L aw on Business and Transfer tax

PPT HANDSOUT–BASED / KATHRINA BINARAO

DONOR’S TAX
DONATION/GIFT
In the Civil law of property, donation is an act of liberality whereby a person
(donor) disposes gratuitously of a thing or right in favor of another (donee) who
accepts it. Gift is a voluntary transfer of property from one person to another
without any consideration or compensation therefore.
ELEMENTS OF DONATION (ADIC)
➢ Acceptance of the gift by the done
*Minors may become donees, acceptance be made by their parents/legal
representative.
➢ Delivery. Whether actual or constructive of the subject matter of the gifts
➢ Donative Intent or intent on the part of the donor to make a gift
➢ Capacity of the donor
KINDS OF DONATION
according to its date of effectivity
1. Donation mortis causa – takes effect upon the death of the donor. It
partakes the nature of testate succession. It is subject to ESTATE TAX.
2. Donation Inter Vivos – takes effect during the lifetime of the donor
FORMS OF DONATION
1. In case of movable property
➢ May be made orally or in writing
➢ Oral donation requires the simultaneous delivery of the thing or the
document representing the right donated.
➢ If the value thereof is more than P5,000 – acceptance shall be made in
writing. Otherwise, the donation is VOID.
2. In case of immovable property
➢ Must be in a public instrument with specifications and value of property
indicated
➢ Acceptance may be made in the same deed of donation or in a separate
instrument, and during the lifetime of the donor.
VALID DONATION IS IRREVOCABLE WHEN ACCEPTED
except when:
1. Officiousness on account of the done
2. Failure of the done to comply with the conditions/charges imposed by the
donor
3. Ingratitude on the part of the done
OTHER TRANSACTIONS COVERED BY DONORS TAX
1. Remuneratory donations
2. Condonation of debt (Income tax/donor’s tax/capital transaction)
3. Sale of ordinary assets for insufficient consideration
4. Creation of an irrevocable trust
WHO ARE REQUIRED TO FILE THE DONOR’S TAX RETURN?
Every person, whether natural or juridical, resident or nonresident, who
transfers or causes to transfer property by gift, whether 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 RATE (TRAIN LAW)
Tax Reform for Acceleration and Inclusion Law
All donations made beginning January 1, 2018, and onwards shall be taxed at
6% on net gift. The threshold on the value of gift taxable is Php 250,000. No more
distinction on the personality of the done whether relative or stranger.
VALUATION OF GIFTS
1. Personal property – FMV at the time of the gift is given.
2. Shares of stock
a. Listed in the stock exchange – average (mean) of the highest and lowest
quoted price at the date of donation, or the date nearest to the date of
donation.
b. Not listed in the in the stock exchange
c. Common shares – book value of the stock at the date of donation, or the
date nearest thereto. Preferred shares – Par value
COMPOSITION OF GROSS GIFT
1. Resident donor – real properties, tangible and intangible personal
properties wherever located
2. Non-resident donor – real properties, tangible or intangible properties
located in the Philippines.
INTANGIBLE PERSONAL PROPERTIES LOCATED IN THE PHILIPPINES
1. Franchise, shares, obligations, bonds issued by a corporation organized or
constituted in the Philippines in accordance with its law.
2. Shares, obligations, or bonds issued by a foreign corporation 85% of the
business of which is in the Philippines
3. Shares, obligations, bonds issued by a foreign corporation if the same have
acquired business situs in the Philippines
4. Shares or right in any partnership, business or industry established in the
Philippines.
RULE ON INTANGIBLE PROPERTIES OWNED BY NON-RESIDENT ALIEN DONOR
1. If the donor at the time of donation was a resident of a foreign country
which at the time of giving the gift 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
2. If the laws of the foreign country of which the donor was a resident at the
time of donation allow a similar exemption from transfer taxes of every
character in respect of intangible personal property owned by citizens of the
Philippines not residing in that foreign country
TAX CONSEQUENCE OF TRANSFER FOR LESS THAN FULL CONSIDERATION
A sale, exchange, or any transfer of property for less than an adequate and full
consideration constitutes an indirect gift to the extent of the difference where
there is no donative intent to make a gift.
TAX CONSEQUENCE OF DONATION FOR POLITICAL PURPOSES
Under the Omnibus Election Code, donations, or any contribution in cash or in
kind to any candidate for an elective position, political party, or coalition of parties
for campaign purposes is not subject to donor’s tax provided that the donor and
the done comply with the requirements of filing tax returns of contributions with
the COMELEC. (Sec. 99 (c) of the tax code)
REPUDIATION OF INHERITANCE
General renunciation by an heir including a surviving spouse of his/her share
in the hereditary estate left by the decedent is not subject to donor’s tax.
ALLOWABLE DEDUCTIONS FROM GROSS GIFT
1. 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.
2. Gifts in favor of educational and/or charitable and/or Religious Corporation,
institution, foundation, trust, or philanthropic organization or research
institution or organization. Provided, however, that not more than 30% of
said gift shall be used by such donee for administration purposes
3. Encumbrances on the property donated, if assumed by the done
4. Those provided under special laws
PERIOD TO FILE DONOR’S TAX RETURN
The return shall be filed within 30 days after the date the gift is made with the
RDO, BIR collection agent or duly authorized treasurer of the municipality in which
the donor was domiciled at the time of the transfer.
a. If the donor has no legal residence in the Philippines, then with the office
of the CIR
b. Return may be filed with an extended period authorized by the CIR, but
the extended period shall not exceed 30 days.
PERIOD TO PAY DONOR’S TAX
1. The tax shall be paid at the time the return is filed with the RDO, collection
agent, or duly authorized treasurer of the city or municipality in which the
donor was domiciled at the time of the transfer or if there is no legal
residence in the Philippines, with the office of the CIR.
2. If payment would impose undue hardship upon the donor, the CIR may upon
the request of the taxpayer extend the payment to a date not to exceed 6
months from the date prescribed for the payment of the tax. CIR may
require the donor to file a bond not exceeding double the amount of the tax
due.
GIFT SPLITTING
spreading of gift or donation over numerous calendar years to avail of lower
donor’s tax. It is considered as tax avoidance.
DEDUCTIONS FROM THE GROSS ESTATE
DEDUCTIONS FROM THE GROSS ESTATE
The value of the net estate of a citizen or resident alien of the Philippines shall be
determined by deducting from the value of the gross estate the following items:
(Sec 86 A NIRC; RR 2-2003)
1. Ordinary deductions
a. Claims, Losses, Unpaid mortgages, Taxes
▪ Claims against the estate
▪ Claims against insolvent persons
▪ Unpaid mortgages
▪ Unpaid taxes
▪ Casualty losses
b. Transfer for public use
c. Property previously taxed (vanishing deductions)

1
2. Special deductions
a. Family home
b. Standard deduction of
3. Amount received by heirs under Republic Act No. 4917
4. Net share of the surviving spouse in the conjugal property
CLAIMS AGAINST THE ESTATE
The word "claims" is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime and
could have been reduced to simple money judgements. Claims against the estate
or indebtedness in respect of property may arise out of: (I) Contract; (2) Tort; or (3)
Operation of Law.
Requisites for deductibility:
1. The liability represents a personal obligation of the deceased existing at the
time of his death except unpaid obligations incurred incident to his death
such as unpaid funeral expenses (i.e., expenses incurred up to the time of
interment) and unpaid medical expenses;
2. The liability was contracted in good faith and for adequate and full
consideration in money or money's worth;
3. The claim must be a debt or claim which is valid in law and enforceable in
court;
4. The indebtedness must not have been condoned by the creditor or the
action to collect from the decedent must not have prescribed.
Substantiation requirements:
1. If the claim arises from the purchase of goods or services by the decedent,
a. Documents evidencing the purchase (invoice, receipts, statement of
accounts);
b. Creditor's certification as to the unpaid balance of the debt, including
interest; and
c. Certified true copy of the latest audited statement of financial position of
the creditor showing the unpaid balance of the decedent.
2. If the claim is in the form of a loan
a. The instrument must be notarized except if it is not the business practice
of the financial institution-lender to notarize such instruments;
b. Notarized Certification from the creditor as to the unpaid balance of the
debt, including interest;
c. Proof of financial capacity of the creditor to lend the amount at the time
the loan was granted;
d. If the loan was contracted within three (3) years prior to the death of the
decedent a statement under oath executed by the administrator or
executor of the estate stating disposition of the proceeds of the loan.
Illustration I
Mr. Casino borrowed P200,000 from Mr. Ramiro supported by a notarized promissory
note. Mr. Casino died without paying the note. Is the unpaid obligation deductible from
the gross estate?
Yes. This is a claim against the estate. (Decedent was the debtor)
CLAIMS AGAINST INSOLVENT PERSONS
These shall be deductible from the gross estate, provided that the value of the
decedent's interest in the claim is included in the value of the gross estate.
Illustration 2
Mr. Atienza had a receivable of P 150,000 from Mr. Lim. Mr. Lim could not be located
where he used to live and there were no properties of Mr. Lim that could be found. Mr.
Atienza died. How much is the deduction from the gross estate of Mr. Atienza?
P150,000 for a claim against an insolvent person. (Also known as bad debts)
Illustration 3
Mr. Panopio died with a receivable from Mr. Ramon of P300,000. The total assets and
liabilities of Mr. Ramon amount to P 1,500,000 and respectively. How much is the
deduction from the gross estate of Mr. Panopio?
Receivable 300,000
Less: Recoverable amount (I .5/4.5 x P300,000) (100,000)
Deduction from the gross estate (or 3/4.5 x 300,000) 200,000
Illustration 4
Mr. Lorico died with a receivable from Mr. Bonita. Mr. Bonita has properties worth
P385,OOO and obligations of 560,000. Included in the obligations of Mr. Bonita are
P35,OOO owed to the Government of the Republic of the Philippines for unpaid taxes
and P 105,000 owed to Mr. Lorico. How much could be deducted from the gross estate
as claim against insolvent person?
Receivable 105,000
Less: Recoverable amount (350/525*x105,000) (70,000)
Deduction from the gross income 35,000
Properties of Mr. Bonita (385,000 - 35,000)
Obligations of Mr. Bonita (560,000 - 35,000)
(The government is a preferred creditor)
UNPAID MORTGAGES
Unpaid mortgages shall be deductible from gross estate, subject to the following
conditions:
1. That the value of the decedent's interest in the property which was
encumbered by such mortgage or indebtedness is included in the value of
the gross estate;
2. That the deduction shall be limited to the extent that they were contracted
bona fide and for an adequate and full consideration in money or money's
worth, if such unpaid mortgages or indebtedness were founded upon a
promise or an agreement.
In case unpaid mortgage payable is being claimed by the estate, verification
must be made as to who was the beneficiary of the loan proceeds. If the loan is
found to be merely an accommodation loan where the loan proceeds went to
another person, the value of the unpaid loan must be included as a receivable of
the estate. If there is a legal impediment to recognize the same as receivable of the
estate, said unpaid obligation/mortgage payable shall not be allowed as a
deduction from the gross estate. In all instances, the mortgaged property, to the
extent of the decedent's interest therein should always form part of the gross
taxable estate.
Illustration 5
Mr. Banzon mortgaged his house and lot to Allied Bank for PI He died having paid 50% of
the mortgage loan. The fair market value of the mortgaged house at the time of his death
is How much is the debt deductible from the gross estate of Mr. Banzon?
P600,000 unpaid mortgage. The FMV of P2M included in the GE.
Illustration 6
Mr. Ong mortgaged his house and lot to PSBank for P175,000 just to lend the money to
his sister, Ms. Grace, and thereafter he died. How much could be deducted from the gross
estate as unpaid mortgage?
P175,000 unpaid mortgage while the same amount should be included in the gross
estate as a receivable.
UNPAID TAXES
These are taxes which have accrued as of the death of the decedent which were
unpaid as of the time of death.
The following are not deductible:
1. Income tax upon income received after death;
2. Property taxes not accrued before his death; or
3. Estate tax due from the transmission of his estate.
Illustration 7
On April 10 Mr. Chua, while on his way to the BIR office to file his income tax return and
pay the tax payable of P 17,000 for the calendar year, was hit by a car and died. How
much is the tax deductible from the gross estate of Mr. Chua?
P17,000. Unpaid income tax accrued before his death.
CASUALTY LOSSES
Losses are deductible from the gross estate if all of the following conditions are
satisfied:
1. The losses incurred during the settlement of the estate;
2. Arising from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement;
3. When such losses are not compensated for by insurance or otherwise;
4. If at the time of the filing of the return such losses have not been claimed
as a deduction for income tax purposes in an income tax return; and
Provided that such losses were incurred not later than the last day for the
payment of the estate tax.
(If a loss of property occurred before death, the property would not anymore be in the
gross estate, so a deduction cannot be claimed for the loss)
The estate tax return shall be filed within one (I) year from the decedent's death.
In meritorious cases, the Commissioner shall have the authority to grant a
reasonable extension not exceeding thirty (30) days for filing the return. The estate
tax shall be paid at the time the return is filed by the executor, administrator, or the
heirs.
Illustration 8
Four months after Mr. Peralta died and while the estate was being settled, a house which
he owned and which was appropriately declared as forming his gross estate was totally
destroyed by fire. The house which had a fair market value of at the time of death was
not compensated for by insurance. How much is the loss deductible from the gross estate
of Mr. Peralta?
P2M. Loss from fire after death & during the settlement date
TRANSFER FOR PUBLIC USE
The amount of all bequests, legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines or any political subdivision thereof,
for exclusively public purposes.
Requisites for deductibility:
1. The disposition is in a last will and testament; House & lot 1 st Transfer Present Lower
2. To take effect after death; Car 1,600,000 1,700,000 1,600,000
3. In favor of the government of the Philippines or any political subdivision 240,000 140,000 140,000
thereof;
Step 1 Value taken (value of property at the time of the first
4. For exclusive public purpose; and
transfer or at the time of the present decedent's 1,600,000
5. The value of property given is included in the gross estate
death, whichever is lower) 140,000
Step 2 Less: Mortgage debt paid, if any (140,000)
Illustration 9 Initial Basis 1,600,000
Mr. Capitulo, in his last will and testament, devised a 1,500 sq. m. lot with fair market Step 3 Less: IB 1,600,000/GE6,400,000 X P1,200,000 (300,000)
value of to the provincial government of Bulacan to be developed as a public school. Is Final basis 1,300,000
there a deduction from the gross estate of Mr. Capitulo? Step 4 Percentage of vanishing deduction 80%
Vanishing deduction 1,040,000
Yes, the full amount of is deductible
FAMILY HOME
All bequests, devises, legacies or transfers to social welfare, cultural and charitable
It is the dwelling house, including the land on which it is situated, where the
institutions, no part of the net income of which insures to the benefit of any individual:
husband and wife, or a head or the family, and members of their family reside, as
Provided, however, That not more than thirty percent (30%) of the said bequests, devises,
certified to by the barangay captain of the locality. In other words, the family home
legacies or transfers shall be used by such institutions for administration purposes. (may
is generally characterized by permanency, that is, the place to which, whenever
be excluded in GE if not; may be deducted)
absent for business or pleasure, one still intends to return. A person may constitute
only one family home.
PROPERTY PREVIOUSLY TAXED
Deduction of property previously taxed or vanishing deduction is a deduction Requisites for deductibility:
allowed on the property left behind by the decedent which he had acquired 1. The family home must be the actual residential home of the decedent and
previously by inheritance or donation. his family at the time of his death, as certified by the barangay captain of
the locality;
Previously, a transfer tax had already been imposed on the property, either the 2. The total value of the family home must be included as part of the gross
estate tax if the property was acquired by inheritance or the donors tax if the same estate of the decedent; and
was acquired by donation. Now that the recipient of the inheritance or donation 3. Allowable deduction must be in an amount equivalent to the current fair
has died, the same property will again be subjected to a transfer tax, the estate tax. market value of the family home as declared or included in the gross estate,
Thus, to minimize the effects of a double tax on the same property within a short whichever is lower, but not exceeding PI 0.000.000. TRAIN LAW
period of time, i.e. five (5) years, the law allows a deduction to be claimed on the
said property. Illustration 12
The gross estate of Mr. Pagoso included a family home of P12,000,000 in the Philippines.
Illustration 10 How much is the deduction for family home from the gross estate?
In March 2011, Mr. Father Tan died and left Mr. Son Tan some properties as inheritance.
Mr. Son Tan died in December 2011. May vanishing deductions be claimed as deductions 10,000,000The family home should be in the Philippines
in computing Mr. Son Tan's net taxable estate?
Standard Deduction
Yes, VD shall be allowed if the following conditions are met
An amount equivalent to one million pesos (P5.000.000) shall be deducted from
the gross estate without need of substantiation. TRAIN LAW
Requisites for deductibility:
1. Death — The present decedent (Mr. S) died within five years from the Illustration 13
receipt of the property from a prior decedent (Mr. F) or donor, Mr. Bassig died leaving a gross estate of and deductions from it of PI not including the
2. Identity of the property — The property with respect to which deduction is standard deduction. How much is the net taxable estate?
sought can be identified as the one received from the prior decedent or the
donor, or as the property acquired in exchange for the original property so Gross estate P9,400,000
received; Less: All other deduction (1,800,000)
3. Inclusion of the property — The property must have formed part of the Balance 7,600,000
gross estate situated in the Philippines of the prior decedent, or the total Less: Standard deduction (5,000,000)
amount of the gifts of the donor; Net taxable estate 2,600,000
4. Previous taxation of the property — The donor's tax on the gift or estate
tax on the prior succession (Mr. F's succession) was finally determined and Amount Received by Heirs under Republic Act No. 4917
paid; and Any amount received by the heirs from the decedent's employer as a
5. No vanishing deduction on the property was allowed to the estate of the consequence of the death of the decedent-employee in accordance with Republic
prior decedent. ActNo. 4917 is allowed as a deduction provided that the amount of the separation
benefit is included as part of the gross estate of the decedent.
Steps in computing the vanishing deduction
Step 1 Value taken (value of property at the time Of the first transfer or at the P xx Net Share of the Surviving Spouse in the Conjugal Property
time of the present decedent's death, whichever is lower) After deducting the allowable deductions appertaining to the conjugal or
Step 2 Less: Mortgage debt paid, if any (xx) community properties included in the gross estate, the share of the surviving
Initial Basis xx
spouse must be removed to ensure that only the decedent's interest in the estate
Step 3 Less: initial basis / gross estate X (CLUT +T) (xx)
Final basis xx is taxed.
Step 4 Percentage of vanishing deduction %
Vanishing deduction xx Table 2 Comparison of deductions from the gross estate
Deductions Citizen or Resident Non-resident Alien
Decedent Decedent
Table 1 Percentage of vanishing deduction 1. Claims, losses, unpaid Deductible Phil. Gross Estate
Rate More than Not more than mortgages, and taxes World Gross Estate
100% 1 year (CLUT)
80% 1 year 2 years X Worls CLUT
60% 2 years 3 years 2. Transfer for public use Deductible Deductible
40% 3 years 4 years 3. Vanishing deductions Deductible Deductible
20% 4 years 5 years 4. Family home Deductible
5. Standard deduction Deductible (5N) Deductible (P500,000)
6. Amounts received by Deductible
Illustration 11 heirs under Republic
In January 2011, Mr. Alberto died leaving his house & lot and car to Mr. Benedict, his only Act No. 4917
son. The FMV of the car was P240,000 and the FMV of the house & lot was P1,600,000 7. Net share of the Deductible Deductible
at the time of Mr. Alberto's death. At the time Mr. Benedict inherited the land, it was surviving spouse in the
subject to a mortgage of P160,000. Mr. Benedict paid P 140,000 of the mortgage during
conjugal property
his lifetime (leaving a balance of P20,000).
In July 2012, Mr. Benedict died. The FMV of the properties at the time of Mr. Benedict's
death were P1,700,000 for the house & lot and P140,000 for the car. Mr. Benedicts gross Illustration 14
estate amounted to P6,400,000 while total deductions (excluding medical expenses, The decedent was a non-resident alien
family home, standard deductions) amounted to P1,200,000
 Gross estate in the Philippines..................................................................
P4,800,000
Gross estate outside the Philippines.........................................................
3,200,000
Funeral expenses outside the Philippines.................................................
320,000
Administration expenses in the Philippines..............................................
240,000
Administration expenses outside the Philippines………………………………….
160,000
Claims against the estate in the Philippines.............................................. 640,000
Claims against the estate outside the Philippines………………………………….
240,000
How much is the allowable ordinary deduction from the gross estate?

Claims against the estate in the Philippines.........................................................

640,000
Claims against the estate outside the Philippines................................................
240,000
Total world ELIT...........................................................................................
880,000
Allowable ordinary deduction (4.800,0000/8M X 880,000) =
520,000