Chapter 11

Chapter 11: Introduction to transfer taxation Transfers -

Refer to any transmission of property from one person to another o Bilateral transfers  For a consideration  Onerous transactions or exchanges  Subject to income taxation  Sale - exchange of property for money  Barter - exchange of property for another property o Unilateral transfers  Without consideration  Gratuitous transactions or transfers  Subject to transfer taxes  Donation o From a living donor to a donee o Donation inter vivos o Subject to donor’s tax o Valued at the date of completion or perfection of the donation o Made during the lifetime of the donor o Taxable only once they are completed and perfected  Succession o From a deceased person upon death to his heirs o Either by operation of law or by virtue of will o Donation mortis causa o Subject to estate tax which has a higher tax rate than the donor’s tax o Valued at the date of death o Effected by death o Completed upon delivery of the property o Perfected upon acceptance by the donee o Complex transfers  For less than full and adequate consideration  Consideration of the facts and the circumstance  Consideration to the liquidity of the asset or the availability of willing buyers  Tax rules for adequate consideration  Deemed pure exchanges and are subject to income tax  Tax rules for less than adequate and full consideration  Split into transfer element and exchange element o Transfer portion - indirect donation subject to transfer tax  Classified as either mortis causa or inter vivos depending on the intent o Onerous portion - realized gain subject to income tax  Generally considered as inter vivos  However, if made in contemplation of death or agreed to be transferred upon death of the seller, then mortis causa o Non-taxable transfers  Not actually donation  Void transfers o Prohibited by law  Transfer of property not owned  Donation between spouses  Donations that do not manifest all essential requisites  Donations that do not conform to formal requirements  Quasi-transfers o Do not involve transfer of ownership  Transmission of a property by a person with a right of usufruct over the property to the owners of the naked title  Transmission of a property by a trustee to the real owner  Transmission of a property from the first heir to a second heir in accordance with the desire of a predecessor  Incomplete transfers o Ownership is not transferred at the point of delivery

Actual transfer of ownership will take effect in the future upon the happening of certain future events or conditions o Subject to transfer tax in the future when the transfer is completed upon the happening of the event o Completed inter vivos or mortis causa  Conditional transfers  Subject to donor’s tax at the fair value of the property at the date of their completion or perfection  Completed inter vivos upon the happening of the following during the lifetime of the donor: o Fulfillment of the condition by the transferee o Waiver of the same by the transferor  If pre-terminated by the death of the transferor, it shall be subject to estate tax at the point of death of the transferor  Revocable transfers  Subject to donor’s tax at the fair value of the property at the date of their completion or perfection  Completed inter vivos upon: o Waiver by the transferor to exercise his right of revocation o The lapse of his reserved right to revoke  If pre-terminated by the death of the transferor, it shall be subject to estate tax at the point of death of the transferor  Transfer in contemplation of death - completed by the death of the decedent  Transfers with reservation of title to property until death completed by the death of the decedent Complex incomplete transfers  Incomplete transfers are sometimes made for less than full and adequate consideration  Similar to complex transfers, the gratuity component is determined and is subject to the appropriate type of transfer tax  Donation inter vivos - fair value at the date of completion of transfer less the consideration given  Donation mortis causa - fair value at the date of death less the consideration given at the date of transfer  Test of taxability  Incomplete transfer must have been paid for less than full and adequate consideration at the date of delivery of the property  Property must not have decrease in value less than the consideration paid at the completion of the transfer o

o

Rationale of transfer taxation 1. Tax evasion or minimization theory To avoid exchanges that may be structured to defeat income taxation 2. Tax recoupment theory To recoup on future losses in income taxes caused by transfers 3. Benefit received theory Transfers are made possible by government laws 4. State partnership theory The government is an indirect partner behind wealth accumulation 5. Wealth redistribution theory Governments strive toward equitable wealth redistribution as a basic policy 6. Ability to pay theory The ability to transfer property is an indication of an ability to pay tax Nature of transfer taxes 1. Privilege tax Imposed because the transferor is exercising a privilege in the form of assistance rendered by the government 2. Ad valorem tax Amount of transfer tax is dependent on the value of the properties transferred 3. Progressive tax

Determined based on a schedule of tax rates 4. National tax Levied by the national government 5. Direct tax Cannot be shifted 6. Fiscal tax Levied to raise money for the support of the government Classification of transfer taxpayers 1. Residents or citizens - subject to tax on all transfers of properties regardless of their location a. Resident citizen b. Resident alien c. Non-resident citizen 2. Non-resident aliens - taxable only on transferred properties located in the Philippines at the date of transfer 3. Juridical persons - depends on their place of incorporation or operations Situs of properties 1. Residents or citizens - purposes of computing tax credits for foreign transfer taxes paid 2. Non-resident aliens - taxable only on transfers of properties located in the Philippines Properties considered located in the Philippines -

Franchise exercisable in the Philippines Shares issued in the Philippines in accordance with its laws Shares issued by any foreign corporation, 85% of which is located in the Philippines Shares acquired business situs in the Philippines Shares in any partnership established in the Philippines Any personal property, whether tangible or intangible, located in the Philippines

Reciprocity rule on non-resident aliens Intangible personal properties of non-resident alien is exempt provided that Filipino non-residents’ intangible personal properties are also exempted from transfer taxes. Examples -

Financial assets o Cash (Bills and coins) o Receivables or credit o Investment in bonds o Shares of stock o Interest in a partnership

-

Accounting intangible assets o Patent o Franchise o Leasehold right o Copyright o Trademark

The motive of donation is the determining factor. Motives associated with life 1. To reward services rendered 2. To relieve the donor of the burden of management of the property 3. To save on income tax 4. To see children financially dependent 5. To see children enjoy the property while the decedent still lives 6. To settle family disputes

Motives associated with death 1. Donation to take effect at the death of donor 2. Donation in the last will and testament of the donor 3. Donation with retention of certain rights until death 4. Revocable transfers 5. Conditional transfers