2.

Donor’s Tax

a) Basic principles, concept and definition

Definition: Donor’s tax is synonymous with the term gift tax. “It is a tax imposed on the
gratuitous transfer of property between two or more persons who are living at the time of the
transfer.” The gift tax falls upon the gratuitous transmission of property which tends to reduce
the estate subject to tax at death.

A donation is defined as an act of liberality whereby a person disposes gratuitously of a thing or

right in favor of another who accepts it. There are two individuals involved in donation: the one
disposing the thing gratuitously or the donor, and the one accepting the thing or the donee.
Donation can be of two kinds: donations mortis causa and donations inter vivos. The former
takes effect upon the death of the donor and partakes of a testamentary disposition, and is thus,
properly the subject of estate tax. The latter is a donation between two living persons which is
perfected from the time the donor has knowledge of the donee’s acceptance, and is properly the
subject of donor’s tax.

Donation can be of two kinds: donations mortis causa and donations inter vivos. The former
takes effect upon the death of the donor and partakes of a testamentary disposition, and is thus,
properly the subject of estate tax. The latter is a donation between two living persons which is
perfected from the time the donor has knowledge of the donee’s acceptance, and is properly the
subject of donor’s tax.

b) Nature, purpose and object

Nature: Like estate tax, donor’s tax is in the nature of an excise tax which is imposed on the
transfer of property by lifetime gifts. It has been held that: “The donor’s tax is not a property tax,
but is a tax imposed on the transfer of property by way of gift inter vivos.”

Purpose: The purposes of donor’s tax are the following: to prevent avoidance of estate taxes, and
to compensate for loss of income tax when large estates are split by donations. As a rule, all
donations whether outright gifts or made to a trust, are subject to donor’s gift tax except
donations enumerated in the NIRC and other special laws. For the application of donor’s tax,
there must be a completed gift.

Coverage of the Tax “Gifts” include real and personal property, whether tangible or intangible,
or mixed wherever situated. In case of a nonresident alien, his real and personal property so
transferred but which are situated outside the Philippines are not included as part of the gross
gift.137 The following are considered situated in the Philippines and includible as gifts: (1)
Franchise which must be exercised in the Philippines; (2) Shares, obligations or bonds issued by
any corporation or sociedad anonima organized or constituted in the Philippines; (3) Shares,
obligations or bonds by any foreign corporation 85% of the business of which is located in the
Philippines; (4) Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations, or bonds have acquired a business situs in the Philippines; and (5) Shares or rights in
any partnership, business or industry established in the Philippines, which are to be considered as
situated in the Philippines.
 c) Time and transfer of properties
The transfer of property by gift is perfected from the moment the donor knows of the acceptance
by the done; it is completed by the delivery, either actually or constructively, of the donated
property to the donee.

Thus, the law in force at the time of the perfection/completion of the donation shall govern the
imposition of donor’s tax.

d) Requisites of a valid donation

The following are the requisites of a donation for purposes of the donor’s tax:
(1) Capacity of the donor;
(2) Donative intent, or an intent of the donor to make a gift;
(3) Delivery, whether actual or constructive, of the subject matter of the gift; and
(4) Acceptance of the gift by the donee.

e) Transfers which may be constituted as donation

(1) sale/exchange/transfer of property for insufficient consideration
Requisites:
1. The transfer was for less than adequate and full consideration
2. Such transfer was effective during his lifetieme (inter vivos) and
3. Other than real property in Sec 24(d), i.e. the property was not subject to final capital gains
tax (capital asset)

(2) condonation/remission of debt

If a creditor desires to benefit a debtor, and without any consideration therefore, cancels the debt
(and the debtor “accepts”), the amount of the debt is a donation by the creditor to the debtor.

(3) transfer for less than adequate and full consideration

Generally, transfers for less than adequate and full consideration are considered donations to the
extent by which the FMV of the donated property exceeds the value of the consideration.

But TRAIN law now gives an exception: When the transfer is made in the ordinary course of
business, it will be considered as made for an adequate and full consideration. The requisites are:
1. bona fide transaction;
2. arm’s length; and
3. free from any donative intent.

f) Determination of gross gift

The rules for the valuation of the property for purposes of estate taxes are applicable to the
valuation of property for gift tax purposes. Thus, the NIRC states that “if gift is made in
property, the fair market values thereof at the time of the gift shall be considered the amount of
the gift.”93

g) Composition of gross gift

There are 2 kinds of donors (similar to estate tax):
 1. The resident or citizen of the Philippines; and
2. The non-resident, not citizen of the Philippines

If the donor is a resident or a citizen of the Philippines, gross gifts would consist of:
1. Real estate, regardless of location
2. Tangible personal property, regardless of location
3. Intangible personal property, regardless of location

If the donor is a non-resident, not citizen of the Philippines, gross gifts would consist of:
1. Real estate located in the Philippines
2. Tangible personal property located in the Philippines
3. Intangible personal property located in the Philippines, subject to the “reciprocity clause”
a. If donor at the time of the donation was a citizen and resident of a foreign country
which at the time of the donation did not impose a transfer tax of any character in
respect of intangible personal property of Filipino citizens not residing in that
country, or
b. If the laws of the foreign country of which the donor was a citizen and resident at the
time of donation allow a similar exemption from transfer taxes of every character in
respect of intangible personal property owned by citizens of the Philippines not
residing in that country

Also be considered as gifts are the following:

1. Transfers for insufficient consideration; and
2. Cancellation of indebtedness.

h) Valuation of gifts made in property

The fair market value of the property donated/given at the time of the donation shall be the value
of the gross gifts.

i) Tax credit for donor’s taxes paid to a foreign country

A resident citizen is taxable on all income derived from worldwide sources and it is not unlikely
that the foreign-source income may also be subject to taxation in the country from which it was
derived. To minimize the possibility of double taxation, the taxpayer may avail of the benefits
provided under the applicable and effective tax treaty, which may either be in the form of tax
exemption or a preferential tax rate. The amount of income taxes paid during the taxable year to
any foreign country may be used as credits against Philippine income taxes.

j) Exemption of gifts from donor’s tax

The following gifts or donations are exempt from the donor’s tax, under certain conditions: 138
(1) In case of gifts made by a resident of the Philippines: (a) Dowries or gifts made on account of
marriage and before its celebration or within one year thereafter by the parents to each
legitimate, recognized, natural, or adopted children to the extent of the first PhP10,000.00; (b)
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 of its political subdivisions; and (c) Gifts in
favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited non-government organization, trust or philanthropic organization or
research institution or organization provided that not more than 30% of said gifts shall be used
by such donee for administrative purposes. (2) In case of gifts made by a nonresident alien of the
Philippines: (a) 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 of its political subdivisions; and
(b) 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 that not more than 30% of said gifts shall be used by the recipient for
administrative purposes.

k) Time and place of filing returns

a. Filing and contents of returns A return is required in all cases of transfers by gift except those
which are exempt under the NIRC, and shall set forth: each gift made during the calendar year
which is to be included in computing net gifts; the deductions claimed and allowable; any
previous net gifts made during the same calendar year; name of donee; relationship of the donor
to the donee; and such other information as may be required. b. Time and place of filing and
payment The return 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 with an authorized agent bank, 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 is no legal residence in the
Philippines, with the Office of the Commissioner. In case of gifts made by a non-resident, the
return may be filed with the Philippine embassy or Consulate in the country where the donor is
domiciled at the time of the transfer, or directly with the office of the Commissioner