MODULE 1: DONOR’S TAXATION

Lesson 5: Laws / Rules on Allowed Deductions

Overview:
Under the Civil Code of the Philippines, donation is an act of liberality whereby a
person disposes gratuitously of a thing or right in favor of another, who accepts it. The transfer
includes not only the transfer of ownership but also the passage of control over the economic
benefits of the property.
The computation is on a cumulative basis over one calendar year.
Donor’s Tax is imposed on the transfer of property by way of gift inter-vivos. The tax shall not
apply until there is completed gift.

Allowed deductions are those amounts specified by law / BIR to be deductible from
the Gross Gift to arrive at taxable net gift that is subject to computation of donor’s tax. These
deductions include encumbrances on the gift, diminution on the gift as directed by the donor and
those exempt gifts as specified by NIRC and other special laws.
This module will discuss in details the Allowed deduction in Donor’s taxation to be
able to compute the proper donor’s tax due payable to BIR.

Module Objectives:
After successful Completion of this module, you should be able to:
1. Know the provisions of Tax Code (both the Old and new Tax Code) related to Allowed
deduction to arrive at Taxable Net Gift.
2. Summarized the amendments made by TRAIN law on the Philippine Tax Code.
3. Apply the provisions of Tax Code in different scenarios.
4. Identify the transactions (donations / gift) that are part of Gross gift and Allowed
deductions.
5. Identify transactions that are exempted and excluded from Donor’s tax.
6. Determine the amount Allowed deductions to compute the taxable net gift.
7. Compute the Donor’s Tax still due based on the Tax Code (both the Old and New Tax
Code)

Course Materials:

AMENDMENTS BY TRAIN LAW (RA 10963)

DONOR’ S TAX OLD NEW (Effective Jan 1, 2018)

(Topic)
Door’s Tax rates 2% to 15% with first P 100,0000 6% rate computed on the basis
net gift exempted if the done is a of net gift in excess of P
relative 250,000 exempt gift made
during the Calendar year
whether done is a relative or a
30% flat rate if done is a stranger stranger
 Definition of A stranger is a person No Longer relevant
Stranger who is not a:

 brother, sister
(whether by whole or
half-blood), spouse,
ancestor and lineal
descendants; or
 relative by
consanguinity in the
collateral line within
the fourth degree of
relationship.
Transfer for Less No provision regarding sale, A sale, exchange, or other
than Adequate exchange, or other transfer of transfer of property made in the
and Full property made in the ordinary ordinary course of business (a
Consideration course of business (a transaction transaction which is a bona
which is a bona fide, at arm’s fide, at arm’s length
length transactions and free transactions and free from
from donative intent), will be donative intent), will be
considered as made an considered as made an
adequate and full consideration adequate and full consideration
in money or money’s worth. in money or money’s worth.
Dowries or gift on Dowries or gift on account of No longer allowed
account of marriage and before celebration
marriage. of marriage or within one year
thereafter by parents to each of
their legitimate, recognized
natural or adopted children to the
extent of first P 10,000

EXEMPTIONS OF CERTAIN GIFTS (EXEMPT GIFTS)

The following are property gifts, donations or contributions that are exempt from donor’s
tax:

1. 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) (Repealed by TRAIN law)

Under TRAIN law, this is no longer allowed.

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;

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.

Exempt gifts under Special Laws.

ALLOWED DEDUCTIONS

INCLUSION IN THE ALLOWED DEDUCTIONS:

A. Deductions as Specified by BIR
1. Encumbrance on the gift if such debt is assumed by the donee.
2. Diminution on the gift as directed by the donor- These are conditions or requirements provided
by donor, for compliance by donee that will reduce or diminish the value of property gift received
by donee.

B. Exempt gifts as specified by the NIRC

The following are property gifts, donations or contributions that are exempt from donor’s
tax:
1.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) (Repealed by TRAIN law)

Under TRAIN law, this is no longer allowed.

2.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.

3.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.

4. Exempt gifts under Special Laws.

ILLUSTRATION OF DONOR’S TAX RETURN FORMULA, IN GENERAL:

Gross Gift P xxxx
Less; Allowed Deductions P xxx
Taxable Net Gift P xxx

Donor’s Tax Due P xxx

SUMMARY OF DEDUCTIONS
Deductions: Resident or Non resident
Citizen Alien
Deductions as Specified by the BIR:
Encumbrance on gifts in Phil Yes Yes
Encumbrance on gifts Abroad Yes No
Diminution on gift in Phil Yes Yes
Diminution on gift Abroad Yes No

Deductions as Specified by NIRC / Special Laws

Deduction on exempt gift in Phil in NIRC Yes Yes*
Deduction on exempt gift Abroad in NIRC Yes No
Deduction on exempt gift in Phil in Special law Yes Yes
Deduction on exempt gift Abroad in Special law Yes No
Liabilities, charges on property transfer in Phil not No No
covered by/ not subject to donor’s tax
Liabilities, charges on property transfer in Abroad not No No
covered by/ not subject to donor’s tax

*Except dowries or gift on account of marriage. This item is not applicable to NRA.
However, this item was removed under TRAIN law effective Jan 1, 2018.

Illustration 1:
Case A. On January 1, 2014, Mr and Mrs Mayaman, resident citizen, donated a house and lot, a
conjugal property, at fair market value of 620,000 to their legitimate son on account of his marriage
on January 15, 2014.
The net gift of each spouse is: Mr. Mayaman and Mrs.Mayaman are as follows:
Mr Mrs
Gross Gift 310,000 310,000
Allowed deductions 10,000 10,000
Taxable net Gift 300,000 300,000
Donor’s tax Due 6,000 6,000
Case B. On January 1, 2019, Mr and Mrs Mayaman, resident citizen, donated a house and lot, a
conjugal property, at fair market value of 620,000 to their legitimate son on account of his marriage
on January 15, 2019.
The net gift of each spouse is: Mr. Mayaman and Mrs.Mayaman are as follows:
Mr Mrs
Gross Gift 310,000 310,000
Allowed deductions 0 0
Taxable net Gift 310,000 310,000
 Donor’s Tax Due 3,600 3,600

Illustration 2:
Miss Tapia donated to Mr Gomez, her boyfriend, a car amounting to 400,000 in 2019. The car
has an unpaid mortgage of 180,000. Mr Gomez agreed to assume payment for the mortgage.
Amount
Gross Gift 400,000
Allowed deductions- Mortgage assumed 180,000
Taxable net Gift 220,000
Donor’s tax Due P0

Illustration 3:
In 2019, Asta donated 300,000 to Yuno on condition that the latter will give 60,000 of the total gift
to the charity. The net gift of Asta would be:
Amount
Gross Gift 300,000
Allowed deductions- Diminution to charity 60,000*
Taxable net Gift 240,000
Donor’s tax Due P0
*If Yuno did not comply to the condition of Asta, the diminution to charity will not be allowed as
deductible to gross gift.
Illustration 4:
In 2019, Don Kit donated his 100 hectares land valued at the date of donation at 1,000,000 as
follows: National Government 500,000; Manila City Local Government 300,000 Mr. Asta, friend
200,000
Amount
Gross Gift 1,000,000
Allowed deductions- Exempt gift per NIRC 800,000
Taxable net Gift 200,000
Donor’s tax Due P0

Illustration 5:
In 2019, Mr. Hey , a nonresident alien, donated 1,000,000 to an accredited charitable
organization. Compute for the Net Gift:
If not more than 30% of the gift was used for administrative purposes:
Amount
Gross Gift 1,000,000
Allowed deductions- Exempt gift per NIRC 1,000,000
Taxable net Gift 0
Donor’s tax Due P0
If more than 30% of the gift was used for administrative purposes:
Amount
Gross Gift 1,000,000
Allowed deductions- Exempt gift per NIRC 0
Taxable net Gift 1,000,000
Donor’s tax Due P 45,000