© Donor's Tax Basic Principles of Donor’s TaxNATURE OF DONOR’S TAX * Section 98, Tax Code + Donor's tax shall be levied, assessed, and collected and paid upon the transfer by any person, resident or non- resident, of the property by gift = The tax shall be imposed whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible = Donor's tax is not a property tax, but is a tax imposed on the transfer of property by way of gift infer vivos 131NATURE OF DONOR’S TAX = Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. [Article 725, Civil Code] * The donation is perfected from the moment the donor knows of the acceptance by the donee. [Article 734, Civil Code] * All persons who may contract and dispose of their property may make a donation. [Article 735, Civil Code] = The donor's capacity shall be determined as of the time of the making of the donation. [Article 737, Civil Code] * All those who are not specially disqualified by law therefor may accept donations. [Article 738, Civil Code] 132NATURE OF DONOR’S TAX = Donative Intent in Direct Gift * Donative intent must be present in a direct gift of property in order that the donor's tax can be assessed and collected + Such intent followed by a donative act is essential to constitute a gift = Adonative intent, however, is not always essential to constitute a gift such as in a presumed gift 133134 ELEMENTS OF A DONATION = Donation has the following elements: = The reduction of the patrimony of the donor; = The increase in the patrimony of the donee; and, = The intent to do an act of liberality or animus donandi. « Requisites of a valid donation = Donor must have capacity to make the donation = He must have donative intent (animus donandi) «There must be delivery » Donee must accept or consent to the donation during the lifetime of the donor and of the donee in case of donation inter vivos135 NATURE OF DONOR’S TAX « Gifts that may be Treated as a Donation = Gifts for insufficient consideration + Transfer for less than an adequate and full consideration + Section 100, Tax Code = Where property [other than real property that has been subjected to the capital gains tax under Section 24(D), Tax Code] is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the FMV of the property exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift (an indirect or presumed gift), and shall be included in computing the ‘amount of gifts made during the CYNATURE OF DONOR’S TAX = Gifts that may be Treated as a Donation = Gifts for insufficient consideration = Transfer for less than an adequate and full consideration + Exception: A sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth [Added by TRAIN Law] + Itis possible that property may be sold for less than adequate ‘consideration for a bona fide business purpose as where the owner the owner was compelled to sell the property even at a price less than its market value to minimize his losses * Im such event, where from the facts there is no showing of donative intent, dealings done in the “ordinary course of business” remain as “arm's length’ transactions not subject to donor's tax + The rule in Section 100, Tax Code is not absolute 136NATURE OF DONOR’S TAX * Gifts that may be Treated as a Donation * Gifts for insufficient consideration = Consideration for transfer fictitious + Where the consideration is fictitious, the entire value of the property transferred shall be subject to donor's tax = Where shares of stock not listed and traded through the local ‘stock exchange sold for less than their book value * Rev, Regs. No. 6-2008 137NATURE OF DONOR’S TAX « Gifts that may be Treated as a Donation « Gifts given out of gratitude * "Gratitude" is not a consideration the value of which can be deducted from that of the property transferred as a gift * It has no economic value and is not “consideration” in the sense that the word is used in Section 100, Tax Code + Hence, donation given out of gratitude for services rendered constitutes a taxable gift 138139 NATURE OF DONOR’S TAX « Gifts that may be Treated as a Donation » Renunciation by heir of inheritance + Where one of the heirs renounces his share, that share becomes the property of the persons to whom the benefit is given and is additional inheritance of the latter. + General renunciation in favor of all heirs + Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor's tax The general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor's tax, unless specifically and categorically done in favor of identified heit/s to the exclusion or disadvantage of the other co-heirs in the hereditary estateNATURE OF DONOR’S TAX = Gifts that may be Treated as a Donation = Renunciation by heir of inheritance * Renunciation in favor of one or more heirs + Ifthe renunciation is made in favor of one or more heirs but not all the heirs, the act of renunciation is, in effect, an act of disposition inasmuch as the act made out of pure liberality and benefits thereof are not enjoyed by everybody but by one or more heirs = The renouncer is subject to donor's tax on such renunciation or disposition of his share in the hereditary estate. 140NATURE OF DONOR’S TAX = Taxable Gifts « Any transfer of property by gift, or for less than an adequate and full consideration in money or in money's worth may be subject to donor's tax + The tax is computed on the market value of the property, or such value minus the value of the consideration in case the transfer is for less than a full and adequate consideration in money or in money's worth = The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or tangible 141GOVERNING LAW = Section 12, Rev. Regs. No. 12-2018 = The donor's tax shall not apply unless and until there is a completed gift = The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee + Itis completed by the delivery, either actually or constructively, of the donated property to the donee = The law in force at the time of the completion of the donation shall govern the imposition of the donor's tax 142© Donor’s TAX Determination of Gross GiftROAD MAP vo Beccary ye Bey Gross Gifts Note} +Determine the Peer ered which are coed eee ay Dee ny donor's tax tect) Pree een Prederied STEP 3: Compute Peony Sma) Bet reco BeetoatyCLASSIFICATION OF DONORS = Importance of classification + The Tax Code establishes an important distinction among different classes of donors for the purpose of determining what items shall be included in the taxable gross gifts = Classification of donors = Citizen and resident donors » Resident citizen + Non-resident citizen = Resident alien » Non-resident alien donors 145COMPOSITION OF GROSS GIFTS IN GENERAL lents = For citizens and re: = The gross gifts shall include, to the extent of his interest, the value at the time of the donation of all: + Real or immovable property wherever situated + Tangible personal property wherever situated; and * Intangible personal property wherever situated = For non-resident who is not a citizen « Gross gifts shall include, to the extent of his interest, the value of the time of his death of all: + Real or immovable property situated in the Philippines; + Tangible personal property situated in the Philippines; and + Intangible personal property with a situs in the Philippines unless exempted on the basis of reciprocity 146147 EXEMPTION OF CERTAIN GIFTS FROM DONOR'S TAX = Section 99(A), Tax Code * Gross gifts to the extent of the first Php250,000 exempt from donor's tax + Section 101, Tax Code « Enumerates the donations which are exempt from donor's tax » Although the Tax Code speaks of “exemption,” it is more appropriate to consider them as “deduction” as they are subtracted from the gross value of the property donated to arrive at the value of net gift, the basis in the computation of the donor's tax.EXEMPTION OF CERTAIN GIFTS FROM DONOR’S TAX = Gifts Made by a Citizen or Resident * 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 or religious, cultural, or social welfare corporation, institution, accredited non-government organization, trust or organization subject to the condition that not more than 30% of said gifts shall be used by the donee for administration purposes 148EXEMPTION OF CERTAIN GIFTS FROM DONOR'’S TAX = Gifts Made by a Citizen or Resident « Previously, dowries or gifts made on account of marriage (propter nuptias) and before its celebration or within one (1) year thereafter by parents to each of their legitimate, recognized natural or adopted children to the extent of the first P10,000 = This has been deleted by the TRAIN Law 149EXEMPTION OF CERTAIN GIFTS FROM DONOR'’S TAX « Gifts Made by a Non-resident Not a Citizen «= Gross gifts to the extent of the first Php250,000 exempt from donor's tax + 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 or religious, cultural, or social welfare corporation, institution, accredited non-government organization, trust or organization subject to the condition that not more than 30% of said gifts shall be used by the donee for administration purposes 150EXEMPTION OF CERTAIN GIFTS FROM DONOR'’S TAX = Other Deductions from Gross Gifts = Encumbrance on the property donated if assumed by the donee (e.g., where the donee of a mortgaged real property assumes the mortgaged indebtedness of the donor = Those specifically provided by the donee as a diminution from the property donated (e.g., where the donation is subject to certain conditions) 151SPECIFIC ITEMS INCLUDED/EXCLUDED IN GROSS GIFT = Section 104, Tax Code = The following properties shall be considered situated in the Philippines: = Franchise which must be exercised in the Philippines = Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws = Shares, obligations, or bonds by any foreign corporation = 85% of the business of which is located in the Philippines = If such shares, obligations, or bonds have acquired a business situs in the Philippines = Shares or rights in any partnership, business, or industry established in the Philippines 152SPECIFIC ITEMS INCLUDED/EXCLUDED IN GROSS GIFT « Section 104, Tax Code = No tax shall be collected in respect of intangible personal property: « If the donor at the time of the donation was a citizen and resident of a foreign country which at the time of the donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or If the laws of the foreign country of which the donor was a citizen and resident at the time of the donation allows a similar exemption from transfer tax of very character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country 153DONOR’S TAX Computation of Donor’s TaxCOMPUTATION OF DONOR’S TAX = Person Liable = Donor, or the person making the donation « Tax Base = Total net gifts made during the calendar year = Net Gift = The net economic benefit from the transfer that accrues to the donee * Gross gift less exempted gifts under Section 101, Tax Code and other encumbrance imposed on the property « Tax Rate = 6% of the total gifts in excess of Php250,000 exempt gift made during the calendar year