BUSINESS AND TRANSFER TAXATION 2019

Chapter 6

INTRODUCTION TO DONATION AND DONOR’S TAX

DONATION

Donation is the gratuitous transfer of property from one person to another. The person who
transfers property is called the “donor”. The recipient of the property is the “donee”.

ESSENTIAL REQUISITES OF DONATION

1. Capacity of the donor

The donor must be legally competent to make a donation. Donation made by a minor, an
insane, or by one under hypnotic spells, force or intimidation is unenforceable.

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. There is no such thing as an implied

donation.

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

As a rule, no one can be compelled to accept the generosity of another. The donee has he
prerogative to accept or reject the gratuity. The acceptance of the donee perfects the
contract of donation. Donation is deemed perfected when the donor knows of the
acceptance of the donee.

FORMAL REQUISITES OF DONATION

For donation of properties to be valid, it must have to adhere to certain formalities required by law:

A. Real properties – must be in a public instrument (Art. 749, New Civil Code)
B. Personal property
1. Intangible – must be in public instrument
2. Tangible
a. If the value is P5,000 and below – may be made orally
b. If the value exceeds P5,000 – must be in writing

A public instrument is a written document annotated by a lawyer.

TYPES OF DONORS

A. Resident or citizen – taxable on world donation, such as

1. resident citizen
2. non-resident citizen
3. resident alien

B. Non-resident alien – taxable only on Philippine donations, except intangible personal

property subject to reciprocity conditions.

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Summary of rules on taxable donation

Residents or NRA with

NRA without reciprocity
Citizens reciprocity
Property Location Within Abroad Within Outside Within Outside
Real properties ✔ ✔ ✔ x ✔ x
Personal properties
Tangible ✔ ✔ ✔ x ✔ x
Intangible ✔ ✔ ✔ x x x

TYPES OF DONEES
A. Relatives – include the spouse:
1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendants
2. Relatives by consanguinity in the collateral line within fourth degree of consanguinity
B. Strangers – any person other than relatives
Table Summary of Relatives

Siblings of Great grandparents

Grandparents
Grandparents
Uncles/Aunties
Parents
st
1 Cousins
DONOR
Brothers/ Sisters
--------------------------
Children
Collateral relatives Nephews/ Nieces

Grandchildren
Brother’s or Sister’s
Grandchildren
Great ------------------------
Grandchildren
Collateral relatives
Lineal relatives
Lineal relatives such as ascendants and descendants are still considered relatives regardless of the
number of generation gap between the donor and the donee.
When the donee is in the collateral line, only those within four generation gap (4th degree of
consanguinity) to the donor is considered relative for purposes of the donor’s tax. Needless to say,
relatives by affinity or those relatives by virtue of marriage are strangers.
A legally adopted child is entitled to all the rights and obligations provided by law to legitimate
children, and therefore, donation to him shall not be considered as donation made to stranger.

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TAXATION OF DONATION TO RELATIVES AND TO STRANGERS
1. Donations made to relatives – subject to a progressive tax
2. Donations to strangers – subject to a 30% proportional tax
The Progressive Tax on Donations to Relatives
Over Not Over Basic Tax Plus % Of excess over
- P 100,000 Exempt - -
P 100,000 200,000 P 0 2% P 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 - 1,004,000 15% 10,000,000

Note: The first P100,000 net gift is exempt from donor’s tax.
The controlling factors to donor’s taxation are the classification of the donor and the location of
the property. The identity of the donee is only important in identifying the applicable tax rate.
DONOR’S TAX
Donor’s tax is a tax upon the gratuitous transfer of property between two or more living persons at
the time of transfer whether the transfer is direct or in trust and without regard to the type of
property transferred.
NATURE OF DONOR’S TAX
1. Privilege tax (excise tax) – Donor’s tax is a tax upon the privilege to transfer property
gratuitously during the lifetime of the donor.
2. Progressive – donor’s tax is progressive with the exception of donations made to strangers
3. Annual tax – donor’s tax is imposed on annual net gifts of donors
4. Ad valorem – donor’s tax depends upon the value of the property donated.
5. National tax – donor’s tax is imposed by the national government.
6. Revenue or fiscal tax – donor’s tax is a intended to provide the government income.
RATIONALE BEHIND DONOR’S TAXATION
1. To control tax evasion of the estate tax
If there is no tax on donation, a person may transfer his properties while he is still living
to avoid the estate tax. Donor’s tax is partly intended to minimize tax evasion on estate
tax.

2. To control tax evasion on income tax

Sellers of goods and properties may intentionally set the selling price below the fair
value for some personal reasons. The gratuity is an unrealized benefit which will not be
taxed under income taxation. Donor’s tax supports income tax by taxing the gratuity.

3. To recoup future loss of income tax revenue

Similar to succession, donation of property will cause the spread of income generating
properties to multiple individual taxpayers. This will cause a reduction in future income
tax. The transfer is subjected to donor’s tax to recoup future loss of government income
tax revenue.

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THE DONOR’S TAX MODEL
For every taxable donation, the donor shall determine and report his or her taxable net gift which is
computed as:
Gross Gift P XXX
Less: Deductions from
Gross Gift XXX
Net Gift P XXX

Gross gift pertains to the fair value of a taxable donation at the date of the perfection of the
donation.
Deduction from gross gift are exemptions or reductions from gross gifts which are allowed by the
law.
“Net gift” shall mean the net economic benefit from the transfer that accrues to the donee.
The detailed rules on gross gift and deductions will be discussed extensively in the following
chapter.
Exclusions in Gross Gift
There are donations of properties which are not reported in gross gift or as deductions. These
donations are sometimes called “exclusions in gross gift” or “exempt donations”.
EXCLUSIONS IN GROSS GIFT/ EXEMPT DONATIONS
1. Donations to exempt donees under the NIRC and special laws
2. Donation for election campaign
3. Transfer for insufficient consideration involving real property classified as capital
assets
4. General renunciation of inheritance
5. Donation with reserved powers
6. Quasi-transfers
7. Void donations
8. Foreign donations of non-resident alien donors
9. Donation of property exempt under reciprocity
EXEMPT DONATION UNDER THE NIRC AND SPECIAL LAWS:
Donations to the following entities are exempt:
1. Aquaculture Department of the Southeast Asian Fisheries Development Center (Sec. 2,
P.D. 292)
2. Aurora Pacific Economic Zone and Freeport Authority (Se. 7, R.A. No.10083)
3. Development Academy of the Philippines (Sec. 12, PD 205)
4. Girl Scouts of the Philippines (Sec. 11, R.A. No. 10073)
5. Integrated Bar of the Philippines (Sec. 3 PD 181)
6. International Rice Research Institute (Art. 5(2), PD 1620)
7. National Commission for Culture and the Arts (Sec. 35, R.A. No. 10066)
8. National Social Action Council (Sec. 4, P.D. 294)
9. National Water Quality Management Fund (Sec. 9, R.A. No. 9275)
10. People’s Television Network Incorporated (Sec. 15, R.A. No. 10390)
11. People’s Survival Fund (Sec. 13, R.A. No. 10174)
12. Philippine-American Cultural Foundation (Sec. 4, P.D. No. 3062)
13. Philippine Normal University (Sec. 7, R.A. No. 9647)
14. Philippine Investors Commission (Sec. 9, R.A. No. 3850)

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15. Philippine Red Cross (Sec. 5, R.A. No. 10072)
16. Ramon Magsaysay Award Foundation (Sec. 2, R.A. No. 3676)
17. Rural Farm School (Sec. 14, R.A. No. 10618)
18. Task Force on Human Settlements 9 (Sec. 3 (b)(8), E.O. 419)
19. Tubbataha Reefs Natural Park (Sec.1 7, R.A. No. 10067)
20. University of the Philippines (Sec. 25, R.A. No. 9500)
DONATION 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 Election to be exempt from
donor’s tax.
TRANSFER 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.
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 of the
selling price. Hence, there would be no need to impose the donor’s tax.
It must be noted, however, that exemption applies only to real properties subject to the 6% capital
gains tax. Hence, the exemption does not extend to:
a. Sale of real properties classified as ordinary asset
b. Sale of personal or movable property
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 favour of no particular co-heir. A general
renunciation is a repudiation of inheritance which cannot be imputed as a donation.
Renunciation by the surviving spouse
The renunciation by a surviving spouse of his share in the hereditary estate of the decedent will be
subject to the aforementioned rules.
However, the renunciation of the surviving spouse of his share in the net conjugal or communal
properties upon dissolution of the marriage is taxable 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 share in the common
Taxable Taxable
properties

DONATION WITH RESERVED POWERS (INCOMPLETE TRANSFERS)

Incomplete transfers are transfers of property wherein ownership will transfer only upon the
happening of a future event which is specified by the donor.

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Examples:
1. Conditional donation
2. Revocable transfers
Donor’s tax shall not apply unless and until there is a complete gift. (RR2-2003) Incomplete
transfers are not subject to tax upon delivery of the property. These are taxed upon completion and
perfection of the donation.
A gift that is incomplete because of reserved powers becomes complete 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 condition, other than because of the donor’s death.
QUASI-TRANSFERS
Quasi-transfers involve delivery of property to another person but will never results in transfer of
ownership thereto. These are not subject to donor’s tax.
Examples:
1. Merger of the usufruct n the owner of the naked title during the lifetime of the usufractuary.
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. Void donation includes those prohibited by law and those
with defects on their execution. Void donations are not object of taxation.
Prohibited donation under the Civil Code
1. Donation between spouses, except minor gifts
2. Donations between persons who were guilty of adultery or concubinage at the time of
donation;
Criminal conviction for adultery or concubinage is no material to the disqualification of the
donee. Hence, donation to a common-law wife as beneficiary in the life insurance policy of a
legally married man is held void.
3. Donations between persons found guilty of the same criminal offense, in consideration thereof;
4. Donations to a public officer or his wife, descendants or ascendants by reason of his office.
5. Donations to incapacitated persons
6. Donation of future property
Donation 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 donor’s tax.
DONATION OF PROPERTY EXEMPT UNDER RECIPROCITY
The donation of intangible personal property in the Philippines by a non-resident alien are exempt
if the reciprocity exemption applies.

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The reciprocity rule
No tax shall be imposed in respect of intangible personal property donation of NRA donors if:
a. The donor at the time of the donation was a citizen and resident of a foreign country which
at the time of his death or donation did not impose a transfer tax of any character in respect
of intangible personal property of citizens of the Philippines not residing therein
b. The laws of the foreign country of which the donor was a citizen and resident at the time of
donation allows a similar exemption from transfer tax of every character in respect of
intangible personal property of citizens of the Philippine not residing therein
EXAMPLES OF TAXABLE DONATIONS
1. Direct donation of property
a. Transfer of property in 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 share in the conjugal or community property
5. Transfer inter-vivos for insufficient consideration of any property other than real property
capital asset

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