Introduction To Donor's Tax - PDF

DEPARTMENT OF ACCOUNTANCY HOLY ANGEL UNIVERSITY INTRODUCTION TO DONOR’S TAX DONATION Art. 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. -Civil Code DONATION -Is the gratuitous transfer...

DEPARTMENT OF ACCOUNTANCY HOLY ANGEL UNIVERSITY INTRODUCTION TO DONOR’S TAX DONATION Art. 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. -Civil Code DONATION -Is the gratuitous transfer of property from one living person (donor) to another (done) Essential Requisites of Donation Formal Requisites of Donation a) Capacity of the donor Required Property Formality b) Intention to donate Real Property Public Instrument Tangible Personal c) Donative act or delivery Property d) Acceptance by the donee (not Amount exceeding Written considered in transfers for 5 000 insufficient consideration) Amount not Oral exceeding 5 000 Intangible Public Instrument Personal Property  TYPES OF INTER-VIVOS DONATION A.Direct Donation – donation is made by the donor directly to the done B.Indirect Donation – involves transfer of property by the donor in favor of the done but under the supervision of a trust. It can either be: 1. Revocable – not completed donation, therefore not taxable 2. Irrevocable – completed donation; thus, taxable  TYPES OF DONORS Resident or citizen – taxable on global donations, such as - resident citizen - non-resident citizen - resident alien Non-resident alien – taxable only on Philippine donations, except intangible personal property subject to reciprocity rule  Summary rules on Taxable Donations Real Properties Tangible Personal Intangible Personal Properties Properties 1. Residents/ Yes Yes Yes Citizens (Within and Abroad) 2. NRA Without reciprocity i. Within Yes Yes Yes ii. Abroad No No No 2. NRA With reciprocity i. Within Yes Yes No ii. Abroad No No No DONOR’S Is a tax upon the gratuitous transfer of property between two or more living persons at the time of transfer whether the transfer is TAX direct or in trust and without regard to the type of property transferred. NATURE OF DONOR’S TAX RATIONALE OF DONOR’S TAXATION a) Privilege tax b) Proportional tax a) To control tax evasion of the c) Annual tax estate tax d) Ad valorem b) To control tax evasion on e) National tax income tax f) Revenue or fiscal tax c) To recoup future loss of income tax revenue EXEMPT a. Donations to exempt donees under NIRC and special laws GIFTS b. Donations for election campaign c. Transfers for insufficient consideration involving real property classified as capital assets d. General Renunciation of inheritance e. Donations with reserved powers f. Donation to the government for public use g. Donation to accredited non-profit institution h. Quasi-transfers i. Void Transfers j. Foreign Donation of non-resident alien donors k. Donations of property exempt under reciprocity EXEMPT Donations to exempt donees under NIRC and special laws GIFTS 1. Aquaculture Department of the Southeast Asian Fisheries Development Center 2. Aurora Pacific Economic Zone and Freeport Authority 3. Development Academy of the Philippines 4. Girl Scout of the Philippines 5. Integrated Bar of the Philippines 6. International Rice Research Institute 7. National Commission for Culture and the Arts 8. National Social Action Council 9. National Water Quality Management Fund 10. People’s Television Network, Incorporated EXEMPT Donations to exempt donees under NIRC and special laws GIFTS 11. People’s Survival Fund 12. Philippine-American Cultural Foundation 13. Philippine Normal University 14. Philippine Investor Commission 15. Philippine Red Cross 16. Ramon Magsaysay Award Foundation 17. Rural Farm School 18. Task Force on Human Settlements 19. Tubbataha Reefs Natural Park 20. University of the Philippines EXEMPT Donations for election campaign GIFTS 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. Exemption is not automatic. These donations must be reported to the Commission on Elections to be exempt from donor’s tax. Supporting political candidates or parties making campaign donation to them during elections is an exercise of one’s political freedom – a constitutionally vested right. Hence, it is not subject to taxation. EXEMPT Transfers for insufficient consideration involving real property classified as capital assets GIFTS – this is only applicable real property classifies as capital assets, they are exempt from donor’s tax because they are already subjected to capital gains tax (double taxation is not allowed); for other properties, the difference between the fair value and the selling price is subject to donor’s tax EXEMPT General Renunciation of inheritance – occurs when a heir or the surviving spouse renounces GIFTS his/her share in hereditary estate of a decedent in favor of no particular coheir. A General Renunciation is a repudiation of inheritance which cannot be imputed as a donation. Type of Renunciation General Specific Renunciation with more than 2 heir Exempt Taxable Renunciation with only 2 heirs Exempt Exempt Renunciation by the surviving Taxable Taxable spouse of his share in the common properties EXEMPT Donations with Reserved Powers GIFTS – transfer of ownership depends on the happening of a future event. It may either be a: - Conditional donation - Revocable transfers EXEMPT Donation to the Government for Public Use GIFTS – gifts made to or for the use of national government or any entity created by any of its agencies which are not conducted for profit or to any political subdivision of the said government are exempt from donor’s tax EXEMPT Donation to accredited non-profit institution GIFTS – in order to be exempt, it has to meet the following requirements: 1. Not more than 30% of the gift will be used for administrative purposes 2. The donee entity is a non-stock entity 3. The donee does not pay dividends 4. The donee entity’s board of trustees does not earn compensation 5. The donee must devote all its income to the accomplishment and promotion of its purposes EXEMPT Donation to accredited non-profit institution GIFTS ACCREDITING AGENCIES 1. Department of Social Welfare and Development – for charitable and social welfare organizations 2. Department of Science and Technology – for research and other scientific activities 3. Philippine Sports Commission – for sports development 4. National Council for Culture and Arts – for cultural activities 5. Commission on Higher Education – for educational activities EXEMPT Quasi-transfers GIFTS – involve delivery of property to another person but will never result in transfer of ownership thereto. These are not subject to donor’s tax. EXEMPT GIFTS Void Donations – Void donations are invalid donations. These includes those prohibited by the law and those with defects in their execution. Void Donations are not objects of taxation. EXEMPT Foreign Donation of Non-resident GIFTS Alien Donors – donations of property situated in a foreign country by non-resident alien donors are not subject to donor’s tax. EXEMPT Donations of property exempt under GIFTS Reciprocity - donations of intangible property by non-resident alien are exempt if the reciprocity rule applies. Diminution of Gift as specified by the Donor The Donor may specify that a portion of the donation will be given to another person other than the donee. Diminution is not exempt from donor’s tax. It is merely a deduction against the original donation but it is in itself another form of donation from the same donor which may be subject to donor’s tax. Taxable Donation Donations that do not qualify among those exemption criteria are subject to tax. Example: 1. Direct donation of property 2. Donation in trust, if irrevocable 3. Specific renunciation of inheritance, unless there are only two heirs 4. Renunciation by the surviving spouse of his share in the conjugal or community property 5. Transfer inter-vivos for insufficient consideration of any property other than real property capital asset Reference Business and Transfer Taxation 2019 edition by Rex Banggawan