 30% than 6% capital gains tax. Real estate companies so long as they have real properties put in together in one corporation, general rule is it is always an ordinary asset. Why? If you put in an asset of 100K 10 years ago and the value now is 10M, it’s really hard to dispose it as capital asset. If it’s capital asset, it could have been 6% on the 10M. But if it’s treated as ordinary asset, the difference of 9.9M is 30% + 12% VAT. So do not mistakenly just put in all your assets in a real estate corporation. VIII. Exemptions of certain gifts vs. deductions from gross gift Deductions vs. Exemptions in Donor’s Taxation Exemption from gross income, automatically, in donor’s taxation, when we say exemptions we don’t consider it as part of the income that from gross gifts vs. deductions from gross we have to declare to the government. gifts, these are basically almost the same. When we say that a particular gift is exempt
Deductions vs. Exemptions in Y Taxation
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) Deduction from gross income are simply outflows of money or incurrence of expenses that should at least form part first of the gross income before they are considered as deductions or deductible expenses.
from donor’s tax or exemptions of certain gifts from donor’s tax, it will still be form part of the gross gifts that needs to be declared for tax purposes for the reason that we need to give the BIR or the tax authorities the chance to validate whether our assumption of a certain gift is correct – whether it’s really exempt from donor’s tax or not. So exemptions partake deductions in so far as presenting it in the donor’s tax return is concerned. You put in all the donations that you’ve made, whether it’s exempt or not, and after which, if it’s found to be exempt, simply deduct it from the gross gifts that you’ve declared.
GROSS GIFTS THAT ARE EXEMPT FROM DONOR’S TAX 1. when you make donations to the national government, political subdivisions or government agencies that have not been created for profit, whether the donor is a Resident or Citizen or a NRA – all these donors can claim as an exempt gift the donations made to the government or its agencies not created for profit 2. gifts made in favor of an educational, charitable, religious, cultural, social welfare organization, trust, philanthropic or research organizations, including accredited NGOs, so long as the donations made to them, not more than 30% of which will be used for administrative purposes. But strictly, if the donor is a Resident or Citizen, the recipient of the donation must have been created: 1. As a non-stock, non-profit entity 2. Governed by a board of trustees, who is not a receiving any compensation from the entity 3. No income of which will inure to any private individuals, meaning it’s not paying dividends 4. All income or proceeds of such entities receiving the donation will be used for the furtherance of the purpose for which it was created [confused: all income? Does all income mean not more than 30%?] Slightly different is that if the donor is NRA, so long as the donation is given to entities such as educational, cultural, scientific, religious, social welfare, and etc. including accredited NGOs, the requirement is that these entities must not spend more than 30% of the donation for administrative purposes for it be exempt. dowries or gifts on account of marriage
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000) DOWRIES MAY BE MADE BY? Made by the parents to legitimate, recognized natural (those who will soon to be legitimated children because they were conceived and born of parents without legal impediment to marry each other), or adopted children. CHILDREN INCLUDE ILLEGITIMATE So legitimate, illegitimate, recognized natural, legally adopted children may be recipients of these dowries from parents given on account of marriage not exceeding 10K. WHEN SHOULD BE GIVEN? Before marriage or within 1 year after marriage ILLUSTRATION If marriage is to take place Dec. 25, 2011 and a dowry is made or given on Dec. 1, 2010, can it be considered as an exempt gift? YES, because there is no limit for the period when dowry is made before marriage and since in this case, dowry was made before marriage, such dowry is considered as exempt gift to the extent of the first 10K. TIU: Whenever a dowry is given and you’re trying to determine whether it’s still exempt or not, there is no time frame within which you have to reckon if it’s given before marriage so long as it’s given on account of marriage as long as the marriage is valid or legally recognized by law, it may be considered as an exempt gift to the extent of the first 10K pesos. But if the dowry is given after marriage or after the celebration of marriage, it should be made within 1 year. HOW MANY TIMES CAN A PARENT CLAIM AN EXEMPT DOWRY? Only one exempt dowry for each child for each legal marriage
Is this an absolute rule? NO. There’s an exception. It depends on what type of property is given as a dowry. If it’s conjugal property, parents are considered as separate donors to the child. But if the property given is an exclusive property, only the parent who owns the exclusive property can claim the 10K dowry as an exempt gift. ILLUSTRATION
AMOUNT THAT CAN BE CLAIMED BY PARENTS ILLUSTRATION If the parents give a dowry in a value of 500K, how much exempt dowry can the parents claim? 10K for each parent. Whenever dowry is given to a child on account of marriage, both parents can claim the dowry as exempt gift.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) Mr. A & Mrs. A, they have a child Mr. X, who is going to marry Ms. Y. Assuming that the dowry will be given by Mr. A and Mrs. A in the amount of 1M to both Mr. X and Ms. Y. How much net gift is taxable? Whenever a gift is given to 2 spouses, it is assumed that it is given to both of them unless the donor specifies otherwise – this is the default. 1M was intended for both Mr. X and Ms. Y, the problem says so, so the donor of Ms. Y are both the parents of Mr. X – each parent giving 250K each to Mr. X and Ms. Y, so a total of 1M. Mr. A and Mrs. A are the parents of Mr. X, so any dowry given to the child can be reduced of the exempt dowry to the extent of 10K so long as it is given on account of marriage before the celebration or within 1 year after the celebration of marriage. The dowry given to Ms Y cannot be reduced of the exempt dowry to the extent of 10K because the recipient is not a child but the daughter-in-law. So how much is the taxable net gift? Refer to illustration below [Note: DTR – Donor’s Tax Rates in the donor’s tax table in a non-stranger relationship]. So the first 100K is exempt to both parents in so far as the gift to their son is concerned because of their non-stranger relationship with their son. Taxable to the father in so far as his gift to his son is concerned is only 140K. The gift of the mother to her child is also taxable at 140K. However, the first 100K is not exempt in so far as the gift to Ms. Y is concerned because of their stranger relationship, which is taxable at a flate rate of 30%, thus, taxable gift in so far as Ms. Y is concerned is 250K. Mr. and Mrs. A
Net Gift Taxable Net Gift
Mr. A 250,000 - 10,000 240,000 - 100,000 140,000 X DTx Rate DTx Payable
250,000 - 10,000 240,000 - 100,000 140,000 X DTx Rate DTx Payable
250,000 0 250,000 0 250,000 X 30% DTx Payable
250,000 0 250,000 0 250,000 X 30% DTx Payable
TIU: If the gift is given to a stranger, meaning not in accordance with who we identified as nonstrangers, example daughters-in-law can never be a non-stranger, she’s not within the 4 th degree of consanguinity in the collateral line but she’s related by affinity, therefore, the donor’s tax table will not apply.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) The donor’s tax table starting with exempt of first 100K up to 15% for anything beyond 10M will only apply if the relationship of the donor and donee is that of a non-stranger. If stranger relationship, it’s automatically at a flat rate of 30%, no exemption of the first 100K. If both parents will contribute funds and such funds, we assume this as a conjugal property of both spouses, if given to Mr. X and Ms. Y on account of marriage, not specifically to Mr. X nor Ms. Y, will be assumed as both parents giving to each person and the parents will be considered as separate donors. How many returns will have to be filed here? 4 – Mr. A and Mrs. A will file their separate donor’s tax returns for each donation to Mr. X and Ms. Y since donation to Mr. X will follow the donor’s tax table while donation to Ms. Y will not follow such table. IX. Exemptions of certain gifts allowed to a citizen or resident (RC, NRC, RA) A.
Dowries or gifts on account of marriage
B. Gifts made to or for the use of the National Government, its agencies or political subdivisions Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government C. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, etc., requisites [Section 101 (A)(3) of the Tax Code] EDUCATIONAL EDUCATIONS NEED NOT BE ACCREDITED For the donation to an educational institution to be tax free, what is required is that it is only a non-stock, non-profit educational institution.
INSTITUTIONS COVERED For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether
NOT MORE THAN 30% OF THE DONATION SHALL BE USED FOR ADMINISTRATIVE PURPOSES Exempt are gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. REQUISITES FOR NON TAXABILITY 1. Not more than 30% of said gifts will be used by such donee for administration purposes 2. Incorporated as a non-stock entity 3. Paying no dividends 4. Governed by board of trustees who receive no compensation 5. Devoting all its income, whether students’ fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its AOI 6. If it’s a NGO, it must be accredited. Exemptions of certain gifts allowed to a non-resident alien (NRA) A. Gifts made to or for the use of the National Government, its agencies or political subdivisions Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. B. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, etc., requisites [Section 101 (B)(2) of the Tax Code] NOT MORE THAN 30% OF THE DONATION SHALL BE USED FOR ADMINISTRATIVE PURPOSES Exempt are gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. ILLUSTRATION A NRA wishes to donate to a religious organization but not all the requisites are present. It does not comply that all its income, whether students’ fees or gifts, donations, subsidies or other forms of philanthropy, must be devoted to the accomplishment and promotion of the purposes enumerated in its AOI; it pays compensation to its board of trustees. Will it be an exempt donation? YES, because what is required for the donation to be an exempt donation when the donor is a NRA is only that not more than 30% of the gifts shall be used by such donee for administration purposes and that the donee is a nonstock, non-profit institution.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) TIU: So it is easier for a NRA to look for a donee so long as it’s non-stock, non-profit and not more than 30% would be used for administrative purposes, it may be an exempt donation for a NRA. So it simply means we are encouraging NRAs to donate even to those which are not among the strict requirements for a donation of a RC, NRC, RA to these types of institutions. Although it’s the same types of institutions, but the requirements differ – lesser requirements when the donor is a NRA. XI. Deductions from gross gift A. Encumbrances Whenever a donated property has an attaching encumbrance, such as mortgage, security, interest, unpaid taxes on the donated property (not donor’s tax liability) by the donor and that there is an agreement that the donee will assume all of these encumbrances or liabilities, it will be considered as deductions against the gross gift for the simple reason that the actual benefit received by the donee is only net of the encumbrances that the donee will have to shoulder.
Whenever the donor puts a condition in his donation that the donee will have to spend for or shoulder, it will be considered as a diminution to the value of the gross gift that is given. ILLUSTRATION If the donor is donating 10M to Mr. X but with the condition that Mr. X will have to donate half of it to a charity or foundation of the donor’s choice, only half of the gross gift will be considered as a taxable net gift from Mr. X because it is the true economic value that has benefits the donee, Mr. X. It’s simple – any charge that you would like the donee to shoulder, it will be a diminution of the gross gift. XII. Net gift and donor’s tax rate A. Principle of accumulation PRINCIPLE OF ACCUMULATION each gift made during the calendar year must be set forthed in the return which is to be included in computing net gift
RATIONALE FOR ACCUMULATION 1. One reason is that, you can only have one 100K exemption every calendar year donation, otherwise, if you are not required to accumulate your donation, every time you make a donation during the calendar year, you simply have to separate 100K each per donation and you will not liable for any donor’s tax. [by analogy, lifeblood doctrine]
NB: ALWAYS calendar year.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) 2. Second reason is that, as you go along the calendar year and you have accumulated various donations, your tax liability would have to increase in accordance with the total number of donations in what bracket it belongs, so if your total donations would exceed 10M during the calendar year, then your tax bracket would have to be at 15% already.
In A (January 1, 2010) – How much is the net gift? Gross gift – Deductions = Net gift 500K – 10K = 490K (taxable net gift of 390 + exempt of 100K)
In B (July 1, 2010) – Would you accumulate your first and second donations? NO, donations to strangers need not be accumulated with the donations to nonstrangers because the tax table does not apply to a stranger. The 1M donation in B is automatically subject to a 30% tax rate.
3. In C (October 1, 2010) – Would it be accumulated in the tax return? Would there be accumulation of gifts? NO, since no principle of accumulation is followed to donations to strangers. We do not have to accumulate in this case since an LGU is a stranger but whether or not if the donation to an LGU is an exempt donation, you still need to file a donor’s tax return separately.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) 4. In D (December 1, 2010) – The principle of accumulation will apply here. The donation made in this case would be reflected as how much is your gross gift? 100K Deductions? 0, so net gift is also 100K in this case plus your previous net gift in A of 490K. So your total net gift as of Dec. 1, 2010 is 590K [490K in A + 100K in D]. The principle of accumulation simply says that you accumulate the net gifts made during the calendar year. 5.
In E (January 1, 2011) – What will you do with this donation? The donation made in this case will be taken as a separate donation for another calendar year even if the recipient is the same recipient who received the donation a month ago, since it’s a different calendar year, we will have to start all over again. So in E, this will be the first donation for the calendar year of 2011. In fact, if you want to save up on taxes and you want to donate 200K to a specific person who is a non-stranger to you, you can donate the first 100K on December 31 this year and the other 100K on January 1 next year. Both 100Ks will be exempt, assuming you have not made a donation to another non-stranger during the calendar year. You’re not really restricted or prohibited from splitting your donation in order to avail of the first 100K exemption so long as you only have 100K exempt during the entire calendar year.
NB: Principle of accumulation is not recognized in estate taxation because the decedent only dies once and he only leaves estate once when he dies.
B. Exemption from donor’s tax First 100K. C.
Donor’s tax credit
WHO CAN AVAIL? Just like in estate taxation, since RC, NRC, and RA are taxable on donations of properties located within and without, therefore they’re expectedly liable on foreign donor’s taxes for properties donated and located abroad.
If only 10% of your worldwide donation comes from foreign donation, then only 10% of your Phil. donor’s tax is offsettable against your foreign donor’s tax, not to exceed –
GENERAL RULE Any foreign taxes paid in accordance with the proportion that we have fully mastered already are deductible against the Philippines donor’s tax.
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) whichever is lower between your actual foreign donor’s tax paid and the maximum limitation per country or the global limitation. EXCEPTIONS a. Per country limitation: [Net gift of foreign country/Entire net gifts) x Phil. donor’s tax b. Global limitation: [Net gift of all foreign countries/Entire net gifts] x Phil. donor’s tax XIII. Manner of computing the donor’s tax A. Capital property B. Conjugal or community property 1. Each of the spouses shall be considered as separate donors for the common or conjugal property to the extent of the spouse’s share, which is automatically ½. 2.
Both spouses are expected to file separate donor’s tax returns.
3. But if the property donated by a spouse belongs to its exclusive property, then only that donating spouse is required to file a donor’s tax return. XIV. Administrative matters A. Filing donor’s tax return It should be filed within 30 days after the date the gift is made or completed. Payment of donor’s tax 1. When to pay the donor’s taxAt the same time the return is filed. So pay as you file. 2.
Where to pay the donor’s tax a. b. c.
An authorized agent bank Revenue district office Revenue collection office
d. Duly authorized treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or e. If there be no legal residence in the Phils., with the Office of the Commissioner If the donor is a non-resident, where should he file the return and pay the donor’s tax? a.The Phil. embassy or Consulate in the country where he is domiciled at the time of the transfer, or
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) b.
Directly with the Office of the Commissioner
TIU: Whenever payment of taxes to be made, we make the payment to an authorized agent bank that is located within the same revenue district office of the BIR where the donor is a domicile. EXAMPLE So if the donor is a resident of Mandaue, you have to pay it with the bank that has been authorized by the BIR to receive tax payments. So it’s usually Land Bank of the Phils. It’s an instance where tax collection may be made by a private entity. But if the donor is not a resident of the Phils., say for example an immigrant, NRC or NRA, it has an option of paying directly with the CIR in Quezon City or with the Phil. embassy where he is a domicile. C.
Penalties for non compliance 1.
For late filing or late payment, the BIR imposes surcharge of 25%.
For fraudulent declaration of donation, it’s 50% surcharge.
3. And in all instances where the government is deprived for a time of the proper taxes, the donor has to pay interest of not more than 20%. So if it’s found out later after more than 2 years, you have to pay more because it’s 20% based on the basic donor’s tax deficiency. DISTINCTIONS BETWEEN DONOR’S TAX AND ESTATE TAX DONOR’S TAX Imposed upon the privilege to give
ESTATE TAX Imposed upon the privilege to transmit property to heirs
Transfer is between the living
Transfer is from the deceased, through his/her estate, to the living
Transfer may take place between natural Transfer takes place only between natural and juridical persons persons Less deductions
Exemption of first 100K in case of non- Exemption of first 200K stranger relationship Payment and Filing must be made within Payment and filing must be made within
Lower tax rates in case of non-stranger Higher tax rates which ranges from 5relationship, which ranges from 2-15% 20%
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tiu’s Outline) 6 months
Principle of accumulation is applicable
Principle of applicable