02. donors tax - Lecture notes 2 PDF

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TAXATION FAR EASTERN UNIVERSITY – MANILA

DONOR’S TAX (201) A. Donation 1. Definition Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. 2. Classification of Donations a. From viewpoint of motive, purpose or cause 1) Simple—the cause is pure liberality 2) Remuneratory—due to past services rendered or future services or charges and burdens 3) Onerous—burdens and charges equal to the value of the thing donated 4) Modal—consideration is less than the value of the thing donated b. Time of taking effect 1) Donation inter vivos – one made between living persons, and which is perfected from the time the donor knows of the acceptance of the done. It is subject to donor’s tax. 2) Donation mortis causa –one which takes effect upon the death of the donor and, therefore partakes of the nature of a testamentary disposition. It is subject to estate tax.

3. Formal Requisites of a Donation  

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  In public instrument otherwise VOID

The acceptance may be made in the same instrument (deed of donation) or in a separate public instrument. If the acceptance is made in a separate instrument, the donor shall be notified in authentic form. 

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4. Essentials of a Taxable Gift a) Capacity of the donor b) Donative intent c) A donee who shall accept the gift (acceptance of the gift) d) Delivery of the gift

5. Completed Gift a) Gift perfected and completed – it is perfected from the moment the donor knows of the acceptance of the done and it is completed by delivery to the donee either actually or constructively of the donated property. b) A gift that is incomplete because of reserved powers becomes complete when either, 1) the donor renounces the reserved power 2) the right to exercise the reserved power ceased because of the happening of some event or contingency or the fulfilment of some condition, other than because of the donor’s death. c) The donor’s tax shall not apply unless and until there is a completed gift.

6. Qualified Donors All persons who may contract and dispose of their property may make a donation (Art. 735, Civil Code).

7. Qualified Donees a. All those who are not specially disqualified by law therefor may accept donations (Art. 738, Civil Code). b. Minors and others who cannot enter into a contract may become donees but acceptance shall be done through their parents or legal representatives (Art. 741, Civil Code). c. Donations made to conceived and unborn children may be accepted by those persons who would legally represent them if they were already born (Art. 742, Civil Code).

B. Donor’s Tax 1. Definition of Donor’s Tax Is a tax levied, assessed, collected and paid upon the transfer by any person, resident or non resident, of the property by gift. 2. Purpose/Objective of donor’s tax a. To prevent avoidance of estate tax. b. To compensate for loss income tax when large estate are split by donation.

2. Donor’s tax

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3. Requisites a. There is a gratuitous transfer of property. b. The donor and the done are both living at the time of the transfer.

C. Format of Computation (BIR Form 1800) Total (gross) gifts Less: Deductions (Exemptions) Total net gifts Add: Total prior net gifts Total net gifts subject to tax Tax due Total tax due Less: Tax credits/payments Payments for prior gifts Foreign donor’s tax pad Tax paid in return previously filed, if this is an amended return Tax payable (overpayment)

Pxxx (xxx) Pxxx Xxx Pxxx Pxxx Pxxx (xxx) (xxx) Pxxx/(xxx)

D. Donor Tax Rates The tax for each calendar year shall be six percent (6%) computed on the basis of the total gifts in excess of Two hundred fifty thousand pesos (P250,000) exempt gift made during the calendar year.

E. Gross Gifts 1. Direct Gift a. Types of properties 1) Real or immovable property 2) Tangible personal property

Examples Land, building or similar structures, or improvements, which are fixed more or less permanently on the ground such as monument. Equipment, furniture, machines, paintings, jewelry, and similar property.

3) Intangible personal property Rights and claims of the donor

Receivables or claims against another, bills and coins, bank deposits, shares of stock, bonds or certificates of indebtedness, franchise and similar property or rights.

b. Classification of Donor

Resident Citizen Non-Resident Citizen Resident Alien Non-Resident Alien

Properties located in the Philippines Tangible Intangible personal Real properties personal properties properties / / / / / / / / / / / /**

Properties located in a Foreign Country Real properties

Tangible personal properties

Intangible personal properties

/ / / X

/ / / X

/ / / X

c. Rule of reciprocity (Non-resident Alien)** 1) Properties covered by reciprocity - Intangible personal property situated in the Philippines owned by non-resident alien donor. Reciprocity can take place when the foreign country where the non-resident alien was a citizen and resident: - Does not have any kind of donor’s taxes - Has donor’s tax but allows exemption to non-resident Filipinos 2) Basic Rules When there is reciprocity - The intangible personal property of non-resident alien situated in the Philippines are not included in the gross gift When there is no reciprocity - The intangible personal property of non-resident alien situated in the Philippines are included in the gross gift 3) Intangible properties considered situated in the Philippines The following shall be considered as situated in the Philippines (among others): a) Franchise which must be exercised in the Philippines; b) Shares, obligations or bonds issued by any corporation or sociedad anonima organized and constituted in the Philippines in accordance with its law; c) Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; d) Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; e) Shares or rights in any partnership, business or industry established in the Philippines.

2. Indirect Gifts a. Transfer for Less Than Adequate and Full Consideration  Rule: Where a property, other than a real property subject to capital gain tax, is transferred for less than an adequate and full consideration

2. DONOR’S TAX

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in money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of donor’s tax, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Provided, however, that a sale, exchange or other transfer of property made in the ordinary course of business (a transaction which is a bon fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. Ordinary Assets Personal Property Real Property DT DT

Capital Assets Personal Property Real Property DT CGT

Exceptions: 1) Real properties classified as capital assets transferred for less than adequate and full consideration (Capital Gains Tax) 2) Where the owner was compelled to sell his property to minimize his losses.

Exercise: Determine if the transfer of property is subject to donor’s tax otherwise indicate what applicable tax apples. Consideration FMV of Received Property Transferred Transactions 1. Computer equipment used in business and transferred to his cousin. P 30,000 P 40,000 2. Computer equipment for personal use and transferred to his cousin P 50,000 P 40,000 3. Building for rent, sold to his best friend. P 25,000,000 P 23,000,000 4. Building for rent, sold to his uncle. P 25,000,000 P 30,000,000 5. House and lot sold to his sister. P 5,000,000 P 3,000,000 6. Car for his personal use. P 5,000,000 P 3,000,000 7. Car used in business. P 400,000 P 300,000

Applicable Tax

b. Forgiveness of Debt Cancellation and forgiveness of may result into payment of income tax or donor’s tax. Norma/Regularl Income tax - when the debtor performs services for the creditor, who in return cancels the debt of the debtor. The debtor is subject to income tax. Donor’s tax – when the creditor without any consideration received from the debtor cancels the debt of the debtor. The creditor is liable to donor’s tax. Final Withholding Tax on Passive Income – When a corporation forgives the debt of a stockholder. It results to a payment of dividends subject to final withholding tax on passive income.

3. Renunciation by Heir of Inheritance Rules: 1) General renunciation (in favor of all heirs) a) General renunciation by an heir of his share in the hereditary estate in favor of all the heirs – not subject to donor’s tax b) General renunciation by the surviving spouse of his or her share in the in the conjugal or absolute community after the dissolution of the estate in favor of the heirs of the deceased or any other person – subject to donor’s tax 2) Specific renunciation (in favor of one or more of the heirs but not all heirs) a) Specific renunciation by an heir of his share in the hereditary estate in favor of one or more of the heirs - subject to donor’s tax

4. Gifts Through creation of a Trust 5. Others a. Donation made by a corporation to the heirs of a deceased officer out of gratitude for his past services. b. Transfers a property to a trust in consideration of marriage. (Commissioner V. Wemyss (324 U.S. 303, 1945).

F. Valuation of Gifts Made in Property 1. 2.

If the gift is made in property, the fair market value of the property at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions in estate tax shall apply to the valuation of said real property.

G. Exemption of Certain Gifts/Deductions from Gross Gift Exemption or deduction Gifts to the government Gifts to educational, charitable, religious, etc. Encumbrances on gift assumed by donee. Diminution of gift provided by donor Diminution of gift – refers to the decrease in the value of property donated as a result of a condition made by the donor to the donee.

RC/NRC/RA    

NRA    

1. Found in the Tax Code

2. DONOR’S TAX

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a. 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. b. 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 Requisites: 1) not more than 30% of said gift shall be used by such donee for administration purposes. Note: A Non-stock educational and/or charitable corporation, institution, accredited non-government organization, etc. is a school, college or university and/or charitable corporation, accredited non-government organization etc.: a. Incorporated as non stock entity b. Paying no dividends c. Governed by trustees who receive no compensation and d. Devoting all its income to the accomplishment and promotion of the purpose enumerated in its Articles of Incorporation

2. Other Deductions a. Encumbrance on the property donated if assumed by the donee b. Those specifically provided by the donor as diminution from the property donated 3. Exempt Donations Under Special Laws Donation to: a. International Rice Research Institute (IRRI) b. Philippine American Cultural Foundation c. Ramon Magsaysay Award Foundation d. Philippine Inventors Commission e. Integrated Bar of the Philippines (IBP) f. Development Academy of the Philippines (DAP) g. National Social Action Council h. Department of Southeast Asian Fisheries Development Center of the Philippines i. National Museum j. National Library k. Archives of the National Historical Institute l. Museum of Philippine Costumes m. Intramuros Administration n. Gifts and donation to the University of the Philippines (R.A. 9500). o. Contributions to the National Book Trust Fund (R.A.9521). p. Donation to qualified foster care agencies (R.A. 10165). q. Any contribution in cash or in kind to any candidate, political party, or coalition of parties for campaign purposes, shall be exempt from donors tax (RA No. 7166) (RMC 30-2016) Any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission shall not be subject to the payment of any gift tax. Only those donations/contributions that have been utilized/spent “during” the campaign period as set by the COMELEC are exempt from donor’s tax. Donations utilized before or after the campaign period are subject to donor’s tax. Note: Exempt Gifts Exemptions are not to be treated as exclusion from the gross gifts of the donor. They partake the nature of deductions and are, therefore, deductible from the gross gifts in order to arrive at taxable net gifts. Hence, same amount shall likewise be presented in the gross gifts of the donor. Exercises: 1. Determine the gross gift and the deduction from each of the following transactions below. 1. Real property donated, cost P1,000,000; fair market value P2,000,000 with unpaid mortgage of P400,000 assumed by the donee. 2. Real property donated, cost P1,000,000; zonal value P1,500,000; assessed value P2,000,000; appraisal value P3,000,000 with unpaid mortgage of P400,000 assumed by the donor 3. Real property donated valued at P2,000,000 with unpaid real esate tax of P150,000 not assumed by the donee. 4. Real property donated valued at P1,500,000, the donee agreed to assume the applicable donor’s tax of P450,000 5. Personal property donated valued at P200,000, the donor provided that P10,000 of the property donated be transferred by the donee to a social wefare organization 6. Personal property donated valued at P220,000, the donor did not provide any diminution on the property donated 7. Real property used as parking space of the factory sold for P3,000,000; fair market value P4,000,000 8. Vehicle donated to Ramon Magsaysay Award foundation valued at P300,000

Gross gift P2,000,000

Deduction P400,000

P2,000,000

0

P2,000,000

0

1,500,000

0

P200,000

P10,000

P220,000

0

P1,000,000 P300,000

P300,000

H. Void Donations/Gifts 1. Under Art. 739 of the new civil code, the following donations shall be void:

2. DONOR’S TAX

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