PSU TAX2 Chapter 6 Donor\'S TAX PDF

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Pangasinan State UniversityAsingan CampusTransfer and Business TaxationNatividad, Alhea Mae S.Olivas, Julie Ann M.Ordonio, Lovely JhoyPablo, Janneal R.Padilla, GeraldDONOR’S TAXSubmitted to:Mrs. Jeanlyn DomingoNATURE OF DONATIONDonation is an act of gratuitously transferring property or rights motiv...

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Pangasinan State University Asingan Campus Transfer and Business Taxation

Natividad, Alhea Mae S. Olivas, Julie Ann M. Ordonio, Lovely Jhoy Pablo, Janneal R. Padilla, Gerald

DONOR’S TAX

Submitted to: Mrs. Jeanlyn Domingo

NATURE OF DONATION Donation is an act of gratuitously transferring property or rights motivated by the liberality of the giver (donor) in favor of the receiver (donee) who accepts it. A donation is a gift – a voluntary transfer of property or right from one person to another for free. The transfer of property or rights includes not only the transfer of ownership or title but also the passage of control over the economic benefits of the property. KINDS OF DONATION Donation Mortis Causa – takes effect upon the death of the donor. Governed by the formalities of testamentary disposition which shall be observed based on the law of succession, and to be imposed with estate tax. Characteristics of Donation Mortis Causa 1. The transferor retains the ownership and control of the property before his death. 2. The transfer is revocable by the transferor at will; or the donor reserves the power to dispose of the properties conveyed; and 3. The transfer should be void if the transferor should outlive the transferee. Illustration Ms. Eva Ngon donated her real property to Mr. Nato Lug which will take effect on the death of Ms. Ngon. Since the above transfer will take effect only upon the death of Ms. Ngon, then this serves as a testamentary disposition and, as such, is subject to estate tax. Donation Inter Vivos – a gratuitous transfer of rights and property that shall take effect during the lifetime of the donor. Illustration Mr. Nato Lug gave a diamond necklace as a gift to Ms. Eva Ngon who immediately accepted the gift. Since the above donation took effect while the donor and the donee are still alive, this is subject to donor’s tax. Essential of Donation 1. Capacity of the donor 2. Donative intent

3. Delivery of the gift; and 4. Acceptance of the donee 5. Capacity of the Donor – a natural or judicial person who owns the property or right being donated. This refers to the condition and legal competence of the donor to enter into a valid contract. 6. A donor must be capacitated to make a valid donation. The donee does not need to be capacitated to receive the gift to make the donation valid. 7. It is already enough that the duly authorized representative of the incapacitated donee received the donation. 8. Illustration 9. Don Rox, a capacitated philanthropist, donated P1,000,000 to retarded child. The child is represented by his parents to accept the donation. Is the donation valid? 10. Yes. This is valid because Don Rox is a capacitated donor and the acceptance was made by the authorized representative of the donee. Donative Intent – refers to the proper declaration of the legal owner of a property or right to transfer ownership to another without consideration. Required Forms to Effect Donation 1. Oral Donation – Where the value of the personal property donated is P5,000 or less, the donation can be made orally. 2. In Writing – Where the value of the personal property donated exceeds P5,000, the donation and the acceptance shall be made in writing, otherwise the donation shall be void. 3. In Public Instrument – In order that a donation of real property shall be valid, it must be made in a public document, specifying therein the property donated. When Donative Intent Not Necessary Required only in a direct gift. However, if a gift is indirect taking place by way of sale, exchange or other transfer of property as contemplated in Section 100 of Tax Code, donative intent is not necessary. Delivery of the Gift The object of donation could be a real property, personal property or even rights. The delivery of the object of donation may be actual or constructive. As a rule, the donor’s tax does not apply unless and until there is a completed gift, whereby the donor does not reserve or retain power over the gift. A gift that is incomplete due to reserved powers become complete when either: 1. The donor renounces the power; or

2. His right to exercise ceases because of the happening of some event or contingency or the fulfillment of some condition, other than the donor’s death. Acceptance of the Gift Acceptance is the acknowledgement of the thing or right donated. The transfer of property by gift is perfected from the moment the donor has known the acceptance by the donee; it is completed by the delivery of the donated property to the donee, but the transfer is perfected at the moment the acceptance of the donee is made. Illustration Ado Datung donated the following properties for the year 200A: Jewelry as a birthday gift to his mother-in-law

P

5,000

Land donated to a domestic corporation

100,000

Car given to his son as a wedding gift

200,000

The donor is Mr. Ado Datung, and the donees are: 1. The mother-in-law, a stranger 2. The domestic corporation, a stranger 3. The son, a relative 4. a. Personal Properties: 5. • Jewelry amounting to P5,000. This gift could be orally donated with simultaneous delivery to the donee. 6. • Car given to his son at P200,000. Since the amount of the gift exceeds P5,000, the donation and acceptance should be made in writing. Otherwise, the donation shall be void. 7. b. Real Property: 8. • Land with a value of P100,000. Regardless of amount, donation of real property must be made in a public document. 9. Cancellation of Indebtedness 10. Condonation or remission of debt where the debtor did not render service in favor of the creditor is a donation. 11. If the cancellation of indebtedness is due to the rendition of service, the transaction has the effect of payment of compensation. Hence, the debtor earned income which is subject to income tax. 12. If a corporation gives the debt of its stockholder, the transaction has the effect of payment of dividend. Renunciation of Inheritance

General renunciation by an heir, including the surviving spouse, of his/her share in the heredarity estate left by the decedent is not subject to donor’s tax. If the renunciation is specifically and categorically done in favor of identified heir(s) to the exclusion or disadvantage of the other coheirs in the heredarity estate, such renunciation is subject to donor’s tax. Compromises on Will Disputes Compromises and settlements of will contests and other disputes are not gifts. However, payments made to a dissatisfied heir who has no legally enforceable rights may constitute donation. Beneficiaries of Trust Where a gift is made to a trustee for the benefit of one or more beneficiaries, the beneficiaries, not the trustee, are the donees of the gift. The transfer of a bare legal title to a trustee is not, by itself, a gift. Hence, a transfer from one trust to another is not a gift if the beneficiaries of the two trusts are the same. Corporation of Shares of Stock A donation by a foreign corporation of its own shares of stock to resident employees is not subject to the gift tax. However, if the “donation” was given in consideration of the latter’s services, the value of the shares can constitute taxable income. Court Ordered Payments Court ordered transfers are not gifts. These include payment in which a party is held to be obliges to make for goods or services received or damages for breach of contract or for torts. However, court-ordered payments out of estate of an incompetent or a minor for the benefit of relatives whom the incompetent or minor is not legally obligated to support have been held to be gifts. GROSS GIFT The value of property or rights donated subject to donor’s tax before any deduction is a gross gift. The determination of a gross gift is the first procedure in the computation of the donor’s tax. Classifications of a Donor 1. Citizen or Resident Alien – at the date of donation, the donor is a citizen of a Philippines or a resident of a Philippines. 2. Nonresident Alien – at the date of donation, the donor is a foreigner and is not a resident of the Philippines. Illustration Mr. Guieb donated all his properties to his relatives in the Philippines as follows: Property A in Baguio to Mr. Angkin

P1,500,000

Property B in Canada to Mr. Amin

2,500,000

Total

4,000,000

In case, Mr. Guieb is a Filipino, the gross taxable donation is P4,000,000. However, if Mr. Guieb is a nonresident alien, the gross taxable donation is P1,500,000. The Rule of Reciprocity A foreign country, of which the donor is a citizen and resident at the time of the gift, did not compose a donor’s tax. When the foreign country allowed similar exemption from transfer tax with respect to the intangible personal property owned by a Filipino citizen not residing within the said foreign country. Illustration Enn Tsik, a Chinese residing in Taiwan, gave the following gifts to his daughter in the Philippines: Tricycle in the Philippines

P140,000

Shares of stock in the Philippines

100,000

Franchise in the Philippines

60,000

Patent in Taiwan

150,000

Time deposit in Taiwan Total

70,000 P520,000

If there is no reciprocity, the taxable gross gift in the Philippines re determine as follows: Motorcycle in the Philippines

P140,000

Shares of stock in the Philippines

100,000

Franchise in the Philippines

60,000

Gross gift in the Philippines

P300,000

If there is reciprocity, the gross gift would be Gross gift – tricycle in the Philippines

P140,000

Summary of Donation GROUP OF DONORS and TAXABLE DONATIONS GROSS GIFT’S LOCATION

DONOR:

Within the

Outside the

A.

Philippines

Philippines

Taxable Taxable Taxable

Taxable Taxable Taxable

Taxable Taxable Taxable

None None None

• • • B. • • •

Citizen or Resident Real property Tangible Personal Property Intangible Personal Property Nonresident Alien Real property Tangible personal property Intangible personal property

Conjugal Donation Husband and wife cannot transfer by virtue of sale or donation any conjugal or community property without th moderate donations for charity or on the occasion of family rejoicing or family distress. Spouses who make donation out of conjugal property shall be considered a separate donor of his or her inter Illustration Mr. and Mrs. Galante, spouse and citizens of the Philippines, donated to their legitimate daughter the followin Fair market value Vacation House(conjugal property) – Hong Kong

P1,500,000

Car in the Philippines(conjugal property)

750,000

Jewelry(exclusive property of Mrs. Galante)

475,000

Total

P2,725,000

The gross gift of the spouses shall be computed as follows: Mr. Galante Vacation house (P1,500,000/2) Car (P750,000/2) Jewelry Gross gift per spouse

P

750,000 375,000 _____-_____

P 1,125,000

Effects of Donations between Husband and Wife

Mrs. Galante P

750,000 375,000 475,000

p 1,600,000

Donations made between husband and wife during the marriage are void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. This provision is also applicable to man and woman living together as husband and wife without a valid marriage. However, donation mortis causa between husband and wife is a valid transfer of property subject to estate tax. VALUATION OF DONATION In general, the principles in determining the value of property in estate taxation are also applicable in determining the value of properties given or received in donations. The value shall be that existing at the time when the gift is made. 1. Cash gifts shall be valued at the face amount of the currency. 2. In the gift is a personal property, the fair market value thereof is considered the amount of the gift. 3. If the gift is a real property, the value of the gift is the fair market value as fixed by the Provincial and City. Assessors or the fair market value as determined by the BIR Commissioner, whichever is higher. Illustration Bee Gay made the following donations in 200A: 1. Real estate acquired 3 years ago at P1,000,000; Fair market value at date of donation P1,500,000. 2. Personal properties acquired at P200,000 with current market price at date of donation P 100,000. 3. Cash amounting to P50,000. The gross value of donation made by Bee Gay would be: Real estate at its fair market value Personal estate at its fair market value Cash at its face amount Total amount donation

P1,500,000 100,000 50,000 P1,650,000

Transfer for Inadequate Consideration A transaction may pass as a sale or exchange but if there is a comparative disparity in consideration, the difference is deemed a gift. Illustration Mr. Uta Khan made it appear that he sold was a real property, to his son for P200,000. The prevailing market price for such property was P1,000,000 when it was for sale. In case where the property sold was a real property, then the capital gain tax should be based on the market price of P1,000,000. The capital gains tax should be P60,000, or

6% of P1,000,000. The transfer is complete and therefore there is no need to pay donor’s tax. In case where the property sold was a personal property, the amount of P800,000 would be considered as donation and such should be taxed with donor’s tax. However, where the consideration is fictitious, the entire value of the property, transferred shall be subject to donor’s tax. An apparent sale, if proven by the circumstances to be really a donation, may be treated as a taxable donation. Net Gift Net gift shall mean the net economic benefit from the transfer that accrues to the donee. DEDUCTIONS FROM GROSS GIFTS Deductions from gross gift are items to be subtracted from the gross value of property donated to arrive at the value of net taxable gift. The net taxable gift is the basis in the computation of the donor’s tax. The following items are allowed by the law to be deducted from the gross gift: 1. Dowries; 2. Encumbrance assumed by the donee; 3. Diminution of gift provided by the donor; 4. Donations to the national government, and the like; and 5. Donation to non-profit organizations. Classifications of Donors Deductible Items

Citizen or Resident

Nonresident Alien

1. Dowries

Yes

No

2. Encumbrances

Yes

Yes

3. Diminution

Yes

Yes

4. To government

Yes

Yes

5. To NGO

Yes

Yes

Dowries A gift to the children of conjugal property is a single gift by any of the parents unless, by common agreement, the gift is made by both parents. Illustration-1

On January 1, 200A, Mr. and Mrs. Mayaman donated a house and lot, a conjugal property, at fair market value of P620,000 to their legitimate son on account of his marriage on January 15, 200A. The net gift of each spouse is computed as follows:

Gross gift (P620,000/2)

Mr. Yaman

Mrs. Yaman

P310,000

P 310,000

10,000

10,000

P300,000

P 300,000

Less: Deductions Net gift on each spouse Illustration-2

Mr. Campo Santo donated P200,000 in cash to his sister, Gloria, on account of the latter’s marriage six months after the celebration. The net gift of Mr. Campo is computed as follows: Gross gift

P200,000

Less: Deductions

-__

Net gift

P200,000

The net gift in this case is still P200,000 because the donation is not made to a child. Illustration-3 Mr. Pundi Dona donated the following gifts to his recognized natural daughter on account of marriage to be held on December 25, 200A. Date of Donation

Donated Property

FMV of Donation

November 1, 200A

Cash

P 8,000

December 25, 200A

Jewelry

110,000

House and Lot

500,000

June 20, 200B

The computation of the next taxable gift of Mr. Dona for 200A would be Gross gift – Cash, November 1, 200A

P

Less: Deduction

8,000 8,000

Net gift

P

Gross gift – Jewelry, December 25, 200A

P 110,000

Less: Deductions Net gift

---

2,000 P 108,000

Note: The total dowry exemption of a parent donor should not exceed P10,000 if two or more gifts are given to the same donee child on account of marriage.

Encumbrance Assumed by the Donee An encumbrance is a claim or liability attached to a property. Examples of encumbrance are mortgage, security interest, costs of rights, accrued and unpaid taxes. Illustration Miss Tapia donated to Mr. Gomez, her boyfriend, a car amounting to P400,000. The car has an unpaid mortgage of P180,000. Mr. Gomez agreed to assume payment for the mortgage. The net gift of Miss Tapia should be Gross gift – Car

P 400,000

Less: Deduction – mortgage assumed by the donee Net gift

180,000 P 220,000

Diminution of Gift Provided by the 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. Illustration Rista donated P300,000 to Huthut on condition that the latter will give P60,000 of the total gift to charity. The net gift of Rista would be Gross gift

P300,000

Less: Deduction – diminution provided by the donor Net gift

60,000 P240,000

Donations to the National Government Gift made for the use of the National Government, or any entity created by any of its agencies which is not conducted for profits, or to any political subdivision thereof shall be exempt from donor’s tax. Illustration Don Vicente Galam donated his 100 hectares land valued at the date of donation at P1,000,000 as follows: Donee:

No. of Hectares

Fair market value

National Government

50

Solano local Government

30

300,000

Mar Roxas, his friend

20

200,000

Total

100

P

P

500,000

1,000,000

The net gifts of Don Galam would be Gross gifts

P1,000,000

Less: Donation to National Government

P500,000

Donation to Solano local Government

300,000

Net gifts

800,000 P 200,000

Donation to NonProfit Organizations Donations to non-profit organizations such as educational, charitable, religious, cultural, social welfare, accredited NGO’s, trust/philantrophic organizations or research institutions are allowed by the law as exemption provided that not more than thirty percent (30%) of the said donation shall be used for administrative purposes. Illustration Mr. Ilong Go, a nonresident alien, donated P1,000,000 to an accredited NGO. Compute the net gift (a) if not more than 30% off the donation was used for asministration, (b) if more than 30% of donation was used for administration. If not more than 30% of donation was used for administration, the net gift of Mr. Go would be Gross gift Less: Deduction Net gift

P1,000,000 1,000,000 -0-

If more than 30% of donation was used for administration, the net gift of Mr. Go would be Gross gift Less: Deduction Net gift

P1,000,000 -0-____ P1,000,000

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