B. Donors Tax PRINCIPLES Definition Not defined under the Tax Reform Act of 1997 .

A gift is merely subjected to donors tax. GIFT or DONATION- an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. (Art 725, Civil Code) REQUISITES for a gift to be subject to donors tax: [ACID] 1. 2. 3. 4. The donor must have CAPACITY There must be an INTENT TO DONATE There must be DELIVERY, either actual or constructive The donee must ACCEPT the donation

Kinds of Donations 1. Donations inter vivos a donation made between living persons, which is perfected the moment the donor knows of the acceptance of the gift by the donee21; subject to donors tax Donations mortis causa a donation which takes effect upon the death of the donor; subject to estate tax

2.

Q: What are considered donations for tax purposes? 1. 2. Sales, exchanges and other transfers of property for less than an adequate and full consideration in money or moneys worth Condonation or remission of debt where the debtor did not render service in favor of the creditor

Noteworthy, the element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or moneys worth. However, real property considered capital assets under the Tax Code are excepted from this rule. (Sec 100 in relation to Sec 24(d)) Under Section 24(d), the fair market value itself, if higher than the gross selling price, is the base for computing the capital gains tax imposed upon the sale of such

capital assets. Thus, what the seller avoids in the payment of the donors tax, it pays for in the capital gains tax. Applicable Law The law in force at the time of the perfection/ completion of the donation (Sec 11, RR 2-2003) NOTE: 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. (Sec. 99(C), NIRC) CASE LAW: Abello v. CIR (Feb. 23, 2005) The contributions of the ACCRA partners to the campaign funds of Sen. Angara during the 1987 21 In the case of donations of immovable property, they must be made in a public document specifying therein the property donated. The acceptance may be made in the same Deed of Donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. national elections constitutes a donation, thus, subject to gift taxes. However, the SC noted that succeeding cases shall be governed by RA 7166 enacted by Congress on Nov. 25, 1991. The RA provides in Sec 13 that political/electoral contributions, duly reported to the Commission on Elections, are NOT subject to the payment of any gift tax. PROPERTIES INCLUDED Classes of Donors and their Gross Gift 1. 2. Citizens or Residents of the Philippines all properties located not only within the Philippines but also in foreign countries Nonresident Alien all real and tangible properties within the Philippines, and intangible personal property, unless there is reciprocity, in which case it is not taxable

Q: What are the intangible properties which are considered by law as situated in the Philippines? 1. 2. 3. Franchise which must be exercised in the Philippines Obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines

4.

Shares, obligations or bonds issued by any foreign corporation 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

5.

Rule on Reciprocity (Sec 104, NIRC) There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: 1. 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 allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country

2.

This rule applies to the transmission by gift of intangible personal property located or with a situs within the Philippines of a nonresident alien. EXEMPTIONS Deductible from gross gifts in order to arrive at the taxable net gifts. Not to be treated as exclusions from the gross gifts of the donor. 1. Dowries or donations made on account of marriage 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 P10,000. However, this exemption may not be availed of by a non-resident not a citizen of the Philippines. Q: Can both parents making a donation to a child in consideration of marriage avail of the P10,000 deduction? TAXATION LAW 2 Yes. If both spouses made the gift, then the gift is taxable one-half to each donor spouse. Separate donors tax returns must be filed; husband and wife are considered as separate and distinct taxpayers for purposes of donors tax. (Section 12, RR 2-2003) However, where there is failure to prove that the donation was actually made by both spouses, the donation is taxable as an exclusive act of the husband

(Tang Ho v. BTA, 97 Phil 890), without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the provisions of the Civil Code and the Family Code. (Section 12, supra) 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 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 not more than 30% of said gifts will be used by such donee for administration purposes Q: What is a non-profit educational and/or charitable corporation, etc? It is a school, college or university and/or charitable corporation, accredited NGO, trust or philanthropic organization and/or research institution or organization: Incorporated as a non-stock entity, Paying no dividends, Governed by trustees who receive no compensation, and Devoting all its income, whether students fees or gifts, donations, subsidies or other

3.

forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation 4. 5. Encumbrances on the property donated if assumed by thedonee in the deed of donation Donations made to entities exempted under special laws, e.g.:

o Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines o Development Academy of the Philippines o Integrated Bar of the Philippines o International Rice Research Institute o National Museum o National Library o National Social Action Council o Ramon Magsaysay Foundation o Philippine Inventors Commission o Philippine American Cultural Foundation o Task Force on Human Settlement on the

donation of equipment, materials and services 6. Donations to persons not strangers where the total of such net gifts for the calendar year is not more than P100,000.00 Net Gifts Net Gift is the net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. (Section 11, RR 2-2003) COMPUTATION How is donors tax computed? This general formula shall be followed: If there were several gifts made during the year, this formula is followed: RATES OF TAX The applicable donors tax rate is dependent upon the relationship between the donor and the donee. TAXATION LAW 2 Gross gifts made Less: Deductions from the gross gifts Net gifts made Multiplied by applicable rate Donors tax on the net gifts 1. If the donee is a stranger to the donor, the tax rate is equivalent to 30 % of the net gifts. A stranger for purposes of the donors tax a. b. a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor or lineal descendant, or a person who is not a relative by consanguinity in the collateral line within the fourth degree of relationship. (Sec. 99(B)) Note that donations made between business organizations and those made between an individual and a business organization shall be considered as donations made to a stranger (RR 2- 2003)

If the donee is not a stranger to the donor, the tax for each calendar

year shall be computed on the basis of the total net gifts made during the calendar year: Gross gifts made on this date Less: Deductions from the gross gifts Net gifts made on this date Add: all prior net gifts during the year Aggregate net gifts Multiplied by applicable rate Donors tax on the aggregate net gifts Less: donors tax paid on prior net gifts Donors tax due on the net gifts to date TAXATION LAW 2 Over 0 100,000 200,000 500,000 1 million 3 million 5 million 10 M But not Over 100,000 200,000 500,000 1 million 3 million 5 million 10 M Tax Is Exempt 0 2,000 14,000 44,000 204,000 404,000 1,004,000 2% 4% 6% 8% 10% 12% 15% 100,000 200,000 500,000 1 million 3 million 5 million 10 million Plus Of the Excess Over

Correspon ding Donors Tax (refer to schedule) VALUATION 124,000 P 204,000 P254,000 Donors Tax P 204,000 Tax Due / Payable 124,000 Less: Tax Previously Paid 124,000 Tax Due P80,000 Note: A legally adopted child is entitled to all the rights and obligations

provided by law to legitimate children, and therefore, a donation to him shall not be considered as a donation made to a stranger. OBJECT OF TAXATION Donors 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. The computation of the donors tax is on a cumulative basis over a period of one calendar year Illustrations: 1. Donation to son by parents on account of marriage (P100,000): Husband Net Taxable Gift = P50,000 10,000 = P40,000 Tax Due = None, since P40,000 is below the P100,000 threshold Wife same as above 2. Donation to son and daughter-in-law by parents on account of marriage (P100,000): If the gift is made in property, the fair market value at that time will be considered the amount of gift. Real Property taxable base = FMV as determined by the Commissioner of BIR (Zonal Value) or FMV as shown in the latest schedule of values of the provincial and city assessor (Market Value per Tax Declaration), whichever is higher. If there is no zonal value, the taxable base is the FMV that appears in the latest tax declaration Improvement value of improvement is the construction cost per building permit and/or occupancy permit plus 10% per year after year of construction, or the FMV per latest tax declaration. TAX CREDIT A situation may arise when the property given as a gift is located in a foreign country and the donor may be subject to donors tax twice on the same property: first, by the Philippine government and second, by the foreign government where the property is situated. The remedy of claiming a tax credit is, therefore, aimed at minimizing the burdensome effect of double taxation by allowing the taxpayer to deduct his foreign tax from his Philippine tax, subject to the limitations provided by law. Q: Who may claim tax credit? Tax credit for donors tax may be claimed only by a resident citizen, non-resident citizen and resident alien. Q: What are the limitations on the tax credit? 1. NET GIFT (foreign country) X PHIL DONORS

 ENTIRE NET GIFTS TAX 2. NET GIFT(all foreign countries)X PHILDONORS ENTIRE NET GIFTS TAX NOTE: The computation of the donors tax credit is the same as the computation for estate tax credit. COMPLIANCE REQUIREMENTS DONORS TAX RETURN I. Who Files Husband o Gift pertaining to the son Net Taxable Gift = P25,000 10,000 = P15,000 Tax Due = None, since P15,000 is below the P100,000 threshold o Gift pertaining to the daughter-in-law Net Taxable Gift = P25,000 Tax Due = P25,000 x 30% = P7,500 Wife same as above 3. Donations to donees not considered strangers for tax purposes were made on: January 30, 2002 P 2,000,000 March 30, 2002 -- August 15, 2002 -1,000,000 500,000

After the first donation

After the second donation

Net Taxable Gift

2,000,000

January Donation - P2,000, March Donation - 1,000,000 Total P3,000,000

Every person, whether natural or juridical, resident or non-resident, 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.

Contents of the Donors Tax Return 1. 2. 3. 4. 5. 6. Each gift made during the calendar year which is to be included in computing net gifts; The deductions claimed and allowable; Any previous net gifts made during the same calendar year; The name of the donee; Relationship of the donor to the donee; and Such further information as the Commissioner may require.

When Filed Filed within thirty (30) days after the date the gift is made or completed and the tax due thereon shall be paid at the same time that the return is filed. Where Filed and Paid Unless the Commissioner otherwise permits, it shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner.