UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
Academic Year 2021-2022

ONLINE LEARNING MODULE

TAXN 1033 – Transfer and Business Taxes

Lesson 12: Donor’s Tax

Donation is the gratuitous transfer of property from one living person (donor) to another (donee).

Essential requisites of donation

1. Capacity of the donor. The donor’s capacity shall be determined as of the time of making
of the donation (Art. 737, Civil Code).
2. Intention to donate. The donation must be intentional or voluntary.
3. Donative act or delivery. Donation is a real contract and is completed by the delivery of
the property to be donated.
4. Acceptance by the donee. The acceptance of the donee perfects the contract of donation.
The donation is deemed perfected when the donor knows of the acceptance of the donee.
*Note that in transfers for insufficient consideration, the acceptance by the donee is NOT a
condition to taxation.

Requisites of Donation
Property Minimum requirement
Real property Public instrument
Tangible personal property
Amount exceeding P5,000 Written
Amount not exceeding P5,000 Oral
Intangible personal property Public instrument

Types of inter-vivos donation

1. Direct donation – one made by the donor directly to the donee
2. Indirect donation – involves transfer of property by the donor in favor of the donee but
under the supervision of another party; this is called “donation in trust”, which may be:
a. Revocable – this is not a completed donation and is not taxable
b. Irrevocable – this is a completed donation and is taxable

Illustration:
Mr. Grantor made a revocable donation of a boarding house worth P10,000,000 in favor
of his son, Melvin. The boarding house shall be managed by Trustee Corporation. Mr.
Grantor specified that P200,000 annual income of the trust shall be transferred to Melvin.
The trustee made payment of P200,000 to Melvin during the year.

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TAXN 1033 – Transfer and Business Taxes

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 The P10,000,000 revocable donation of the boarding house is not subect to donor’s tax. The P200,000 transfer
of income of the propertty to Melvin is a taxable donation of Mr. Grantor.

Illustration:
Assuming the same facts in the preceding illustration, except that the donation is
desgnated by Mr. Grantor as irrevocable.
The P10,000,000 irrevocable donation of a boarding house is subject to donor’s tax. The P200,000 transfer
of income of the property to Melvin is a deduction to the income of the taxable trust. The same shall be treated
as income of Melvin and is not a donation subject to donor’s tax.

Summary of rules on taxable donation

Residents or Citizen
Property location → Within Outside
Real properties ✓ ✓
Personal properties
Tangible ✓ ✓
Intangible ✓ ✓
NRA without
NRA with reciprocity
reciprocity
Within Outside Within Outside
✓  ✓ 
✓  ✓ 
✓   

Rationale of Donor’s Taxation

1. To control tax evasion of estate tax
2. To control tax evasion of income tax
3. To recoup future loss of income tax revenue

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TAXN 1033 – Transfer and Business Taxes

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Donations for election campaign
Any contribution in cash or in kind to any candidate, political party, or coalition of parties for
campaign purposes shall be governed by the Election Code, as amended. Exemption is not
automatic. These donations must be reported to the Commission on Elections to be exempt from
the donor's tax. Supporting political candidates or parties by making campaign donation to them
during elections is an exercise of one's political freedom - a constitutionally vested right. Hence,
it is not subject to taxation.

Transfers for insufficient consideration involving real property classified as capital assets
The gratuitous portion of transfers for insufficient consideration (complex transfers) is subject to
donor’s tax. This is intended to control tax evasion on income tax when the selling price is
intentionally set at a lower amount. However, this rule does not apply to the sale of real property
capital asset. The sale, exchange, and other disposition of real property classified as capital asset
is subject to a capital gains tax of 6% based on fair value or gross selling price, whichever is
higher. This income tax scheme has a flexible tax base. If the selling price is set lower than the
fair value, the fair value is taxed. There could be no income tax evasion to arise from manipulation

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of the selling price. Hence, there is no need to impose the donors tax. It must be noted, however,
that exemption applies only the real properties subject to the 6% capital gains tax.

Illustration:
A corporation sold the following properties:
Fair value Selling price
Vacant and unused lot P2,000,000 P1,000,000
Building 4,000,000 2,500,000
Investment in shares of stocks 1,000,000 400,000
Equipment 400,000 200,000

The donation and the donor’s tax shall be computed as:

Building (P4,000,000 – P2,500,000) P 1,500,000

Investment in stocks (P1,000,000 – P400,000) 600,000
Equipment (P400,000 – P200,000) 200,000
Net taxable gifts P 2,300,000
Less: Exempt donation 250,000
Excess P 2,050,000
Multiply by: Donor’s tax rate 6%
Donor’s tax P 123,000

Illustration:
Liam Mado is having a business liquidity problem. Faced with an imminently maturing debt
which he could not repay, he sold his truck with a second hand value of P3,000,000 for
only P1,000. The P2,000,000 discount is NOT a taxable gift.

General renunciation of inheritance

A general renunciation of inheritance occurs when an heir or the surviving spouse renounces his
or her share in the hereditary estate of a decedent in favor of no particular coheir. A general
renunciation is a repudiation of inheritance, which CANNOT be imputed as a donation. To be
exempt, the renunciation must NOT be done categorically in favor of an identified heir to the
exclusion of other heirs.

Renunciation by the surviving spouse

1. The renunciation by the surviving spouse of his/her share in the hereditary estate of
the decedent will be subject to the rules concerning renunciation of inheritance above.
2. The renunciation by the surviving spouse of his/her share in the net conjugal or
communal properties upon dissolution of the marriage is a taxable donation,
regardless of whether it is specific or general.

Illustration:
Mr. Y died leaving three heirs: his spouse, son S and daughter D. Mr. Y indicated in his
last will and testament that his estate shall be equally distributed among the heirs.

The following is a breakdown of Mr. Y’s net distributable estate:

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 Separate Common Total
Gross estate P1,400,000 P3,600,000 P5,000,000
Deductions 400,000 1,600,000 2,000,000
Net estate after deductions P1,000,000 P2,000,000 P3,000,000
Less: Share of surviving spouse (2M/2) 1,000,000
Estate tax 245,000
Net distributable estate P1,755,000

Thus, Mrs. Y shall receive P585,000 (P1,755,000 ÷ 3) in the net distributable estate.

If Mrs. Y renounces her P585,000 share in the hereditary estate of the decedent, the same
shall be taxable if the renunciation is specific but exempt if the renunciation is general.

If Mrs. Y renounces her P1,000,000 share in the common properties in favor of her
children, the same is a taxable donation regardless of whether the renunciation is specific
or general.

Summary of rules on renunciation

Type of renunciation General Specific
Renunciation with more than 2 heirs Exempt Taxable
Renunciation with only 2 heirs Exempt Exempt
Renunciation by the surviving spouse
of his/her share in the common Taxable Taxable
properties

Donation with reserved powers (Incomplete transfer)

This pertains to transfer of property wherein ownership will transfer only upon the
happening of a future event which is specified by the donor, such as:
1. conditional donation
2. revocable transfers

RR2-2003: The donor’s tax shall not apply unless and until there is a completed gift.
Incomplete transfers are not subject to tax upon delivery of the property. They are taxable
upon completion and perfection of the donation. This happens when either:
a. the donor renounces the power; or
b. his right to exercise the reserved power ceases because of the happening of some
event or contingency or the fulfillment of some conditions, other than because of the
donor’s death

Donation to the government for public use

Gifts made to or for the use of the national government or any entity created by any of its agencies
which are not conducted for profit or to any political subdivision of the government are exempt
from donor’s tax.

Donation to accredited non-profit organization

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Gifts in favor of an educational and or charitable, religious, cultural, or social welfare corporation,
institution, accredited nongovernment organization, trust, or philanthropic organization or
institution are exempt from donor’s tax.

Requisite for exemption:

1. Not more than 30% of said gift shall be used by such donee for administrative
purposes.
2. The donee must be organized as a non-stock entity.
3. The donee entity does not pay dividends.
4. The donee entity’s board of trustees earns no compensation.
5. The donee entity must devote all its income, donations, subsidies, or other forms of
philanthropy to the accomplishment and promotion of its purposes enumerated in its
Articles of Incorporation.

In practice, donee entities are accredited by the applicable government agency. Donations to
accredited donee institutions are exempt. Donations to non-accredited donee institutions are
taxable.

Accrediting Agencies
Effective November 16, 2007, the accreditation function was transferred by Executive
Order No. 671 to the following government entities:
1. Department of Social Welfare and Development – for charitable and or social welfare
organizations including but not limited to those engaged in youth, child, women, family,
disabled persons, and older persons welfare and development
2. Department of Science and Technology – for research and other scientific activities
3. Philippine Sports Commission – for sports development
4. National Council for Culture and Arts – for cultural activities
5. Commission on Higher Education – for educational activities

Quasi-transfers
Quasi-transfers involve delivery of property to another person but will never result in transfer of
ownership. These are not subject to donor’s tax.

Examples:
1. Merger of the usufruct in the owner of the naked title during the lifetime of the
usufructuary
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicommissary during the lifetime of the fiduciary heir
3. The transmission from the first heir, legatee, or donee during his lifetime in favor of
another beneficiary, in accordance with the desire of the predecessor

Void donations
Void donations are invalid donations. Donations include those prohibited by law and those with
defects in their execution. Void donations are not objects of taxation.

Prohibited donation under the Civil Code:

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 1. Donation between spouses, except minor gifts
2. Donations between persons who were guilty of adultery or concubinage at the time of the
nation
3. Donations between persons found guilty of the same criminal offense
4. Donations to a public officer or his wife, descendants or ascendants by reason of his office
5. Donations to incapacitated persons
6. The nations of future property

Donations with defects at execution:

1. Donation by a person who has no legal title to the property
2. Oral or written donation of real property or intangible personal property
3. Donation refused by the donee

Foreign donations of non-resident alien donors

Donations of property situated in a foreign country by non-resident alien (NRA) donors are not
subject to donors tax.

Donation of property exempt under reciprocity

The donation of intangible personal property in the Philippines by a non-resident alien (NRA) is
exempt if the reciprocity exemption applies.

Diminution of Gift as Specified by the Donor

The donor may specify that a portion of the donation will be given to another person other than
the donee. Diminution is not exempt from donors tax. It is merely a deduction against the original
donation, but it is in itself another form of donation from the same donor, which may be subject to
donor’s tax.

Illustration:
Armando donated P600,000 cash to his older sister subject to the condition that she will
give P200,000 to her nephew.

There are two donations in this case:

Sister Nephew
Gross gift P 600,000 P 200,000
Less: Diminution of gift 200,000 …………………-
Net gift P 400,000 P 200,000

Armando’s donor’s tax due shall be computed as follows:

Gross gift P 600,000

Less: Exempt donation 250,000
Excess P 350,000
Multiply by: 6%
Donor’s tax due P 21,000

TAXABLE DONATION

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TAXN 1033 – Transfer and Business Taxes

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Donations that do not qualify under the exemption criteria are subject to tax.

Examples of taxable donations:

1. Direct donation of property
a. Transfer of property to the name of another person
b. Transfer of personal property coupled with delivery of the same
2. Donation in trust, if irrevocable
3. Specific renunciation of inheritance, unless there are only two heirs
4. Renunciation by the surviving spouse of his/her share in the conjugal or community
property
5. Transfer inter-vivos for insufficient consideration of any property other than real
property capital asset

Donor’s tax – imposed on annual net gifts reckoned over a calendar year basis. For every taxable
donation, the donor shall detemine and report his/her net gift. The tax is paid within 30 days after
every donation.

Donor’s tax rate

Up to P250,000 Exempt
Excess above P250,000 6%

Illustration:
A donor made the following donations:

Date Donee Net gift

January 4, 2021 Best friend P100,000
March 7, 2021 Brother, as wedding gift 300,000
November 10, 2021 Sister, as birthday gift 500,000
December 25, 2021 Mother, as Christmas gift 400,000
February 14, 2022 Girl friend 700,000

January 4, 2021 donation

Net gift P 100,000
Less: Exempt donation 250,000
Net gift subject to tax P(150,000)

March 7, 2021 donation

Total net gift P 400,000
Less: Exempt donation 250,000
Net gift subject to tax P 150,000
Multiply by: 6%
Donor’s tax to date P 9,000
Less: Tax due in prior donation 0
Donor’s tax still due P 9,000

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 November 10, 2021 donation
Total net gift P 900,000
Less: Exempt donation 250,000
Net gift subject to tax P 650,000
Multiply by: 6%
Donor’s tax to date P 39,000
Less: Tax due in prior donation 9,000
Donor’s tax still due P 30,000

December 25, 2021 donation

Total net gift P1,300,000
Less: Exempt donation 250,000
Net gift subject to tax P1,050,000
Multiply by: 6%
Donor’s tax to date P 63,000
Less: Tax due in prior donation 39,000
Donor’s tax still due P 24,000

February 14, 2022 donation

Net gift P 700,000
Less: Exempt donation 250,000
Net gift subject to tax P 450,000
Multiply by: 6%
Donor’s tax to date P 27,000
Less: Tax due in prior donation 0
Donor’s tax still due P 27,000

VALUATION OF NET GIFT

A. REAL PROPERTY – the higher of zonal or fair value per assessor’s office.
B. PERSONAL PROPERTIES
1. Shares of stock
➢ Listed in the PSE – simple average of the high and low price of the stocks
at the date of donation
➢ Not listed in the PSE
• Preferred stocks – par value
• Common stocks – book value appearing in financial statements
published nearest to the date of donation
2. Other properties
➢ Newly purchased – purchase price
➢ Old items – second-hand value
➢ Monetary claims – amount fixed in the contract

Illustration:
Miss Beauty donated her 20,000 coomon stocks of Suyoc Mines, a closely-held
corporation. The latest balance sheet of Suyoc Mines disclosed the following:

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 Total assets P 20,000,000
Less: Total liabilities 5,000,000
Stockholders’ equity P 15,000,000

Suyoc issued 40,000 preference shares at par value of P100 per share and P1,000,000
ordinary shares.

At the balance sheet date, the entity disclosed the following assets with fair values different
from their recorded book values:

Tax declaration Appraised

Book value Zonal value
fair value value
Land P2,000,000 P2,500,000 P5,000,000 P6,000,000
Building 1,500,000 2,000,000 2,500,000 2,400,000
Investments 500,000 With a quoted market price of P800,000.

Under the new rule, the book value per share of the non-listed shares shall simply be
computed without regard to the fair value of the assets held by the investee corporation
as follows:

Stockholders’ equity P 15,000,000

Less: Par value of preferred stocks 4,000,000
Residual equity to common shares P 11,000,000
Divided by: Number of outstanding common shares 1,000,000
Book value per share P 11.00

The donation of Miss Beauty shall be reported at net gift of P220,000 computed as P11.00
x 20,000 shares donated.

Timing of valuation of gift

Donation is valued at the point of completion or perfection of donation. Donation is perfected upon
acceptance by the donee. In conditional donations, the donation is completed and perfected upon
satisfaction by the donee of the terms of donation or upon waiver by the donor of the condition.

Donation of common properties

Husband and wife are considered as separate and distinct taxpayers for purposes of the donor’s
tax. Donation of conjugal or community property by the spouses is deemed ½ made by the
husband and ½ made by the wife. The husband and the wife shall file separate donor’s tax returns
for the donation.

Encumbrances on the property donated assumed by the donee

Present obligations on the donated property which are assumed by the donee are diminutions to
the gratuity accruing to the donee. These are onerous assignments of debt and are not gratuity;
hence, these are deductible from the value of the donation.

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DONOR’S TAX RETURN
Any person making a donation (whether direct or indirect), unless the donation is
specifically exempt under the Code or other special laws, is required to accomplish under oath a
donor’s tax return in duplicate for every donation.
Note that the law requires duplicate copies. In practice, the return is filed in triplicate
copies. Two copies will be taken by the BIR. One copy will be the taxpayer’s copy.

Filing Date
BIR Form 1800 is filed within 30 days after the donation is made. A separate return is
required for donations made at different dates during the year reflecting therein any previous net
gift made in the same year.
Only one return is required for donations made on a single day even if made to several
donees. If the donation is a conjugal or communal property, each spouse shall file a separate
return corresponding to their respective share in the conjugal or community property.

Content of the donor’s tax return

1. Each gift made during the calendar year which is to be included in computing net gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same calendar year;
4. The name of the donee;
5. Such further information as the Commissioner may require.

Where to file the return?

Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax
paid to any of the following:
a. Any authorized agent bank
b. Revenue district officer
c. Revenue collection officer
d. Duly authorized treasurer of the city or municipality where the donor is domiciled
e. Office of the Commissioner, if the taxpayer has no legal residence in the Philippines

FOREIGN TAX CREDIT

Residents and citizens with foreign donation may be subjected to foreign donor’s tax. To minimize
international double taxation, our tax law allows a credit for taxes paid in a foreign country.

Foreign tax credit is computed depending on whether a single foreign country or multiple foreign
countries are involved.

Foreign Tax Credit Limit: One foreign country

The foreign tax credit shall be the lower of the actual foreign donor’s tax paid and the following
limit:
Foreign country net gifts
× Philippine donor ′ s tax due
World net gifts

Foreign Tax Credit Limit: Multiple foreign countries

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The tax credit limit for each country is individually determined first using the foregoing
computations.

The final foreign tax credit shall be the lower of the total of the donor’s tax credit allowable per
country and the world donor’s tax credit limit computed as:
Total foreign net gifts
× Philippine donor ′ s tax due
World net gifts
Illustration:
Assume a resident alien made the following donations during the year:

Donation Philippines Taiwan Korea Total

Total net gifts P500,000 P300,000 P200,000 P1,000,000
Donor’s tax paid 15,000 21,000 5,000 41,000

The Philippine donor’s tax due shall be:

Total global net gifts P 1,000,000
Less: Exempt donation 250,000
Total net gifts subject to tax P 750,000
Multiply by: 6%
Total donor’s tax due P 45,000

The donor’s tax credit shall be determined as follows:

Per country tax credit:

Taiwan:
Actual amount paid P 21,000
Credit limit (300K/1M x 45K) 13,500 (lower amount)
Korea:
Actual amount paid P 5,000 (lower amount)
Credit limit (200K/1M x 45K) 9,000

Total of tax credit allowable per country P 18,500

World tax credit limit (500K/1M x 45K) P 22,500

Foreign income tax credit (LOWER) P 18,500

The donor’s tax payable shall be:

Total donor’s tax due P 45,000

Less:
Foreign tax credit P 18,500
PHL donor’s tax paid 15,000 33,500
Donor’s tax payable P 11,500

REFERENCES:

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TAXN 1033 – Transfer and Business Taxes

This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor
transmitted in any form, in whole or in part, without expressed written permission.
Textbooks:
Tabag, E. (2018). Transfer & Business Taxation.
Banggawan, R. (2019). Business and Transfer Taxation. Real Excellence Publishing

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transmitted in any form, in whole or in part, without expressed written permission.