TX-201 - Lecture notes 1 PDF

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCYCPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Weeks 2 - 3TAXATION A. Tamayo Ÿ G. Caiga Ÿ C. Lim Ÿ K. Manuel Ÿ E. BuenPage 1 of 5 0915 -2303213 Ÿ resacpareviewTX-201: DONOR’S TAXA. Donor’s Tax Return (BIR Form No. 1800) See actual Donor’s Tax Return...

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41 ! May 2021 CPA Licensure Examination ! Weeks 2 - 3

TAXATION

A. Tamayo ! G. Caiga ! C. Lim ! K. Manuel ! E. Buen

TX-201: DONOR’S TAX A. Donor’s Tax Return (BIR Form No. 1800) See actual Donor’s Tax Return B. Donor’ Tax Rates 1. Under TRAIN (Effective January 1, 2018 ) 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. 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. C. Composition of Gross Gifts Personal properties Real properties

Resident or citizen donor Wherever situated Wherever situated

Non-Resident Alien Donor Situated in the Philippines Situated in the Philippines

D. Rule of Reciprocity Properties covered Intangible personal properties situated in the Philippines given as gifts by nonby the rule resident alien donor. Basic rules: a. When there is reciprocity – The intangible personal properties situated in the Philippines given as gifts by a non-resident alien donor are not subject to donor’s tax. b. When there is no reciprocity – The intangible personal properties situated in the Philippines given as gifts by a non-resident alien donor are subject to donor’s tax. E. Transfer for Less Than Adequate and Full Consideration 1. The rule: Where property, other than a real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Personal properties Real properties Ordinary assets Subject to donor’s tax Subject to donor’s tax Capital assets Subject to donor’s tax Not subject to donor’s tax 2. A sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona 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.” F. Valuation of Gifts Made in Property Property Donated Valuation Gift is made in property Fair market value at the time of the gift Real property Provisions in estate tax shall apply to the valuation of said real property. G. Exemptions of Certain Gifts/Deductions from Gross Gifts 1. Found in the Tax Code Under TRAIN (Effective January 1, 2018) Resident/citizen donor 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 Allowed as deduction 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 Allowed as deduction organization.

Non-resident alien donor

Notes: 1) In case of gifts made to certain institutions (no. 1 c above), in order to be exempt, not more than 30% of said gifts shall be used by such donee for administration purposes. 2) For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting

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0915-2303213 ! www.resacpareview.com

TX-201

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Weeks 2-3: DONOR’S TAX

all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes 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 a diminution from the property donated

Resident or Citizen Donor Allowed

Non-Resident Alien Donor Allowed

Allowed

Allowed

3. Exercise Gross gift

Deduction

a) Real property donated valued at P1,500,000 with unpaid mortgage of P300,000 assumed by the donee b) Real property donated valued at P1,200,000 with unpaid real estate tax of P150,000 not assumed by the donee c) Real property donated valued at P1,500,000, the donee agreed to assume the applicable donor’s tax of P450,000 d) Personal property donated valued at P100,000, the donor provided that P10,000 of the property donated be transferred by the donee to a social welfare organization 4. Exempt Donations Under Special Laws. – Donations 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. Aquaculture Department of Southeast Asian Fisheries Development Center of the Philippines (SEAFDEC). H. The Law That Governs The Imposition Of Donor’s Tax 1. The donor’s tax is not a property tax, but is a tax imposed on the transfer of property by way of gift inter vivos. 2. The donor’s tax shall not apply unless and until there is a completed gift. 3. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the donee. 4. In order that the donation of an immovable may be valid: a. It must be made in a public document specifying therein the property donated. b. 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. c. 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. 5. A gift that is incomplete because of reserved powers, becomes complete when either: (1) the donor renounces the power; or (2) his right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfilment of some condition, other than because of the donor’s death. 6. Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor’s tax. 7. General renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor’s tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. 8. The law in force at the time of the completion of the donation shall govern the imposition of donor’s tax. 9. For purposes of the donor’s tax, “NET GIFT” shall mean the net economic benefit from the transfer that accrues to the donee. 10. 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 mortgage assumed. I.

Computation of Taxable Net Gift and the Donor’s Tax Due 1. Donations made on or after January I, 1998 shall be subject to the donor’s tax computed in accordance with the amended schedule of rates prescribed under Section 99 of the National Internal Revenue Code of 1997 (R.A. No. 8424). 2. Donations made on or after January 1, 2018 shall be subject to the donor’s tax under TRAIN (R.A. No. 10963). 3. The computation of the donor’s tax is on a cumulative basis over a period of one calendar year.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY

TX-201

Weeks 2-3: DONOR’S TAX

4. Husband and wife are considered as separate and distinct taxpayers for purposes of donor’s tax. 5. If what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor’s tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines. 6. With the exception of moderate donations for charity or on occasions of family rejoicing, neither spouse may donate any community property or conjugal property without the consent of the other. 7. Every donation between the spouses during the marriage shall be void except for moderate gifts, which the spouse may give each other on the occasion of any family rejoicing, and donation mortis causa. 8. Any provision of law to the contrary notwithstanding, any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes, duly reported to the commission (COMELEC) shall not be subject to the payment of any gift tax (Sec. 13 R.A. No. 7166). Exercise: Determine whether or not the following is subject to donor’s tax (Y/N): a. Husband donated conjugal property with the consent of the wife to charity event (charitable institution’s administration expenses exceed 30% of the gifts) b. Wife donated community property without the consent of the husband on occasion of their legitimate child’s birthday (amount of gift is moderate) c. Husband gifted his wife a diamond ring on occasion of her birthday d. Wife gifted her husband a branded shirt of account of his birthday (amount is moderate) e. Husband transferred some of his exclusive property to his wife, transfer to take effect after his death f. Surviving spouse renounced his share in the conjugal partnership in favor of the heirs of the deceased spouse g. An heir renounced his share in the hereditary estate in favor of no one in particular h. Taxpayer donated to the campaign fund of a candidate, duly reported to the COMELEC i. Donee failed to indicate his acceptances of the donation before the transferor died j. Donee signified his acceptance of the donated property known to the donor before he died, delivery of the donated property done after the transferor died J. Tax Credit for Donor’s Taxes Paid to a Foreign Country 1. One foreign Limit country Net gift, foreign X Philippine donor’s tax due Total net gifts xxx Actual foreign donor’s tax xxx Allowed (lower between actual and limit) xxx 2. Two or more Limit (a) – By country xxx foreign Limit (b) – By total xxx countries Limit [lower between limits (a) and (b)] xxx Actual total foreign donor’s taxes xxx Allowed tax credit (lower between allowed limit and actual total foreign donor’s taxes) xxx Exercise Micha is a citizen and resident of the Philippines. On July 8, 2018, she made donations to Queenie, a friend, of properties in Australia and USA. Donor’s taxes paid in Australia and USA amounted to P95,000 and P50,000, respectively. The property in Australia had a fair market value of P300,000 while the property in US had a market value of P200,000. How much was the donor’s tax still due after credit for foreign donor’s taxes? K. Filing of Return and Payment of Tax 1. Requirement Any individual who makes any transfer by gift (except those which are exempt from donor’s tax) shall, for the purpose of donor’s tax, make a return under oath at least in duplicate (triplicate per BIR Form No. 1800) 2. Contents of the The return shall set forth: donor’s tax a. Each gift made during the calendar year which is to be included in computing net return gifts; b. The deductions claimed and allowable; c. Any previous net gifts made during the same calendar year; d. The name of the donee; and e. Such other information as may be required by rules and regulations made pursuant to law. 3. Time for filing of return 4. Payment of donor’s tax 5. Modes of

The donor’s tax return shall be filed within thirty (30) days after the date the gift is made or completed. The donor’s tax due shall be paid at the same time that the return is filed. 1) Payment through Authorized Agent Bank (AAB)...