BUSINESS LAW AND TAXATION REVIEW

Prepared by: N.A. Alauya-Sani MSU-CBAA

DONOR’S TAXATION

*Donation
- it is an act of transferring property or rights motivated by the liberality of the donor in favour
of the donee who accepts it.

*Kinds of Donation
1. Donation Mortis Causa- takes effect upon the death of the donor. This is to be observed based
on the law of succession and to be imposed with estate tax.
2. Donation Inter Vivos- a gratuitous transfer of rights and property that shall take effect during
the lifetime of the donor. This transfer is subject to donor’s tax.

*Requisites of Donation
1. Capacity of the Donor
 The donor must be capacitated to make a valid donation.
 The donee need not be capacitated to receive the gift to make the donation valid. It
is enough that the duly authorized representative of the incapacitated donee
received the donation.
2. Donative Intent
 Refers to the proper declaration of the legal owner of the property or right to
transfer ownership to another without consideration. Such intent followed by a
donative act is essential to constitute a gift especially in case of direct donation.
 When donative intent not necessary: if a gift is an indirect gift, taking place by way
of sale, exchange or other transfer of property as contemplated by transfer for
inadequate consideration.
3. Delivery of the Gift
 The delivery of the object of donation may be actual or constructive. The delivery
may be made to a trustee.
4. Acceptance by the Donee
 Acceptance is the acknowledgement of the thing or the right donated. The transfer
is perfected from the moment the donor knows of the acceptance by the done; it is
completed by the delivery, actual or constructive.
 Donee may accept the donation personally or through an authorized person.
 Donation to conceive and unborn children may be accepted by those persons who
would legally represent them.
5. Forms
 Required Forms to Effect Donation
 Verbally Where the value of the property (movable) donated is
5,000 or less
 In Writing Where the value of personal property donated exceeds
5,000 otherwise it is void.
 In Public Instrument In order that a donation of real property (immovable)
shall be valid, it must be made in public instrument
(deed of donation) specifying therein the property
donated, otherwise it is void ab initio.

*Special Cases

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BUSINESS LAW AND TAXATION REVIEW
Prepared by: N.A. Alauya-Sani MSU-CBAA

1. Cancellation of Indebtedness
 Condonation or remission of debt where the debtor did not render service in favour
of the creditor is a donation.
 There is no donation in the following cases:
i. The cancellation of indebtedness due to rendition of services is compensation
ii. The cancellation of indebtedness in favour of a stockholder is dividend.
2. Renunciation of Inheritance
 Renunciation specifically and categorically done in favour of identified heir(s) to the
exclusion or disadvantage of the other co-heirs in the hereditary estate is subject to
donor’s tax.
 General renunciation by an heir of his share in the hereditary estate left by
decedent is not subject to donor’s tax.
3. Compromises on Will Disputes
 Payments made to a dissatisfied heir who has no legal enforceable rights may
constitute donation.
 Generally, compromises and settlements of will contests and other disputes are not
gifts.
4. Beneficiaries of Trust
 Where a gift is made to a trustee for the benefit of one or more beneficiaries, the
beneficiaries and not the trustee, are the donees of the gift.
 The transfer of a bare legal title to a trustee is not, by itself, a gift. Hence, a transfer
from one trust to another trust is not a gift if the beneficiaries of the two trusts are the
same.
5. Corporation’s Share of Stock
 A donation by a foreign corporation of its own shares of stock to a resident employee is
not subject to gift tax; but if the “donation” was given in consideration of the latter’s
services, the value of the shares can constitute taxable income.
6. Court Ordered Payments
 Court ordered payments out of the estate of an incompetent or a minor for the benefit
of relatives whom the incompetent or minor is not legally obligated to support have
been held to be gifts.
 Generally, court ordered payments are not gifts.

*Classification of Donor
-a donor or a done may be natural or juridical person. A taxable donor need not be a natural
person.

a. Citizen or Resident Alien, including Domestic Corporation- subject to donor’s tax

regardless where the gift was made or where the property donated is located.
b. Non-resident Alien- subject to donor’s tax on their donations of property located in the
Philippines.
 The Rule on Reciprocity: Applicable only to intangible personal properties with
situs in the Philippines owned by a non-resident alien.

*Conjugal Donation

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BUSINESS LAW AND TAXATION REVIEW
Prepared by: N.A. Alauya-Sani MSU-CBAA

 The husband or wife cannot transfer any conjugal property without the consent
of the other, except in moderate donations for charity or on the occasion of
family rejoicing or family distress.
 Spouses who make donations out of conjugal property shall be considered a
separate donor of his or her interest in the conjugal property. Hence, one-half
of the donation shall be considered donation of the husband and the other half
a donation of the wife.
 Unless the wife expressly joins in making the donation, it shall be deemed to
have been made by the husband alone.
 Donation made between husband and wife during the marriage are void, and
not subject to donor’s tax, except moderate gifts between spouses on the
occasion of family rejoicing.

*Gross Gifts
 The value of the gross gift shall be the value existing at the time when the gift is made.
 Specifically, the following valuations shall be observed:
a. Cash gifts- face amount of the currency.
b. Personal Property- fair market value.
c. Real Property- current and fair market value as shown in the schedule of values fixed by
the Provincial and City Assessors or the fair market value as determined by the BIR
Commissioner, whichever is higher.
 Transfer for Inadequate consideration
o Property other than real property, the amount in excess of the property’s fair market
value or the consideration shall be deemed a gift.
o Real properties are subject to capital gains tax.

*Deductions from Gross Gifts

1. Dowries
 The law allows gifts given by natural or adopting parents on account of marriage
of their legitimate, recognized natural, or adopted children a deduction of
P10,000 provided that the giving of the gift is made before the celebration of
the marriage or within one year thereafter.
2. Encumbrance Assumed by the Donee
 An encumbrance is a claim or liability attached to a property. Examples are
mortgage, security interest, cost of rights, accrued and unpaid taxes.
3. Diminution of gift provided by the Donor
 Refers to the decrease in the value of the property donate as a result of a
condition made by donor to the done.
4. Donation to National Government, and the like
 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 thereof shall be exempt from donor’s tax.
5. Donation to Non-Profit Organizations
 Donations to non-profit organizations such as educational, charitable, religious,
cultural, social welfare, accredited NGOs, trust/philanthropic organizations or
research institutions are allowed by law as exemption provided that not more
than 30% of the said donation shall be used for administrative purposes.

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BUSINESS LAW AND TAXATION REVIEW
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*Destroyed Donations
 The donor’s tax accrues upon the completion of a gift. If the donated property was destroyed
after delivery, the donor is still liable to pay the related donor’s tax. The law may suspend the
payment of tax.

*Tax Exempt Donations

1. The first P100,000 of the net gift for every year is not subject to donor’s tax.
2. Under special laws, donation given to the following organizations are exempt from donor’s
tax:
a. Ramon Magsaysay Award Foundation
b. Philippine Inventor’s Commission
c. Philippine-American Cultural Foundation
d. International Rice Research Institute
e. Integrated Bar of the Philippines
f. Development Academy of the Philippines
g. National Museum, National Library, and the archives of the National Historical
Institute
h. National Social Action Council
i. Southern Philippines Development Administration
j. Task Force on Human Settlement
k. Intramuros Administration
l. Irrevocable donations of American-owned private lands acquired under Laurel-
Langley Agreement in favour 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, or any charitable or scientific organization with a nationwide
scope of activities and widely recognized as such as the Philippine National Red
Cross, Community Chest, Boy Scouts of the Philippines, and the Philippine Heart
Foundation.
m. Aqua-culture Department of the Southeast Asian Fisheries Development Center of
The Philippines
n. Museum of Philippine Costumes
o. Donations of foreign origin to international civic organizations, or institutions for
civic, religious or charitable purposes
p. Gratuitous transfer by a religious corporation to its local branch.

*Donor’s Tax
- it is not a property tax, but one which is imposed on the transfer of property by way of gift
intervivos. The law in force at the time of the perfection/completion of the donation shall
govern the imposition of the donor’s tax.

*Computation of Donor’s Tax

-The computation of the donor’s tax is on a cumulative basis over a period of one calendar year.
-The following formula shall be used in computing donor’s tax within a calendar year:
1. On the FIRST donation:
Gross Gift XX
Less: Exemptions (deductions) if applicable (XX)
Net Taxable Gifts XX
Multiply by the applicable rate XX

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BUSINESS LAW AND TAXATION REVIEW
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Donor’s Tax Due XX

==
2. On SUBSEQUENT donations within the same calendar year:
Gross Gifts XX
Less: Exemptions (deductions) if applicable XX
Net Taxable Gifts XX
Add: All Previous Net Gifts During the Year XX
Aggregate Net Gifts XX
==
Donor’s tax on the aggregate net gifts XX
Less: Donor’s tax on previous net gifts XX
Donor’s Tax due, current gift XX
==

*Rates of Donor’s Tax

1. Gifts to Relatives- subject to the schedule of rates as provided by Section 99 A of NIRC.
2. Gift to Strangers- the tax payable by the donor shall be 30% of the net gifts.
o A stranger is a person who is not:
 Brother, sister (whether by whole or half-blood), spouse, ancestor, and lineal
descendants
 Relative by consanguinity in the collateral line within the fourth degree of
relationship.

*Limitation on Tax Credit

1. One foreign country
Tax Credit =( Net donations outside/Total net donations) x Donor’s Tax
2. Two or more foreign countries
The same formula as one foreign country except that the allowable tax credit will be lower of
the following:
a. Actual donor’s tax paid to foreign country
b. Limit on tax credit computed using a donation located at a particular foreign country
(as numerator); or
c. Limit on tax credit computed using total donation outside the Philippines (as
numerator)

*Filing of Returns and Payment of Tax

- Donor’s tax is payable upon the filing of the return. The Commissioner may give an extension
for payment not to exceed 6 months.
- The filing of returns for donor’s tax is within 30 days from the date of the gift.

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