Taxation 2 │DONOR’S TAX

FLABERT VILLASENCIO, CPANotre Dame of Dadiangas University

Donation

oAn act of gratuitously transferring property or rights motivated by the liberality of the giver in favor of the receiveroThe transfer includes not only the transfer of ownership but also the passage of control over the economic benefits of the property

Donation

Kinds of DonationKinds of Donation

Mortis CausaMortis Causa Inter VivosInter Vivos

1. Subject to Estate Tax2. Donor retains

ownership before his death

3. The transfer is revocable by the donor at will

4. The transfer is void if the donee dies ahead before the donor

1. Subject to Estate Tax2. Donor retains

ownership before his death

3. The transfer is revocable by the donor at will

4. The transfer is void if the donee dies ahead before the donor

1. Subject to Donor’s Tax2. Takes effect during the

lifetime of the donor.

1. Subject to Donor’s Tax2. Takes effect during the

lifetime of the donor.

Essentials of Donation

1. Capacity of the Donoro Refers to the condition and legal competence of

the donor to enter into a valid contracto The donor must be capacitated (not necessary for

donee)

2. Donative Intento The declaration of the transfer of ownership by the

owner without considerationa) Oral Donation- any personal property with value less

than 5,000, with simultaneous delivery of the thingb) In Writing- the value of personal property exceeds

5,000 whose donation and acceptance must be in writing, otherwise it is void.

c) Public Instrument- any donation which involves real property

Essentials of Donation

3. Delivery of the GiftoThe delivery may be Actual or ConstructiveoCompletion of the gift requires physical

delivery or delivery of the instrumentoDonor’ tax does not apply until there is a

completed gift (no reservation over the gift)

4. Acceptance of the GiftoAcknowledgement of the thing donatedo It is perfected from the moment the donor has

known the acceptance by the donee and completed by the delivery

Gross Gift

▪ The value of the property or right donated subject to donor’s tax before any deduction

Classifications of Donor

1.Citizen or Resident Alien- taxable for donations within and outside Philippines

2.Nonresident Alien- taxable only for the donations within the Philippines

Gross Gift

Illustration:TiaKemi donated all his properties to his relatives in the Philippines.

Property A in Baguio to Mr. Angkin 1,500,000Property B in Canada to Mr. Amin 2,500,000Total 4,000,000

1. If TiaKemi is a resident, how much is the Gross Taxable Donation?2. If TiaKemi is a nonresident, how much is the Gross Taxable Donation?

1.Answer: 4,000,000

2.Answer:1,500,000

Gross Gift

Summary ApplicationGROUP OF DONORS AND TAXABLE

DONATIONS

DONORGross Gift’s Location

Within Philippines

Outside Philippines

A. Citizen or Resident

• Real Property• Tangible Personal Property• Intangible Personal Property

TaxableTaxableTaxable

TaxableTaxableTaxable

B. Nonresident Alien

• Real property• Tangible Personal Property• Intangible Personal Property

TaxableTaxableTaxable*

NoneNoneNone

Conjugal DonationoHusband and Wife cannot transfer by virtue of sale

or donation any conjugal or communal property WITHOUT CONSENT from the other, unless it is a moderate donations for charity or on occasion of family rejoicing

oSpouses are considered as SEPARATE DONOR of the conjugal property

oUnless, the wife expressly joins in making the donation, it is presumed to have been done by the husband

oDonations made between husband and wife during marriage are void, except as cited in item 1.

oDonation Mortis Causa is valid subject to Estate Tax.

Conjugal DonationIllustration:

Mr and Mrs Galante, spouses and citizens of the Philippines, donated to their legitimate daughter the following properties:

Vacation House (conjugal property- Hong Kong 1,500,000Car (conjugal property)- Phil 750,000Jewelry (exclusive property of Mrs.Galante) 475,000Total 2,725,00

The Gross Gift of the Spouses are computed as:Mr. Galante Mrs.Galante

Vacation House (1,500,000/2) 750,000 750,000Car (750,000/2) 375,000 375,000Jewelry 475,000Gross Gift per Spouse 1,125,000 1,600,00

Valuation of DonationGeneral Valuation: The Value existing at the TIME THE GIFT IS MADE.

oCash Gifts- at Face Amount

oPersonal Property- the Fair Market Value

oReal Property- FMV by the City Assessor or by the BIR, higher

oTransfer for Inadequate Consideration- the excess of the fair market value (personal property), however if it is a real property, it is not subject to donor’s tax but subject to final tax.

oNet Gift- the amount of mortgage assumed is deducted from the fair market value of the property

Deductions from Gross Gifts

Classifications of Donors

Citizen or ResidentNonresidentDeductible Items Alien1.Dowries Yes No2.Encumbrances Yes Yes3.Diminution Yes Yes4.To Government Yes Yes5.To NGO YesYes

Deductions from Gross Gifts1. Dowries- gift given by natural or adopting parents

on account of marriageo A deduction of 10,000 is allowed provided that the gift is

given before the wedding or within one year after the celebration.

Illustration:On January 1, 2014, Mr and Mrs Mayaman donated a house

and lot, a conjugal property, at fair market value of 620,000 to their legitimate son on account of his marriage on January 15, 2014. The net gift of each spouse is:

Mr. Mayaman Mrs.MayamanGross Gift (620,000/2) 310,000 310,000Less: Deductions 10,000 10,000Net Gift of each Spouse 300,000 300,000

Deductions from Gross Gifts2. Encumbrance Assumed by the Donee- a claim or

liability attached to a property such as mortgage, security interests, cost of rights and unpaid taxes

– Allowed as a deduction once assumed by the donee.

Illustration:

Miss Tapia donated to Mr Gomez, her boyfriend, a car amounting to 400,000. The car has an unpaid mortgage of 180,000. Mr Gomez agreed to assume payment for the mortgage.

The Net Gift of Miss Tapia would be:

Gross Gift-Car 400,000Less: Deduction (Mortgage assumed) 180,000Net Gift 220,000

Deductions from Gross Gifts3. Diminution of Gift Provided by the Donor –

refers to the decrease in the value of the property donated as a result of a condition made by the donor to the donee

Illustration:

Rista donated 300,000 to Huthut on condition that the latter will give 60,000 of the total gift to the charity.

The net gift of Rista would be:Gross Gift 300,000Less: Deduction- diminution to charity 60,000Net Gift 240,000

Deductions from Gross Gifts4. Donations to the National Government- gifts made for the use of

the National Government, or any entity created by any of its agencies not constructed for profit

– Deductible at 100% of the gift (Donation during Election must be reported ti Comelec)

Illustration:

Don Pepot donated his 100 hectares land valued at the date of donation at 1,000,000 as follows:

National Government 500,000Solano Local Government 300,000Mar Roxas, friend 200,000

The Net Gift of Don Pepot would be:Gross Gift 1,000,000Less: Deductions (500,000+300,000) 800,000Net Gift 200,000

Deductions from Gross Gifts5. Donation to Non Profit Organizations- donations to

educational, charitable, religious, cultural, social welfare, accredited NGOs and other related agencies are allowed as exemption as long as that not more than 30% of the donation shall be used for administrative purposes.

Illustration:Mr. Eloh Canoe, a nonresident alien, donated 1,000,000 to an

accredited NGO. Compute for the Net Gift.

a. If not more than 30%Gross Gift 1,000,000Less: Deduction 1,000,000Net Gift -

b. If more than 30%Gross Gift 1,000,000Less: Deduction - Net Gift 1,000,000

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Tax Exempt Donations1. The first 100,000 of the net gift to relatives every year.2. Donations given to the following:a) Ramon Magsaysay Award Foundationb) Philippine Inventor’s Commissionc) Philippine-American Cultural Foundationd) International Rice Research Institutee) Integrated Bar of the Philippinesf) Development Academy of the Philippinesg) National Museum, National Library, and the archives of the National

Historical Instituteh) National Social Action Councili) Southern Philippines Development Administrationj) Task Force on Human Settlementk) Intramuros Administrationl) Irrevocable donations of American-owned private landsm) Aqua-culture Development of the Southeast Asian Fisheries Development

Center of the Philippinesn) Museum of Philippine Costumeso) Donations of Foreign Originp) Gratuitous transfer by a religious corporation

Donor’s Tax▪ Imposed on the transfer of property by way of gift intervivos ▪ The tax shall not apply until there is completed gift▪ Computation is on a cumulative basis over one calendar year

Formula:1.On the first donation

Gross gifts xxxLess: Exemptions (deducitons) if applicable xxxNet taxable Gifts xxxMultipy by applicable tax rates xxxDonor’s Tax Due xxx

2. On Subsequent donations within same calendar yearGross gifts xxxLess: Exemptions (deducitons) if applicable xxxNet taxable Gifts xxxAdd: All previous Net gifts during the year xxxAggregate Net Gifts xxxDonor’s Tax on the Aggregate Net Gift xxxLess: Donor’s Tax on Previous Net Gifts xxxDonor’s Tax Due, Current xxx

Rates of Donor’s Tax1. Gifts to Relatives- in general, the donor’s tax for each year

shall be computed on the basis of the total net gifts made during the calendar year

Net Gift Tax Plus Of the ExcessOver Not Over Shall Be % Over

- 100,000 exempt - -100,000 200,000 - 2% 100,000200,000 500,000 2,000 4% 200,000500,000 1,000,000 14,000 6% 500,0001,000,000 3,000,000 44,000 8% 1,000,0003,000,000 5,000,000 204,000 10% 3,000,0005,000,000 10,000,000 404,000 12%

5,000,00010,000,000 & above 1,004,000 15% 10,000,000

Rates of Donor’s Tax

2. Gift to Stranger- the tax payable by the donor shall be 30% of the net gift.

For purposes of Taxation, 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 relationship

▪ For Donor’s tax purposes, the children of the first cousin of the donor are considered strangers.

Rates of Donor’s TaxIllustration:Mr Santiago Baldado donated the following during 2013:

Jan 5 House and lot to Francis, his legitimate son, 1,000,000

on account of marriageMar 15 Car to Maria, his legitimate daughter on300,000

account of her birthdayApr 30 Cash to Susan, his secretary, on account 50,000

of her birthday. On condition that 10,000shall be given to charity.

May 10 Antique items to Tokmo, his uncle, on 100,000account of gratitude

The Donor’s Tax of Mr Baldado would be:

Jan 5 Gross Gift (House and Lot)1,000,000

Less: Deduction- Dowry 10,000Net Taxable Gift990,000

Donor’s Tax on 500,00014,000Tax on Excess (490,000x6%)29,400Donor’s Tax, Current 43,400

Mar 15 Gross Gift (Car) 300,000Less: Deduction -Net Taxable Gift 300,000Add: All previous net gifts 990,000Aggregate Net Gifts

1,290,000

Donor’s Tax on 1,000,000 44,000Tax on excess (290,000 x 8%)

23,200Donor’s Tax on the aggregate net gifts

67,200less: Donor’s tax , previous

43,400Donor’s tax, current

23,800

Apr 30 Gross Gift: (Cash)50,000

less: Deduction- Diminution10,000

Net Gift 40,000Multiply by Donor’s Tax Rate (Stranger)

30%Donor’s Tax on the Gift

12,000

May 10 Gross Gift (Antique)100,000

Less: Deduction -Net Taxable Gift

100,000Add: All previous net gifts

1,290,000Aggregate Net Gifts

1,390,000

Donor’s Tax on 1,000,00044,000

Tax on excess (290,000 x 8%)31,200

Donor’s Tax on the aggregate net gifts75,200

less: Donor’s tax , previous67,200

Donor’s tax, current8,000

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PROBLEM 6-19

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Problem 6–19 1. Letter C Gross gifts, as of August 15, 200A (P150,000 x 2 lots) P300,000

Less: Deductions 0Net gifts, August 15, 200A P300,000 Donor’s tax on P200,000 P 2,000Tax on excess (P300,000 – P200,000) x 4% 4,000Total donor’s tax P 6,000

2. Letter D Wedding gifts, as of November 15, 200A150,000Less: Deductions - dowry 10,000Net gifts, November 15, 200A 140,000Add: Previous, net gifts 300,000Total net gifts 440,000

Donor’s tax on P200,000 2,000Tax on excess (P440,000 – P200,000) x 4%

9,600Total donor’s tax 11,600Less: Donor’s tax – August 15, 200A

6,000Donor’s tax payable – November 15, 200A

5,600

Tax Credits 1. Only ONE Foreign country is involved

Tax Credit= Net Donations in Foreign Country x Donor’s TaxWorld Net Donations

ORDonor’s Tax = Actual Donor’s tax paid to foreign country

whichever is LOWER2. TWO or MORE Foreign CountriesLimit A: Per Foreign Country

Net Donations per Foreign Country x Donor’s TaxEntire Net Donations

ORDonor’s Tax = Actual Donor’s tax paid to foreign country

whichever is LOWER

Limit B: By TotalNet Donations ALL Foreign Country x Donor’s Tax

Entire Net DonationsOR

The Actual Donor’s Tax paid to Foreign Country, LOWER Value

Tax Credits Illustration:

The following were donations made by Mr Galante, a Filipino, to his relative for the taxable year 2014:

Donation of Property which are located in:Foreign Country A 300,000Foreign Country B 200,000Philippines 500,000Total Donations 1,000,000

Foreign Donor’s TaxForeign Country A 10,600Foreign Country B 10,000

How much is the Tax Credit and the Donor’s Tax Due?

Tax Credits Illustration:

Donation of Property which are located in:Foreign Country A 300,000Foreign Country B 200,000Philippines 500,000Total Donations 1,000,000

Foreign Donor’s TaxForeign Country A 10,600Foreign Country B 10,000

Limit A:Country A= 300,000 x 44,000 = 13,200

1,000,000 vs = 10,600 10,600Country B=200,000 x 44,000= 8,800

1,000,000 vs = 10,000 8,800Total 19,400Limit B: vsTotal Foreign: 500,000 x 44,000 = 22,00019,400

1,000,000

Tax Credits Illustration:

Donation of Property which are located in:Foreign Country A 300,000Foreign Country B 200,000Philippines 500,000Total Donations 1,000,000

Limit A:Country A= 300,000 x 44,000 = 13,200

1,000,000 vs = 10,600 10,600Country B=200,000 x 44,000= 8,800

1,000,000 vs = 10,000 8,800Total 19,400Limit B: vsTotal Foreign: 500,000 x 44,000 = 22,00019,400

1,000,000Tax on 1,000,000 44,000Less: Tax Credit 19,400Donor’s Tax Still Due 24,600

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Problem 6–29 1. Letter C Philippine donor’s tax P404,000 Actual donor’s tax - foreign P120,000 Tax credit, limit (P404,000 x 500,000/5,000,000) - lower P40,400

P40,400

2. Letter B Philippine donor’s tax: Relative (P500,000) P 14,000 Stranger (P5,000,000 – P500,000) x 30% 1,350,000 1,364,000 Less: Tax credit Actual donor’s tax – foreign (lower) P120,000 120,000 Tax credit, limit (P1,364,000 x 500,000/5,000,000) 136,400

Donor’s tax still due and payable P1,244,000

Filing of Returns and Payment of Tax

The return shall consist of:1.Each gift made during the calendar year that is to be included in the computation of gift tax2.The deductions claimed and allowable3.Any previous net gifts made during the same calendar year4.The name of the donee5.Other information required by rules and regulations pursuant to the law

Filing of Return- within 30 days after the gift is made

- pay as you file, unless with extension not more than six months

Attachments to the Donor’s Tax Return

1. Sworn statement of the relationship of the donor to the donee2. Proof of claimed tax credit, if applicable3. Certified true copy if the Original/ Transfer/Condominium Certificate

Title of the donated property, if applicable4. Certified true copy of the latest tax declaration of lot and/or

improvement, if applicable5. Certificate of No Improvement issued by the Assessor’s Office where

the donated real properties have not declared improvements, if applicable

6. Proof of valuation of shares of stock at the time of donation if applicablea) For Listed Stocks- newspaper clippings/ certificate issued by SEC as to value of

the sharesb) For Unlisted Stocks- latest audited Financial Statements of the issuing

corporation with computation of the book value per share7. Proof of valuation of other types of personal properties, if applicable8. Proof of claimed deductions, if applicable9. Proof of Tax Debit Memo used as payment , if applicable

Penalties1. 25% Surcharge- shall be imposed on the following violations:

a) Failure to file any return on or before the due dateb) Filing a return with a person or office other than those with

whom it is required to be filedc) Failure to pay the full or partial amount of tax shown on the

return or the full amount of tax due for which no return is required to be filed on or before the due date

d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment

No Surcharge of 25% shall be imposed if:a) The donor’s tax return is filed voluntarilyb) Without notice from the BIR Commissionerc) It is shown that there was a reasonable cause for failure to

file the returnd) The failure to file the return was not due to wilful neglect.

Penalties

2. 50% Surcharge- shall be imposed on the following violations:

a) Willful neglect to file thee return within the period prescribed by the Code or by rules and regulations

b) The return filed is false or fraudulent3. Interest- at the rate of 20% per annum shall

be imposed on the basic unpaid amount of tax from the date prescribed for the payment until the amount is fully paid

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