BUSINES

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TAXATIO
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TRANSFER TAXES
TRANSFER- Refers to any transmission of property to another person
The transfer of the private property may be either gratuitous & onerous
BILATERAL TRANSFER (ONEROUS TRANSACTION) — Involve the exchange of
the property for something valuable and consideration. Both parties in the transaction
give something in return. Example.
Sale — You sell your old bicycle to someone in exchange for money, you give the bike
they give you money.
Barter — You trade your skateboard to someone in exchange for bike, you both
exchange items without using money.
UNILATERAL TRANSFER (GRATUITOUS TRANSACTION) — Involve giving away
the property without expecting anything in return or without any consideration.
Example.
Gift—You give your friend a book in his birthday without expecting anything in return or
without any consideration.
Donation (inter-vivos) — You donate clothes to the charity without receiving payment.
Donor to donee, DONOR TAX
Succession (donation mortis casua) — is when someone's property is transferred to
others after they pass away, either according to their will or by the laws of inheritance.
ESTATE TAX

NATURE OF TRANSFER TAXES

1, Privilege Tax — is a type of tax imposed by a state or local government on specific
businesses or professions for the privilege of operating within that jurisdiction. It's often
based on the gross receipts or sales of the business.
Example: If you own a theme park in a state that imposes a privilege tax on
amusement parks, you would need to pay a portion of your park's ticket sales as tax to
the state government.
2, Ad Valorem Tax — is a tax calculated based on the assessed value of a property
or item. The tax amount increases or decreases proportionally with the value of the
item being taxed.
Example: If you own a house with an assessed value of $200,000 and the ad valorem
tax rate is 2%, you would pay $4,000 in property taxes annually.
3, Progressive Tax — It is a tax that imposes a lower tax rate on low-income earners
compared to those with a higher income. It takes a larger percentage from high-income
earners than it does from low-income individuals
Example: In a country with a progressive income tax system, individuals earning over
$100,000 might pay a higher tax rate, such as 30%, while those earning under $50,000
might pay a lower rate, such as 10%
4, National Tax — refer to the national internal revenue taxes imposed and collected
by the national government through the Bureau of Internal Revenue (BIR), such as
income tax, Value Added Tax (VAT) or percentage tax, excise tax, estate tax, capital
gains tax, and documentary stamp tax.
5, Direct Tax— A direct tax is a tax paid directly by individuals or entities to the
government. It's a tax on income, property, wealth, or assets that cannot be shifted to
another person or entity.
Example: When you pay personal income tax directly to the government based on your
earnings, it's considered a direct tax.
6, Fiscal Policy — refers to how a government adjusts its spending levels and tax
rates to manage and influence the economy. It is the sister strategy to monetary policy
through which a central bank influences a nation's money supply.

PHILIPPHINE TRANSFER TAX

Transfer taxation in the Philippines can be traced back to the Federal Gift and Estate
Taxation system of the United States at the beginning of the 20th century.
The first transfer tax law in the country was Act No. 2601, which became effective on
July 1, 1916. The provisions of that law were subsequently incorporated in the Revised
Administration Code
In simple terms, the transfer tax rules were moved around a few times in the laws of
the Philippines. First, they were part of the Revised Administrative Code. Then they
were moved to the National Internal Revenue Code and went through some changes.
One important change happened with Presidential Decree No. 69 in 1973. This decree
reduced the types of transfer taxes from three to two. The tax on inheritance was
removed, leaving only estate tax and donor’s tax.
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So basically, these rules about taxes when transferring property have been there since
1939 and have been updated several times, with one of the latest updates being the
Tax Reform Act of 1997.

TYPES OF TRANSFER TAX

1, ESTATE TAX — Imposed on donation mortis casua
2, DONOR’s TAX — Imposed on donation inter-vivos
CLASSIFICATION OF TRANSFER TAXPAYERS
1, Resident or Citizen — such as;
a. Resident Citizen — Filipino citizen residing in the Philippine.
b. Resident Alien — Citizen of a foreign country living in the Philippine.
c. Non Resident Citizen — Filipino citizens not residing in the Philippines
2, Non Resident Aliens — Citizens of a foreign country not residing in the Philippines
For purposes of donor’s tax, juridical persons such as corporations and partnerships
which donate properties are classified as citizens or aliens and residents or non-
residents depending on their place of incorporation or operations. A corporation or
partnership with a fixed place of business in the Philippines is a resident. If the
corporation has no fixed place of business within the Philippines, it is considered a
non-resident.

GENERAL RULE IN TRANSFER TAXATION

A transfer tax is a fee imposed when ownership or title of real property (like land or
buildings) is transferred from one person to another. This transfer could happen
through a sale, donation, exchange (barter), or any other method.

According to Section 135 of the Local Government Code (LGC) of 1991, this tax is set
at a maximum rate of 0.5% (or 50% of 1%) of the total amount paid for the property.
However, in cities and municipalities within Metro Manila, the rate is higher at 0.75%
(or 75% of 1%).
Here's a simple example to illustrate:
Let's say you sell a piece of land for $100,000. In a city outside Metro Manila, the transfer tax would
be calculated as follows:
Transfer tax = 0.5% of $100,000 = $500
However, if the same transaction happens within Metro Manila, the transfer tax would be higher:
Transfer tax = 0.75% of $100,000 = $750

1, FOR RESIDENT & CITIZEN — They are subject to tax on all transfer of
properties regardless of their location. In other words, they are taxable on the global
transfer of properties.
Illustration: Mr. James Smith, an American residing in the Philippines, donated his car located in
Mexico to a friend and a motorbike located in the Philippines to his brother in America.
Analysis: Since the taxpayer is a resident alien, both the donation of a car abroad and the donation of
a motorbike in the Philippines are subject to transfer tax. Since the donor is living at the time of
donation, the transfers are donations inter-vivos subject to donor’s tax

2, FOR NON-RESIDENT ALIEN — They are taxable only on properties

transferred which are in the Philippines at the date of transfer.
Illustration: Mr. Li Xiu Yung, a Chinese citizen residing in Hong Kong, died due to a heart attack. The
deceased has a car in Hong Kong and left it to his brother in the Philippines.
Analysis: The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to
transfer tax. Since the transfer is effected by death, it is a donation mortis causa subject to estate tax.

Only the classification of the donor and the location of the property are material in
determining taxability. The identity of the donee is immaterial in the taxability of a
transfer.

SITUS & TIMING OF VALUATION OF TRANSFER

The "situs" of a property refers to its location, which is crucial when it comes to taxation
related to property transfers. For non-resident aliens, they are only taxed on transfers
of properties located within the Philippines. This means that if they sell or transfer
property in the Philippines, they are subject to taxation on that transaction.
For residents or citizens, the situs of a property is relevant when calculating tax credits
for foreign transfer taxes paid. If they own property overseas and pay taxes on the
transfer of that property in another country, they may be able to offset or receive credit
for those taxes when calculating their tax liability in their home country.
Example: Alice is a non-resident alien who owns a piece of land in the Philippines.
Bob is a resident citizen of the Philippines who owns a vacation home in Hawaii, USA.
If Alice decides to sell her land in the Philippines, she would be subject to Philippine taxation on the
sale because the property is located within the Philippines.
On the other hand, if Bob sells his vacation home in Hawaii, USA, he would need to pay taxes on the
sale to the United States government. However, when Bob calculates his Philippine taxes, he may be
able to claim a credit for the taxes paid to the US government on the sale of his property. This is
because the situs of the property (the vacation home) is outside the Philippines, but he can still
receive credit for the taxes paid abroad when computing his Philippine tax liability.

PROPERTIES CONSIDERED LOCATED IN THE PHILIPHINES

1. Franchise exercisable in the Philippines — If a business holds a franchise that allows it
to operate in the Philippines, that franchise is considered to be located in the
Philippines.
 Example: A fast-food chain franchise that operates in the Philippines.
2. Shares, obligations, or bonds issued by corporations organized in the Philippines — Stocks,
bonds, or debts issued by companies incorporated in the Philippines are considered
to be located in the Philippines.
 Example: Shares of a telecommunications company incorporated in the Philippines.
3. Shares, obligations, or bonds issued by foreign corporations with significant presence in the
Philippines — If a foreign corporation conducts 85% of its business operations within
the Philippines, any stocks, bonds, or debts issued by that corporation are
considered to be located in the Philippines.
 Example: Bonds issued by a multinational company that generates 85% of its
revenue from its operations in the Philippines.
4. Shares, obligations, or bonds issued by foreign corporations with business situs in the
Philippines — Even if a foreign corporation is based outside the Philippines, if its
stocks, bonds, or debts have acquired a significant business presence in the
Philippines, they are considered to be located there.
 Example: Shares of a foreign company listed on the Philippine Stock Exchange and
actively traded in the country.
5. Shares or rights in partnerships, businesses, or industries established in the Philippines —
Ownership interests in partnerships, businesses, or industries established in the
Philippines are considered to be located in the country.
 Example: Ownership shares in a real estate development partnership operating in
the Philippines.
6. Personal property located in the Philippines — Any tangible or intangible property
physically located within the Philippines is considered to be situated there.
 Example: A piece of artwork owned by a foreign collector that is displayed in a
museum in the Philippines.
In summary, these properties are considered to be located in the Philippines based on
various criteria, including their physical presence, legal status, or economic activity
within the country.
Reciprocity Rule On Non-Resident Alien
The reciprocity rule on non-resident alien states that if a non-resident alien donates
intangible personal properties located in the Philippines, those properties are exempt
from Philippine transfer tax if the country where the alien is a citizen also exempts
Filipino non-residents from transfer taxes on intangible properties.
Example: Let's say there's a scenario involving two countries: the Philippines and Japan.
Dr. Riku Hinata is a Japanese citizen.
He decides to donate the following properties located in the Philippines:
1. A car
2. Cash in a Philippine bank account
3. Shares of stocks of a domestic corporation in the Philippines.
NOTE; Under Japanese laws, non-resident Filipinos (i.e., Filipino citizens who are not residing in
Japan) are exempt from transfer taxes on intangible properties in Japan.
Analysis:
Since Japan offers reciprocity by exempting non-resident Filipinos from transfer taxes on intangible
properties, the reciprocity rule applies in this case.
Dr. Riku Hinata will be subject to donor's tax only on the donation of the car because it's a tangible
property.
The donation of intangible personal properties (i.e., cash and shares of stocks) is exempt from
donor's tax in the Philippines because of the reciprocity exemption.
Another Example:
Let's consider a scenario involving a non-resident alien from Malaysia who donates properties located
in the Philippines. If Malaysia also exempts Filipino non-residents from transfer taxes on intangible
properties, then the reciprocity rule would apply, and the donation of intangible properties by the
Malaysian donor would be exempt from Philippine transfer tax.

Timing Valuation Of Transfer

1. Donation Inter-Vivos — This refers to a gift made between living persons.
— Donation inter-vivos is valued at the date when the gift is completed or perfected,
typically when the transfer of ownership is finalized during the donor's lifetime.
— Donation inter-vivos is like giving a present while you're alive, and the value is
determined when you give it.
 Example: Sarah decides to give her friend David her old car as a gift because she no longer
needs it. They complete the paperwork and transfer the car's ownership to David while they are
both alive.

2. Donation Mortis Causa — This refers to a gift that takes effect upon the donor's death.
— Donation mortis causa is valued at the date of the donor's death because the
transfer of ownership is contingent upon the donor's death and the terms of their will or
other legal document.
— Donation mortis causa is like leaving something for someone in your will, and the
value is determined when you pass away.
 Example: Maria decides to leave her antique jewelry collection to her granddaughter Sofia in her
will. While Maria is still alive, she allows Sofia to keep and use the jewelry, but the ownership
transfer will only occur after Maria's death.

DISTINCTION BETWEEN ESTATE TAX AND DONOR TAX

In the Philippines, any levy imposed by the State upon transfers of property, whether
real or personal, by means of succession or donation is called a transfer tax.
Simple Explanation:
Estate tax is paid when someone passes away, and their property is transferred to
heirs.
Donor's tax is paid when someone gives away property as a gift while they are still
alive.
In essence, estate tax is for transfers due to death, while donor's tax is for transfers
due to gift-giving during life. Both taxes are forms of transfer tax in the Philippines, but
they apply to different situations and have different taxpayers responsible for payment.

Donation Inter-Vivos: This refers to a gift made between living persons with motives
associated with life.
Donation Mortis Causa: This refers to a gift made during the lifetime of the donor but is
motivated by the thought of death or in contemplation thereof.