Understanding Donor's Tax and Regulations

Good day everyone, let's discuss donor's tax. The donor's tax is imposed on donations inter vivus or those made between living persons to take effect during the lifetime of the donor. The donor's tax supplements the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime of the deceased. A gift or donation is a voluntary transfer of property from one person to another without any consideration or compensation therefore. The donor's tax is imposed on donations inter vivos or those made between living persons to take effect during the lifetime of the donor. Basically, donation is an act of liberality whereby the donor disposes gratuitously a thing or right in favor of another or the donee who accepts it. Now, the law in force at the time of the perfection of the donation shall govern the imposition of donor's tax. This is also in line with Article 777 of the New Civil Code which provides that the rights to the succession are transmitted from the moment of death of the decedent. How do we define donor's tax? A donor's tax is levied, assessed, collected, and paid upon the transfer by any person, resident or non-resident, of the property by gift. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real, personal, tangible, or intangible. What is the nature of donor's tax? The donor's tax is not a property tax, but this is an excise tax imposed on the privilege of the owner to give or donate. Is it onerous? The answer is no. It is based on pure act of liberality. Is it a property tax? The answer is no. It is not a tax on property as such because the imposition does not rest upon the general ownership. The donor's tax shall not apply unless and until the gift is completed. The transfer of property by gift is perfected from the moment the donor knows the acceptance of the donate. It is completed by delivery, either actual or constructive. Thus, the law enforced at the time of the perfection or completion of the donation shall govern the imposition of the donor's tax. What is the purpose why the government imposes donor's tax on gifts? We have two purposes. Number one, to supplement estate tax. And second, to prevent avoidance of income tax through the device of splitting income among numerous donies. who are usually members of a family or into many trusts with the donor, thereby escaping the effect of the progressive rates of income tax. Now, let's review the requisites of a valid donation under Article 725 of the New Civil Code. A donation is an act of liberality whereby a person or the donor disposes gratuitously of a thing or right. in favor of another of the donor who accepts it. We have four requisites of a valid donation. Number one, the donor must have the capacity and by capacity we mean the condition and legal competence of the donor to enter into a valid contract. Second requisite, there must be an intent to donate by donate, donative intent. This is the declaration of the legal owner of a property or right to transfer. ownership to another without any consideration. Now, do you still recall the forms required to effect donation? Oral donations can be made for amounts involving 5,000 pesos or less. Now, donation and acceptance must be in writing if the value of the personal property donated exceeds 5,000 pesos. Now, for real properties, it is required that the donation must be reflected or contained in a public instrument. Otherwise, the donation shall be deemed void. have an issue or inexistent. Third requisite of a valid donation is the delivery of the gift. By delivery, you have actual or constructive delivery. Donor's tax does not apply until there is a completed gift. The fourth requisite of a valid donation is the acceptance by the donee. By acceptance, we mean the acknowledgement of the thing or right donated. Donation is perfected from the moment the donor knows the acceptance of the donee. It is completed from the moment of the delivery of the donated property to the donee. Acceptance can be the same document or in a separate document in which case the donor must be notified of the donee's acceptance. Can donations be made to unborn children? The answer is yes. Donations made to unborn children may be accepted by those persons who would legally represent them. Minor or those incapacitated who cannot enter into a contract may become donies, but acceptance shall be done through their parents or legal representatives. Let's move on to transfers which may be constituted as donation. You have four types of transfers which are considered for tax purposes as a donation. Number one, sale or exchange or transfer property for insufficient consideration. Noteworthy, the element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or money's worth. Letter B or second is Condonation or remission of debt where the debtor did not render service in favor of the creditor. Letter C, you have gifts given out of gratitude where the consideration is not money or anything of economic value. And fourth is renunciation in favor of other ears. Let's tackle them one by one. First. Transfer for less than an adequate or full consideration. The rule is, where property other than real property 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 received shall be deemed a gift, and it shall be computed or included in computing the amount of gifts made during the. calendar year. I repeat, if the fair market value of the thing transferred exceeds the value of the consideration received, then the difference shall be included in computing the amount of gifts made during the calendar year. For example, let's say you sold a cellular phone. The fair market value is around 50,000 pesos, but you only sold the cellular phone at 5,000 pesos. So the fair market value is 50,000 pesos and you compare that with the consideration received which is 5,000 pesos. The difference which is 45,000 pesos is considered as a gift and shall be included in computing the amount of gifts made during the calendar year because the transfer is considered for less than an adequate and full consideration. However, section 29 of Republic Act Act 10963 or the Train Law provides an exception where a sale, exchange, or transfer is made in the ordinary course of business, meaning it is a bona fide transaction at arm's length and free from any donative intent, then it shall be considered as made for an adequate and full consideration in money or money's worth. Let's say you are celebrating your first anniversary. And to entice buyers, you're giving discounts up to 5,000 pesos. So instead of selling your cellular phone at 50,000 pesos, you're only selling it at 45,000 pesos. Such sale is considered as a bona fide transaction and it is free of any donative intent. In compliance with Section 29 of RA 10963, such sale is considered as a bona fide transaction. There is no donative intent, which means to say it is not considered as a transfer for less than adequate and full consideration. How about donation or remission of debt? These are the rules. First, if the debt is condoned but the debtor did not render any service in favor of the creditor, the rule is you subject to donor's tax the amount condoned by the creditor in favor of the debtor. Second, if an individual performs services for a creditor who, in consideration thereof, cancels the debt, income to that amount is realized by the debtor as compensation for his services. Third, if a creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt, 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. So what is the effect? The amount of debt cancelled is subject to donor's tax. And fourth, If it is a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of dividend. So if it is the corporation that condones the debt, the transaction is considered as an advance payment of dividends. Of course, dividends is subject to income tax. How about gifts given out of gratitude? The rule is... Where the consideration is not money or anything of economic value, then the transaction is subject to donor's tax based on the value of the property received. How about renunciation in favor of heirs? Renunciation by the surviving spouse of his or her share in the absolute community property or conjugal partnership of gains after the dissolution of the marriage. in favor of ears of the deceased spouse or any other person, such renunciation by the surviving spouse is subject to donor's tax. So I repeat, when it is the surviving spouse who would renounce her share in favor of other ears of the deceased spouse, such renunciation of share in favor of other ears is subject to donor's tax. Second, if there is a general renunciation by an ear, including the surviving spouse, of his or her share in the hereditary estate left by the decedent, then it is not subject to donor's tax, so long as it is a general renunciation. And third, renunciation specifically and categorically in favor of identified heirs to the exclusion or disadvantage of the other co-heirs in the hereditary estate is subject to donor's tax. How do we classify donors for donor's tax purposes? Under the first classification, for Filipino citizens, whether resident or non-resident, and resident aliens, all properties located not only within the Philippines but also in foreign countries, whenever donations are made by them will be subject to donor's tax. For non-resident alien, all real and tangible properties within the Philippines and intangible personal property unless there is reciprocity, in which case it is not taxable. But the general rule is, with respect to non-resident alien, all real and tangible properties within the Philippines are subject to donor's tax. So for your bird's eye view, this is the classification of donors. For citizen or resident, all real properties within and outside the Philippines, and tangible and intangible properties within and outside the Philippines are subject to donor's tax. For non-resident alien, only real properties, tangible and intangible personal properties are taxable within the Philippines. For those situated outside then, any gifts made by non-resident alien are not subject to donor's tax. Now take note, with respect... to intangible personal property located in the Philippines owned by non-resident alien, the same is subject to the rule on reciprocity. This is the same concept that we discuss in estate taxation. So with respect to intangible personal property owned by a non-resident alien located within the Philippines, the same will not be taxable if it qualifies under the rule on reciprocity. There is reciprocity if the foreign country of which the non-resident alien was a citizen and resident did not impose any transfer tax with respect to intangible personal property or allowed a similar exemption from transfer tax in respect to intangible personal property. So this rule also applies to estate taxation and donor's taxes with respect to transmission by gift of intangible personal property located or with a situs within the Philippines of a non-resident alien. How do we determine gross gift? Gifts of real property and personal property wherever situated belonging to the donor who is either a resident or citizen of the Philippines at a time of donation and gifts of real property and tangible personal property situated in the Philippines and intangible personal property with a situs in the Philippines unless exempted on the basis of reciprocity. belonging to the donor who is a non-resident alien at the time of donation. The gross gift shall pertain to all donations inter vivos, whether the transfer is in trust or otherwise, whether the gift is direct or indirect, whether the property is real, personal, tangible, or intangible. Valuation of Gifts Made in Property If the gift is made in property, the fair market value at that time will be considered the amount of gift. For real property, the taxable base is the fair market value as determined by the Commission of Internal Revenue or fair market value as shown in the latest schedule of values of the provincial and city assessors. So they have the assessor's office has the market value per tax declaration. So whichever is higher, that will be the basis of. your fair market value. If there's no zonal value, the taxable base is the fair market value in the latest tax declaration. Tax credit for donor's taxes paid in a foreign country. There is a situation which may arise when the property given as a gift is located in a foreign country and the donor may be subject to donor's tax twice, meaning the donor is subject to donor's tax in the Philippines. And at the same time, he will be liable for payment of donor's taxes for gifts made in foreign country. So he's subject to donor's tax twice on the same property. First by the Philippine government and second by the foreign government where the property is situated. To avoid the effect of double taxation, the remedy is to claim any tax credit. So the purpose is to minimize the burdensome effect. of double taxation by allowing the taxpayer to deduct his foreign tax from his Philippine tax subject to limitations provided by law. So tax credit is only applicable when the property given as a gift is located in a foreign country. But not all taxpayers are allowed to claim tax credits. Who may claim tax credit? Only resident citizen. non-resident citizen and resident alien. So the bottom line is only Filipino citizens, whether resident or non-resident, and resident alien who may claim tax credit. Can non-resident alien claim tax credit? The answer is no. Why? Because non-resident aliens are not taxable or not subject to donor's tax with respect to gifts made in foreign country. Precisely, They're only liable for gifts made or donated within the Philippines. So that is precisely the reason why non-resident aliens are not allowed to claim any tax credit for donations made in foreign country. Besides, there's no double taxation because they are not being taxed twice by the Philippine government and the foreign government. Let's move on to deductions from gross gifts. There are four types of deductions allowed under the tax code. You have encumbrance assumed by the donee, second, diminution of gift provided by the donor, third, donations to the national government and the like, and fourth, donations to non-profit organizations. For your bird's eye view, these are the types of deductible items. Previously, doories were allowed to be deducted from the gross gifts. However, This has been repealed by Republic Act No. 10963 or TRAIN Law, effective January 1, 2018. Previously, Dories are donations made on account of marriage before its celebration or within one year by parent to each of their legitimate, recognized, natural, or adopted children, and the amount of deduction is only up to P10,000. However, dories are no longer allowed to be claimed effective January 1, 2018. So technically, Only encumbrance, diminution, and donations to the government and donations to NGO are considered deductible items from the gross donations. You also have tax-exempt donations given by resident or non-resident for 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. Second, gifts in favor of educational or charitable religious, cultural, or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization, or research institution or organization provided, not more than 30% of said gifts will be used by such donee for administration purposes. Take Take note under number 2, to be considered as a tax-exempt donation, gifts in favor of educational or religious charitable institutions are tax-exempt provided not more than 30% of said gifts will be used by such donee for administration purposes. For deductions from gross estate for both resident and non-resident, you have encumbrances on the property donated if this is assumed by the donee in the deed of donation. Second, donations made to entities exempted under special laws like Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines, Development Academy of the Philippines, Integrated Bar of the Philippines, International Rice Research Institute, National Museum, National Library, Ramon Magsaysay Foundation, Philippine Inventors Commission, Philippine American Cultural Foundation. And third, donation to persons, whether donee is stranger or not, where the total amount of such net gifts for the calendar year is not more than P250,000. The net gift is the net economic benefit from the transfer that accrues to the donee. And if the mortgage property is transferred as a gift but the donation will impose upon the donor 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 the mortgage assumed. For example, let's say the donor donates his vehicle worth 1.5 million pesos. However, there is unpaid mortgage amounting 500,000 pesos. If the donor will assume the encumbrance, meaning the mortgage obligation, then the net gift is only 1 million pesos because from the fair market value of 1.5 million pesos, the donee assumed the mortgage liability amounting 500,000 pesos. So the net gift is measured by deducting from the fair market value the amount of the mortgage assumed. Speaking of stranger, former rule in the tax code which is effective only until december 31 2017 if the donor is a stranger to the donor the tax rate is 30 percent of the net gifts who is a stranger for donors tax purposes he is a person who is not a brother or sister spouse ancestor or lineal descendant or any person who is not a relative by consanguinity in the collateral line within the fourth degree of relationship However, the rule on stranger has already been repealed effective January 1, 2018 by train law. So the current rule is net gifts in excess of 250,000 pesos is subject to a flat rate of 6% donor's tax. So in computing the donor's tax, you have your gross gifts made comprised of real personal properties. less deductions allowed from the gross gifts. So that results to your net gifts made on that particular date. Then you add prior net gifts during the calendar year. That will result to your aggregate net gifts multiplied by the applicable donor's tax rate of 6%. Then you come up with your donor's tax on the aggregate net gifts less donor's tax paid on prior net gifts. Then the resulting amount is your donor's tax payable on net gifts to date. Again, I repeat the tax rate applicable is 6%. pursuant to Section 28 of RA 10963, which amends the provision relating to donor's tax rate. Filing of donor's tax return. As a rule, donor's tax return must be filed within 30 days after the date the gift is made or completed. And of course, at the time of filing of the tax return, the tax due thereon shall likewise be paid. Let's have a sample problem. Juan donated all his properties to his relatives in the Philippines as follows. House and lot in Baguio, donated to Pedro, fair market value 1.5 million. House and lot in Canada, donated to David, fair market value 2.5 million pesos. Question, how much is the gross taxable donation if who one is a resident Filipino citizen? The answer is 4 million pesos. So the house and lot in Baguio and the house and lot in Canada because or what is their legal basis? Donations involving property situated within and outside the Philippines are subject to donor's tax if donated by a resident Filipino citizen. What if he's a non-resident Filipino citizen? The answer is still. 4 million pesos because donations made by non-resident Filipino citizens are subject to donor's tax with respect to properties located worldwide. How about if Puan is a resident alien? The answer is 4 million pesos since donations involving properties situated within the Philippines and outside the Philippines are subject to donor's tax if donated by a resident alien. What if Juan is a non-resident alien? How much is the gross taxable donation? The answer is only 1.5 million pesos, the property located in the Philippines. Because with respect to non-resident alien, only donations with respect to property situated in the Philippines are subject to donor's tax. On your screen is BIR Form 1800. This is the donor's tax return. On item 1 is where you will indicate the date of donation. This will guide the Bureau of Internal Revenue to check if the return is filed within the deadline which is 30 days from the date of donation. On item number 2, you will also click yes or no to signify if the return is amended or not. On item number 5 is the donor's taxpayer identification number. You will also include the last name, first name, and surname of the donor on item 7, including his registered address on item 8, and residence address on item 9, plus the contact number and email address on items 10 and 11, respectively. Item 12 is where you enter the name of the donee. As you can see, you can attach additional sheets if necessary to list the names of the donees because the donor can donate as many properties as he desire within the taxable year. In item number 14, that reflects the total net gifts subject a tax. The amount indicated in item number 14 is taken from part 4 item 38 which is the result of adding all real and personal properties less or minus deductions from gross donations and exempt donations. So let's proceed first to item 38 so you'll have an idea how it is computed. Now, this is page 2 of BIR Form 1800. In item 25, you will indicate the total amount of personal properties as reflected in Part 4, Schedule A. Item 26 reflects the total amount of your real properties, but the breakdown will be reflected in Part 4, Schedule B. So your total in Items 25 and 26 will be shown in Item 27, which represents the total gifts in the donor's tax return, less deductions allowed under tax code like encumbrance assumed by the donee, diminution of gift provided by the donor, donations to the national government, donations to non-profit organization. So that's items 28, 29, 30, 31, and 32 if you have a lot of deductions. So the total deduction shall be reflected in item 33. The total gifts as shown in item 27 less the deductions allowed under item 33 is equal to the total net gifts under item 34. So total gifts in the return less total deductions. The net amount will be reflected in item 34, your total net gifts in this return. Any other donations during the calendar year include them in item 35. to calculate your total net gifts as of the date you filed your donor's tax return. Then, deduct 250,000 pesos representing exempt gift in item 37. You will arrive at your total net gifts subject to donor's tax as shown in item 38. The total net gifts subject to tax in item 38 on page 2 must tie up with the amount reflected in item 14 on page 1. So basically, your total net gift subject to tax in item 38 is the same amount to be reflected in item 14, which is your total net gifts multiplied by 6% donor's tax rate. The product is your total donor's tax due in item 16. If there were payments of donor's tax, For prior gifts or foreign donors tax paid or any tax credits, you are allowed to claim these as tax credit payments in item 17. So item 17, that is the tax credit payments. These tax credit payments will, the effect is it will lower the amount of your donors tax. Then the net amount is your donors tax payable as shown in item 18. In some instances, it will result to overpayment if the amount of tax credit payments are greater than the total donor's tax due. And lastly, always file your donor's tax return on or before deadline to avoid payment of any surcharge, interest, and compromise as late filing of your donor's tax return and late payment of donor's taxes will result to penalties. And that ends our discussion on donor status. Thank you and have a great day.

The donor's tax is imposed on donations inter vivos or those made between living persons to take effect during the lifetime of the donor. Basically, donation is an act of liberality whereby the donor disposes gratuitously a thing or right in favor of another or the donee who accepts it. Now, the law in force at the time of the perfection of the donation shall govern the imposition of donor's tax.

This is also in line with Article 777 of the New Civil Code which provides that the rights to the succession are transmitted from the moment of death of the decedent. How do we define donor's tax? A donor's tax is levied, assessed, collected, and paid upon the transfer by any person, resident or non-resident, of the property by gift. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real, personal, tangible, or intangible. What is the nature of donor's tax?

The donor's tax is not a property tax, but this is an excise tax imposed on the privilege of the owner to give or donate. Is it onerous? The answer is no. It is based on pure act of liberality.

Is it a property tax? The answer is no. It is not a tax on property as such because the imposition does not rest upon the general ownership.

The donor's tax shall not apply unless and until the gift is completed. The transfer of property by gift is perfected from the moment the donor knows the acceptance of the donate. It is completed by delivery, either actual or constructive.

Thus, the law enforced at the time of the perfection or completion of the donation shall govern the imposition of the donor's tax. What is the purpose why the government imposes donor's tax on gifts? We have two purposes.

Number one, to supplement estate tax. And second, to prevent avoidance of income tax through the device of splitting income among numerous donies. who are usually members of a family or into many trusts with the donor, thereby escaping the effect of the progressive rates of income tax.

Now, let's review the requisites of a valid donation under Article 725 of the New Civil Code. A donation is an act of liberality whereby a person or the donor disposes gratuitously of a thing or right. in favor of another of the donor who accepts it. We have four requisites of a valid donation.

Number one, the donor must have the capacity and by capacity we mean the condition and legal competence of the donor to enter into a valid contract. Second requisite, there must be an intent to donate by donate, donative intent. This is the declaration of the legal owner of a property or right to transfer. ownership to another without any consideration.

Now, do you still recall the forms required to effect donation? Oral donations can be made for amounts involving 5,000 pesos or less. Now, donation and acceptance must be in writing if the value of the personal property donated exceeds 5,000 pesos. Now, for real properties, it is required that the donation must be reflected or contained in a public instrument.

Otherwise, the donation shall be deemed void. have an issue or inexistent. Third requisite of a valid donation is the delivery of the gift.

By delivery, you have actual or constructive delivery. Donor's tax does not apply until there is a completed gift. The fourth requisite of a valid donation is the acceptance by the donee.

By acceptance, we mean the acknowledgement of the thing or right donated. Donation is perfected from the moment the donor knows the acceptance of the donee. It is completed from the moment of the delivery of the donated property to the donee.

Acceptance can be the same document or in a separate document in which case the donor must be notified of the donee's acceptance. Can donations be made to unborn children? The answer is yes.

Donations made to unborn children may be accepted by those persons who would legally represent them. Minor or those incapacitated who cannot enter into a contract may become donies, but acceptance shall be done through their parents or legal representatives. Let's move on to transfers which may be constituted as donation.

You have four types of transfers which are considered for tax purposes as a donation. Number one, sale or exchange or transfer property for insufficient consideration. Noteworthy, the element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or money's worth. Letter B or second is Condonation or remission of debt where the debtor did not render service in favor of the creditor.

Letter C, you have gifts given out of gratitude where the consideration is not money or anything of economic value. And fourth is renunciation in favor of other ears. Let's tackle them one by one.

First. Transfer for less than an adequate or full consideration. The rule is, where property other than real property 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 received shall be deemed a gift, and it shall be computed or included in computing the amount of gifts made during the. calendar year. I repeat, if the fair market value of the thing transferred exceeds the value of the consideration received, then the difference shall be included in computing the amount of gifts made during the calendar year.

For example, let's say you sold a cellular phone. The fair market value is around 50,000 pesos, but you only sold the cellular phone at 5,000 pesos. So the fair market value is 50,000 pesos and you compare that with the consideration received which is 5,000 pesos.

The difference which is 45,000 pesos is considered as a gift and shall be included in computing the amount of gifts made during the calendar year because the transfer is considered for less than an adequate and full consideration. However, section 29 of Republic Act Act 10963 or the Train Law provides an exception where a sale, exchange, or transfer is made in the ordinary course of business, meaning it is a bona fide transaction at arm's length and free from any donative intent, then it shall be considered as made for an adequate and full consideration in money or money's worth. Let's say you are celebrating your first anniversary. And to entice buyers, you're giving discounts up to 5,000 pesos.

So instead of selling your cellular phone at 50,000 pesos, you're only selling it at 45,000 pesos. Such sale is considered as a bona fide transaction and it is free of any donative intent. In compliance with Section 29 of RA 10963, such sale is considered as a bona fide transaction. There is no donative intent, which means to say it is not considered as a transfer for less than adequate and full consideration.

How about donation or remission of debt? These are the rules. First, if the debt is condoned but the debtor did not render any service in favor of the creditor, the rule is you subject to donor's tax the amount condoned by the creditor in favor of the debtor. Second, if an individual performs services for a creditor who, in consideration thereof, cancels the debt, income to that amount is realized by the debtor as compensation for his services. Third, if a creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt, 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.

So what is the effect? The amount of debt cancelled is subject to donor's tax. And fourth, If it is a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of dividend. So if it is the corporation that condones the debt, the transaction is considered as an advance payment of dividends.

Of course, dividends is subject to income tax. How about gifts given out of gratitude? The rule is... Where the consideration is not money or anything of economic value, then the transaction is subject to donor's tax based on the value of the property received.

How about renunciation in favor of heirs? Renunciation by the surviving spouse of his or her share in the absolute community property or conjugal partnership of gains after the dissolution of the marriage. in favor of ears of the deceased spouse or any other person, such renunciation by the surviving spouse is subject to donor's tax. So I repeat, when it is the surviving spouse who would renounce her share in favor of other ears of the deceased spouse, such renunciation of share in favor of other ears is subject to donor's tax.

Second, if there is a general renunciation by an ear, including the surviving spouse, of his or her share in the hereditary estate left by the decedent, then it is not subject to donor's tax, so long as it is a general renunciation. And third, renunciation specifically and categorically in favor of identified heirs to the exclusion or disadvantage of the other co-heirs in the hereditary estate is subject to donor's tax. How do we classify donors for donor's tax purposes?

Under the first classification, for Filipino citizens, whether resident or non-resident, and resident aliens, all properties located not only within the Philippines but also in foreign countries, whenever donations are made by them will be subject to donor's tax. For non-resident alien, all real and tangible properties within the Philippines and intangible personal property unless there is reciprocity, in which case it is not taxable. But the general rule is, with respect to non-resident alien, all real and tangible properties within the Philippines are subject to donor's tax.

So for your bird's eye view, this is the classification of donors. For citizen or resident, all real properties within and outside the Philippines, and tangible and intangible properties within and outside the Philippines are subject to donor's tax. For non-resident alien, only real properties, tangible and intangible personal properties are taxable within the Philippines. For those situated outside then, any gifts made by non-resident alien are not subject to donor's tax. Now take note, with respect...

to intangible personal property located in the Philippines owned by non-resident alien, the same is subject to the rule on reciprocity. This is the same concept that we discuss in estate taxation. So with respect to intangible personal property owned by a non-resident alien located within the Philippines, the same will not be taxable if it qualifies under the rule on reciprocity.

There is reciprocity if the foreign country of which the non-resident alien was a citizen and resident did not impose any transfer tax with respect to intangible personal property or allowed a similar exemption from transfer tax in respect to intangible personal property. So this rule also applies to estate taxation and donor's taxes with respect to transmission by gift of intangible personal property located or with a situs within the Philippines of a non-resident alien. How do we determine gross gift? Gifts of real property and personal property wherever situated belonging to the donor who is either a resident or citizen of the Philippines at a time of donation and gifts of real property and tangible personal property situated in the Philippines and intangible personal property with a situs in the Philippines unless exempted on the basis of reciprocity. belonging to the donor who is a non-resident alien at the time of donation.

The gross gift shall pertain to all donations inter vivos, whether the transfer is in trust or otherwise, whether the gift is direct or indirect, whether the property is real, personal, tangible, or intangible. Valuation of Gifts Made in Property If the gift is made in property, the fair market value at that time will be considered the amount of gift. For real property, the taxable base is the fair market value as determined by the Commission of Internal Revenue or fair market value as shown in the latest schedule of values of the provincial and city assessors. So they have the assessor's office has the market value per tax declaration.

So whichever is higher, that will be the basis of. your fair market value. If there's no zonal value, the taxable base is the fair market value in the latest tax declaration. Tax credit for donor's taxes paid in a foreign country.

There is a situation which may arise when the property given as a gift is located in a foreign country and the donor may be subject to donor's tax twice, meaning the donor is subject to donor's tax in the Philippines. And at the same time, he will be liable for payment of donor's taxes for gifts made in foreign country. So he's subject to donor's tax twice on the same property. First by the Philippine government and second by the foreign government where the property is situated. To avoid the effect of double taxation, the remedy is to claim any tax credit.

So the purpose is to minimize the burdensome effect. of double taxation by allowing the taxpayer to deduct his foreign tax from his Philippine tax subject to limitations provided by law. So tax credit is only applicable when the property given as a gift is located in a foreign country. But not all taxpayers are allowed to claim tax credits.

Who may claim tax credit? Only resident citizen. non-resident citizen and resident alien. So the bottom line is only Filipino citizens, whether resident or non-resident, and resident alien who may claim tax credit.

Can non-resident alien claim tax credit? The answer is no. Why?

Because non-resident aliens are not taxable or not subject to donor's tax with respect to gifts made in foreign country. Precisely, They're only liable for gifts made or donated within the Philippines. So that is precisely the reason why non-resident aliens are not allowed to claim any tax credit for donations made in foreign country.

Besides, there's no double taxation because they are not being taxed twice by the Philippine government and the foreign government. Let's move on to deductions from gross gifts. There are four types of deductions allowed under the tax code.

You have encumbrance assumed by the donee, second, diminution of gift provided by the donor, third, donations to the national government and the like, and fourth, donations to non-profit organizations. For your bird's eye view, these are the types of deductible items. Previously, doories were allowed to be deducted from the gross gifts. However, This has been repealed by Republic Act No. 10963 or TRAIN Law, effective January 1, 2018. Previously, Dories are donations made on account of marriage before its celebration or within one year by parent to each of their legitimate, recognized, natural, or adopted children, and the amount of deduction is only up to P10,000.

However, dories are no longer allowed to be claimed effective January 1, 2018. So technically, Only encumbrance, diminution, and donations to the government and donations to NGO are considered deductible items from the gross donations. You also have tax-exempt donations given by resident or non-resident for 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. Second, gifts in favor of educational or charitable religious, cultural, or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization, or research institution or organization provided, not more than 30% of said gifts will be used by such donee for administration purposes.

Take Take note under number 2, to be considered as a tax-exempt donation, gifts in favor of educational or religious charitable institutions are tax-exempt provided not more than 30% of said gifts will be used by such donee for administration purposes. For deductions from gross estate for both resident and non-resident, you have encumbrances on the property donated if this is assumed by the donee in the deed of donation. Second, donations made to entities exempted under special laws like Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines, Development Academy of the Philippines, Integrated Bar of the Philippines, International Rice Research Institute, National Museum, National Library, Ramon Magsaysay Foundation, Philippine Inventors Commission, Philippine American Cultural Foundation. And third, donation to persons, whether donee is stranger or not, where the total amount of such net gifts for the calendar year is not more than P250,000.

The net gift is the net economic benefit from the transfer that accrues to the donee. And if the mortgage property is transferred as a gift but the donation will impose upon the donor 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 the mortgage assumed.

For example, let's say the donor donates his vehicle worth 1.5 million pesos. However, there is unpaid mortgage amounting 500,000 pesos. If the donor will assume the encumbrance, meaning the mortgage obligation, then the net gift is only 1 million pesos because from the fair market value of 1.5 million pesos, the donee assumed the mortgage liability amounting 500,000 pesos. So the net gift is measured by deducting from the fair market value the amount of the mortgage assumed. Speaking of stranger, former rule in the tax code which is effective only until december 31 2017 if the donor is a stranger to the donor the tax rate is 30 percent of the net gifts who is a stranger for donors tax purposes he is a person who is not a brother or sister spouse ancestor or lineal descendant or any person who is not a relative by consanguinity in the collateral line within the fourth degree of relationship However, the rule on stranger has already been repealed effective January 1, 2018 by train law.

So the current rule is net gifts in excess of 250,000 pesos is subject to a flat rate of 6% donor's tax. So in computing the donor's tax, you have your gross gifts made comprised of real personal properties. less deductions allowed from the gross gifts.

So that results to your net gifts made on that particular date. Then you add prior net gifts during the calendar year. That will result to your aggregate net gifts multiplied by the applicable donor's tax rate of 6%.

Then you come up with your donor's tax on the aggregate net gifts less donor's tax paid on prior net gifts. Then the resulting amount is your donor's tax payable on net gifts to date. Again, I repeat the tax rate applicable is 6%. pursuant to Section 28 of RA 10963, which amends the provision relating to donor's tax rate.

Filing of donor's tax return. As a rule, donor's tax return must be filed within 30 days after the date the gift is made or completed. And of course, at the time of filing of the tax return, the tax due thereon shall likewise be paid.

Let's have a sample problem. Juan donated all his properties to his relatives in the Philippines as follows. House and lot in Baguio, donated to Pedro, fair market value 1.5 million.

House and lot in Canada, donated to David, fair market value 2.5 million pesos. Question, how much is the gross taxable donation if who one is a resident Filipino citizen? The answer is 4 million pesos. So the house and lot in Baguio and the house and lot in Canada because or what is their legal basis? Donations involving property situated within and outside the Philippines are subject to donor's tax if donated by a resident Filipino citizen.

What if he's a non-resident Filipino citizen? The answer is still. 4 million pesos because donations made by non-resident Filipino citizens are subject to donor's tax with respect to properties located worldwide. How about if Puan is a resident alien? The answer is 4 million pesos since donations involving properties situated within the Philippines and outside the Philippines are subject to donor's tax if donated by a resident alien.

What if Juan is a non-resident alien? How much is the gross taxable donation? The answer is only 1.5 million pesos, the property located in the Philippines.

Because with respect to non-resident alien, only donations with respect to property situated in the Philippines are subject to donor's tax. On your screen is BIR Form 1800. This is the donor's tax return. On item 1 is where you will indicate the date of donation.

This will guide the Bureau of Internal Revenue to check if the return is filed within the deadline which is 30 days from the date of donation. On item number 2, you will also click yes or no to signify if the return is amended or not. On item number 5 is the donor's taxpayer identification number.

You will also include the last name, first name, and surname of the donor on item 7, including his registered address on item 8, and residence address on item 9, plus the contact number and email address on items 10 and 11, respectively. Item 12 is where you enter the name of the donee. As you can see, you can attach additional sheets if necessary to list the names of the donees because the donor can donate as many properties as he desire within the taxable year.

In item number 14, that reflects the total net gifts subject a tax. The amount indicated in item number 14 is taken from part 4 item 38 which is the result of adding all real and personal properties less or minus deductions from gross donations and exempt donations. So let's proceed first to item 38 so you'll have an idea how it is computed. Now, this is page 2 of BIR Form 1800. In item 25, you will indicate the total amount of personal properties as reflected in Part 4, Schedule A. Item 26 reflects the total amount of your real properties, but the breakdown will be reflected in Part 4, Schedule B. So your total in Items 25 and 26 will be shown in Item 27, which represents the total gifts in the donor's tax return, less deductions allowed under tax code like encumbrance assumed by the donee, diminution of gift provided by the donor, donations to the national government, donations to non-profit organization.

So that's items 28, 29, 30, 31, and 32 if you have a lot of deductions. So the total deduction shall be reflected in item 33. The total gifts as shown in item 27 less the deductions allowed under item 33 is equal to the total net gifts under item 34. So total gifts in the return less total deductions. The net amount will be reflected in item 34, your total net gifts in this return. Any other donations during the calendar year include them in item 35. to calculate your total net gifts as of the date you filed your donor's tax return. Then, deduct 250,000 pesos representing exempt gift in item 37. You will arrive at your total net gifts subject to donor's tax as shown in item 38. The total net gifts subject to tax in item 38 on page 2 must tie up with the amount reflected in item 14 on page 1. So basically, your total net gift subject to tax in item 38 is the same amount to be reflected in item 14, which is your total net gifts multiplied by 6% donor's tax rate.

The product is your total donor's tax due in item 16. If there were payments of donor's tax, For prior gifts or foreign donors tax paid or any tax credits, you are allowed to claim these as tax credit payments in item 17. So item 17, that is the tax credit payments. These tax credit payments will, the effect is it will lower the amount of your donors tax. Then the net amount is your donors tax payable as shown in item 18. In some instances, it will result to overpayment if the amount of tax credit payments are greater than the total donor's tax due. And lastly, always file your donor's tax return on or before deadline to avoid payment of any surcharge, interest, and compromise as late filing of your donor's tax return and late payment of donor's taxes will result to penalties. And that ends our discussion on donor status.

Thank you and have a great day.

Transcript for:Understanding Donor's Tax and Regulations

Transcript for:
Understanding Donor's Tax and Regulations