donor's tax notes

TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2015-‐2016

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GUIDE NOTES ON DONOR’S TAX DONOR’S TAX Q: What is donor’s tax?

* Donor’s tax is a tax imposed upon the right or privilege to gratuitously transfer property, real or personal, tangible or intangible, between two or more persons who are living at the time of transfer. ** In the 1940s, Enrico Pirovano was President and General Manager of de la Rama Steamship Co. The corporation insured the life of Pirovano with various insurance companies designating itself as the beneficiaries of said policies. Pirovano died. The corporation received a certain sum as proceeds of the life insurance policies. Such amount was later donated by the corporation to Pirovano’s minor children. Ultimately, the issue was whether the sum was subject to donor’s tax. According to Pirovano v. CIR, a donation made by a corporation to the heirs of a deceased officer out of gratitude for his past services is subject to the donees’ gift tax. [Pirovano v. CIR, GR No. L-‐19865, 31 July 1965.]

Q: Differentiate between a donation inter vivos (subject to donor’s tax) and a donation mortis causa (or a transfer in contemplation of death, subject to estate tax).

* The case of Austria-‐Magat v. CA differentiated between a donation inter vivos and donation mortis causa. Sometime in 1975, Basilisa Comerciante, mother of 5, executed a document entitled “Donation” in favor of her 4 living children. The issue lies

on the characterization of the Donation. Citing jurisprudence, the Supreme Court laid out the characteristics of a donation mortis causa, to wit: (1) It conveys no title or ownership to the transferee before the death of the transferor; or, what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive; (2) That before his death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed; and (3) That the transfer should be void if the transferor should survive the transferee. Essentially ruling that all the above characteristics were not present, the Supreme Court categorized the Donation as one inter vivos, and stated that the prohibition to alienate in said Donation did not necessarily defeat the inter vivos character of the donation. [Austria-‐Magat v. CA, GR No. 106755, 1 Feb. 2002.] ** In del Rosario v. Ferrer, in August 1968, the Gonzales Spouses executed a document entitled “Donation Mortis Causa” in favor of their 2 children, Asuncion and Emiliano, and 1 granddaughter, Jarabini covering a property. The deed specifically stated that the donation was irrevocable and contained an acceptance clause. In September 1968, the wife died. In December 1968, the husband executed a deed of assignment of his rights and interests in the subject property to their daughter Asuncion. The husband died in June 1972. The Supreme Court ruled that although the deed was denominated as “Donation Mortis Causa,” “irrevocability” is a


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quality absolutely incompatible with the idea of conveyances mortis causa, where “revocability” is precisely the essence of the act. “Given that the donation in this case was irrevocable or one given inter vivos, the husband’s subsequent assignment of his rights and interests in the property to Asuncion should be regarded as void for, by then, he had no more rights to assign. He could not give what he no longer had. Nemo dat quod non habet.” [del Rosario v. Ferrer, GR No. 187056, 20 Sept. 2010.] *** In Puig v. Peñaflorida, Doña Carmen Ubalde expressly and consistently declared her conveyance to be one of donation mortis causa and further forbade the registration of the deed until after her death. The Supreme Court held that “[a]all these features concordantly indicated that the conveyance was not intended to produce any definitive effects, nor to finally pass any interest to the grantee, except from and after the death of the grantor.” [Puig v. Peñaflorida, GR No. L-‐15939, 31 Jan, 1966.] **** BIR Ruling No. 089-‐2011 addressed the issue of whether a general renunciation made by the sole heir of the decedent, which made the four grandchildren the heirs next in line as the direct heirs, created a taxable event for which donor’s tax should be paid. The BIR ruled that in the transaction above, there was no donation to speak of. Hence, no donor’s tax could be assessed on the transaction. [BIR Ruling No. 089-‐2011, 21 Mar. 2011.] ***** BIR Ruling No. 109-‐2011 interpreted certain provisions of the Special Purpose Vehicle Act of 2002 in relation to the 1997 Tax Code. It ruled that the transfer of property from the Philippine Distressed Asset Asia Pacific, Inc., pursuant to the SPV

Law, as amended, was not subject to donor’s tax. [BIR Ruling No. 109-‐2011, 7 Apr. 2011.]

Q: What is the law that governs the imposition of donor’s tax?

* The gift is perfected from the moment of acceptance by the donee, and it is completed at the time of delivery. The delivery can either be constructive or actual. Hence, it is the law at the time of the perfection and/or completion that will govern the imposition of the donor’s tax. ** A gift that is incomplete because of reserved powers becomes complete when either: (i) The donor renounces the power; or (ii) His right to exercise ceased because of the happening of some event or contingency or the fulfillment of some condition, other than the death of the donor. [RR No. 02-‐03]

Q: What transfer may be considered as donations?

* The following transfers may be treated as donations: (a) debt condoned or remitted (in which case the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income) [Sec. 50, RR No. 02-‐40]; (b) transfers made in trust for another person; and (c) 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 deceases spouse or any other person.


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** Further to item (c) above, note, however, that a 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 the renunciation is specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-‐heirs in the hereditary estate. [RR No. 02-‐03]

Sec. 98, Imposition of Tax (A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. (B) The tax shall apply 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. Sec. 99, Rates of Tax Payable by Donor 99(A) In General -‐ The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the following schedule:

If the net gift is:

Over But Not Over The Tax Shall be Plus Of the Excess Over P 100,000 Exempt

P 100,000 200,000 0 2% P100,000 200,000 500,000 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


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Q: What are the factors that affect the determination/computation of gross gift?

* These are: (1) citizenship and residency of the donor at the time of donation; and (2) location of the property donated.

Q: How does one arrive at the valuation of a donation?

* The same rules apply as in valuation of a decedent’s gross estate. (1) Gross gifts is computed on a cumulative basis. (2) Donor’s tax is based on the net gifts. Net gifts is computed as follows: gross gifts minus allowable deductions.

99(B) Tax Payable by Donor if Donee is a Stranger -‐ When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a 'stranger,' is a person who is not a: (1) Brother, sister (whether by whole or half-‐blood), spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship. Q: Who is a “stranger”?

* When the donee is a stranger, the tax payable by the donor shall be 30% of the net gifts. “Stranger” shall be any person who is not: (1) a brother, sister (whether by whole or half-‐blood) spouse, ancestor and lineal descendant; or (2) a relative by consanguinity in the collateral line within the fourth degree of relationship.

99(C) Political Contributions -‐ 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. Q: Are political contributions considered gifts and therefore liable for donor’s tax?

* In the case of Abello v. CIR, partners of the ACCRA law firm contributed amounts to the 1987 senatorial campaign fund of Angara. The issue at bar was whether such political contributions were subject to donor’s tax. The Supreme Court found that all the elements of donation were present, namely: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality or animus donandi. Hence, the political or electoral contributions were subject to donor’s tax. [Abello v. CIR, GR No. 120721, 23 Feb. 2005.]

Sec. 100, Transfer for Less than Adequate and Full Consideration Where property, other than real property referred to in Section 24(D), 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 exceeded the value of the consideration shall, for the purpose of the tax imposed by this


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Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Q: Cite an example of a transfer for less than adequate and full consideration.

* The case of CIR v. B.F. Goodrich Phils., Inc. dealt with the sale by B.F. Goodrich to Siltown Realty of a rubber plantation in Basilan for a price less than its declared fair market value. The BIR wanted to assess BF Goodrich for deficiency donor’s tax representing the difference between the fair market value and the actual purchase price of the property. The BIR also contended that BF Goodrich filed a “false” income tax return. The Supreme Court said that real property may be sold for less than adequate consideration for a bona fide purpose and that in such event, the sale remains an “arm’s length” transaction. On the issue of falsity of the return filed, the Supreme Court ruled that although donor’s tax is different from capital gains tax (as reported in the income tax return), the 1974 income tax return was sufficient compliance with the legal requirement to file a donor’s tax return. “In other words, the fact that the sale transaction may have partly resulted in a donation does not change the fact that [BF Goodrich] already reported its income for 1974 by filing an income tax return.” [CIR v. B.F. Goodrich Phils., Inc., GR No. 104171, 24 Feb. 1999.]

Sec. 101, Exemption of Certain Gifts The following gifts or donations shall be exempt from the tax provided for in this Chapter:

* BIR Ruling No. 124-‐2011 ruled that the donation of lots by Diamond Cement and Industrial Corporation – Ayala Corporation (DCIC-‐AC) to relocatees of the Department of Transportation and Communications’ Laguindingan International Airport Project in Misamis Oriental was not included among those donations exempt from donor’s tax under Section 101 of the 1997 Tax Code. [BIR Ruling No. 124-‐2011, 12 Apr. 2011]

101(A) In the Case of Gifts Made by a Resident (1) Dowries or gifts made on account of marriage and 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 Ten thousand pesos (P10,000): (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; and (3) 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, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. 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


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devoting 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. Q: What are the tax implications of a donation 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?

* (1) Such donation is exempt from payment of donor’s tax subject to the condition that not more than 30% of said donation shall be used by the done for administration purposes. In case of donation of real property, the Register of Deeds shall annotate this condition at the back of the TCT/OCT because failure to comply with said condition shall be a ground for the revocation of the exemption from the payment of the donor’s tax. (2) The deed of donation is likewise not subject to documentary stamp tax prescribed under Section 196 of the 1997 Tax Code (Stamp Tax on Deeds of Sale and Conveyances of Real Property), but only to the documentary stamp tax of PhP 15 imposed under Section 188 of the same code (Stamp Tax on Certificates). (3) If the donor is a VAT-‐registered person and the donation is an ordinary asset, the donation is subject to VAT pursuant to RR No. 16-‐2005, as amended, the same being considered a transaction deemed sale. If the donor is not a VAT-‐registered person, the donation is exempt from VAT.

(4) If the same property acquired by donation is subsequently conveyed by way of sale or exchange, the sale will be subject to corporate income tax on the gain realized which is determined by deducting from the gross selling price the historical cost or the adjusted basis thereof, as it would be in the hands of the donor, pursuant to Sections 27 and 101 of the 1997 Tax Code, and consequently to creditable expanded withholding tax under Section 2-‐98, as amended. If the donee-‐institution donates the subject property to a non-‐exempt done, it shall be liable for donor’s tax pursuant to Section 98 of the 1997 Tax Code. [BIR Ruling No. 128-‐2013, 4 Apr. 2013.]

Q: What is the benefit derived by a donor in case the donee is accredited by the Philippine Council for NGO Certification (PCNC)?

* Gifts, donations, and other contributions made by residents to an educational institution or a foundation are exempt from donor's tax, subject to the condition that not more than 30% of said gift shall be used for administration purposes. [Sec. 101(A)(3), 1997 Tax Code.]

Moreover, for income tax purposes, an accreditation of the educational institution or foundation by accrediting entities, such as the PCNC, allows a donor to deduct the charitable contribution as a business expense. [RR No. 13-‐98 dated 8 Dec. 1998; BIR Ruling No. 029-‐10, 12 Aug. 2010; BIR Ruling No. [NSNP-‐(S30H-‐010)061-‐10], 5 July 2010; BIR Ruling No. 017-‐10, 1 July 2010]


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The PCNC is a private, voluntary, non-‐stock, non-‐profit corporation established by six of the country's largest NGO networks.

"The PCNC, duly registered with the Securities and Exchange Commission, shall be the government's partner in a system of accreditation, to determine the qualification of domestic corporations or associations or NGOs organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes, or for the rehabilitation of veterans, or to NGOs for accreditation as donee institutions." [EO No. 720, 11 Apr. 2008]

A PCNC accreditation endows an entity with a "donee institution status" such that charitable contributions to these qualified donee institutions are allowed as business deductions for income tax purposes.

Q: What are the requirements for the above?

* A donor engaged in business shall give a Notice of Donation on every donation worth at least PhP 50,000 to the Revenue District Office which has jurisdiction over his place of business within 30 days after receipt of the qualified donee institution’s duly issued Certificate of Donation, which shall be attached to said Notice of Donation.

On the other hand, the Certificate of Donation states that not more than 30% of the donation/gifts for the taxable year shall be used by the qualified donee institution for administration purposes.

** The Certificate of Donation must indicate/contain (1) donee certification, and (2) donor’s certificate of values. (RMC No. 86-‐14]

101(B) In the Case of Gifts Made by a Nonresident not a Citizen (1) 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. (2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. 101(C) Tax Credit for Donor’s Taxes Paid to a Foreign Country 101(C)(1) In General. -‐ The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country. 101(C)(2) Limitations on Credit. -‐ The amount of the credit taken under this Section shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and


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(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts.

* The case of CIR v. Central Luzon Drug Corporation dealt with the 20% discount required by law to be given to senior citizens. The Supreme Court held that the 20% discount is a tax credit for the establishment concerned. [NOTE: This was the old doctrine. Today, the 20% discount is a tax deduction from the gross income or gross sales of the establishment concerned. However, the discussion on tax credit for donor’s taxes paid to a foreign country remains instructive.] It stated: “While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. For example, in computing the estate tax due, Section 86(E) allows a tax credit -‐-‐ subject to certain limitations -‐-‐ for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donor’s taxes -‐-‐ again when paid to a foreign country -‐-‐ in computing for the donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our government.” [CIR v. Central Luzon Drug Corporation, GR No. 159647, 15 Apr. 2005.]

Sec. 102, Valuation of Gifts Made in Property If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof. Sec. 103, Filing of Return and Payment of Tax 103(A) Requirements. -‐ Any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax provided for in this Chapter) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall se forth: (1) Each gift made during the calendar year which is to be

included in computing net gifts; (2) The deductions claimed and allowable; (3) Any previous net gifts made during the same calendar year; (4) The name of the donee; and (5) Such further information as may be required by rules and regulations made pursuant to law. 103(B) Time and Place of Filing and Payment. -‐ The return of the donor required in this Section shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise permits, the return 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


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the Office of the Commissioner. In the case of gifts made by a nonresident, 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. Q: How and when are donor’s tax returns filed?

* The case of CIR v. B.F. Goodrich Phils., Inc. dealt with the sale by B.F. Goodrich to Siltown Realty of a rubber plantation in Basilan for a price less than its declared fair market value. The BIR wanted to assess BF Goodrich for deficiency donor’s tax representing the difference between the fair market value and the actual purchase price of the property. The BIR also contended that BF Goodrich filed a “false” income tax return. The Supreme Court said that real property may be sold for less than adequate consideration for a bona fide purpose and that in such event, the sale remains an “arm’s length” transaction. On the issue of falsity of the return filed, the Supreme Court ruled that although donor’s tax is different from capital gains tax (as reported in the income tax return), the 1974 income tax return was sufficient compliance with the legal requirement to file a donor’s tax return. “In other words, the fact that the sale transaction may have partly resulted in a donation does not change the fact that [BF Goodrich] already reported its income for 1974 by filing an income tax return.” [CIR v. B.F. Goodrich Phils., Inc., GR No. 104171, 24 Feb. 1999.]

** The case of Sumipat v. Banga discussed the time and place of filing and payment of donor’s tax. Sumipat, with the consent of his wife, executed a document entitled “Deed of Absolute Transfer and/or Quitclaim” over three parcels of land, in favor of his five illegitimate children with another woman. The

Supreme Court found that the deed was actually a deed of donation, but that it was patently void for non-‐compliance with certain requirements. There was also no proof of filing of a donor’s tax return and payment of the applicable donor’s taxes, which the Supreme Court considered as “mandatory. In fact, the registrar of deeds is mandated not to register in the registry of property any document transferring real property by way of gifts inter vivos unless a certification that the taxes fixed and actually due on the transfer has been paid or that the transaction is tax exempt from the Commissioner of Internal Revenue, in either case, is presented.” [Sumipat v. Banga, GR No. 155810, 13 Aug. 2004.]

Sec. 104, Definitions -‐ For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-‐five percent (85%) of the business of which is located in the Philippines; 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, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal


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property: (a) if the decedent at the time of his death or 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 in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax.

donor's tax notes

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