Introduction to Transfer Taxation

 Transfers refer to any transmission of property from one person to another.

 A person may be a natural person such as individuals or a juridical person created by law such as
corporation, partnership or joint ventures.

Types of transfers
1. Bilateral transfers 2. Unilateral transfers 3. Complex transfers

Bilateral Transfers
 Bilateral transfers involve transmission of property for a consideration. They are referred to as onerous
transactions or exchanges.
Ex:
1. Sale-exchange of property for money
2. Barter-exchange for another property

Unilateral Transfers
 Unilateral transfers involve the transmission of property by a person without consideration. They are
commonly referred to as gratuitous transactions or simply, transfers.

 The right or privilege to transfer properties is subject to transfer taxes.

Types of Unilateral Transfers

1. Donation is the gratuitous transfer of the property from a living donor to a donee. Since it is made between
living persons, it is called donation inter vivos.

2. Succession is the gratuitous transfer of the properties of the deceased person upon his death to his heirs.
When a person dies, his legal identity including proprietary rights are extinguished. His properties transferred to
his successors either by operation of law or by virtue of a written will. Succession is a donation of all the
properties of the decedent caused by his death. Hence, it is called donation mortis causa.

Comparison between inter-vivos and mortis causa

Inter-vivos Mortis causa
Transferor Living donor Decedent
Nature Voluntary Involuntary
Reason Gratuity Death
Scope of the transfer of properties Only properties selected by All properties of the decedent at
the donor death
Property given Gift Estate
Transferee Donee Heir
Transfer tax Donor's tax Estate tax
Timing of valuation of donation Date of donation Date of death

Complex Transfers
 Complex transfers are transfers for less than full and adequate consideration. These are sales made at
prices which are significantly lower that the fair value of the property sold.

What constitutes an adequate consideration?

There is no fixed quantitative rule on what constitutes an adequate consideration.
Tax rules on transfers for adequate consideration
Transfers for adequate consideration are deemed pure exchanges and are subject to income tax, not to transfer
tax.

Transfer for less than adequate and full consideration

 Transfers for less than full and adequate consideration are split into its components: transfer element
and exchange element. The transfer element is subject to transfer tax while the realized gain on the
exchange element is subject to income tax.

Illustration
Assume a property with a fair value of P70,000 and tax basis of P20,000 is sold for merely P40,000.
Fair value P70,000
Gratuity (indirect donation) 30,000 Transfer tax
Consideration or selling price P40,000
Less: Cost or tax basis 20,000
Realized gain P20,000 Income tax

The transfer element is generally considered as an inter-vivos donation, but it is a donation mortis-causa if:
 the sale is made in comtemplation of the death of the seller, or
 if title to the property is agreed to be transferred upon the death of the seller.

Rationale of Transfer Taxation

 Tax evasion or minimization theory
 Tax Recoupment theory
 Benefit received theory
 State partnership theory
 Wealth redistribution theory
 Ability to pay theory

Comparison of the Two Types of Transfer Tax

Donor's Tax Estate Tax
Subject transfer Inter-vivos Mortis causa
Nature Annual tax One-time tax
Taxpayer Donor Decedent
Who actually pay the tax? The donor himself Executor, administrator or heirs in
behalf of the decedent

Nature of Transfer Taxes

 Privilege Tax
 Ad valorem tax
 Proportional tax-flat 6%
 National tax
 Direct tax
 Fiscal tax

Classification of Transfer Taxpayers and their extent of Taxation

1. Residents or Citizens-such as
a. Resident citizens
b. Resident aliens
c. Non-resident citizens
-these are taxable on global transfers of property.

2. Non-resident Aliens
-these are taxable on Philippine transfers of property

 The citizenship of juridical persons is determined by the incorporation tests. Juridical persons that are
organized in the Philippines are considered Philippine citizens. Those organized abroad are considered
aliens.

 In donor’s taxation, the term resident citizen or alien includes domestic or resident foreign corporation.
Obviously, corporations are not subject to estate taxation.

Situs of Transfer
 Properties are transferred mortis causa in the place where they are located at the point of death. They
are not transferred at the place where the decedent died. Likewise, properties are transferred inter-vivos
in the place where they are located at the date of donation. They are not transferred at the place where
the donor executed the deed of donation.

Examples:
1. A resident alien who has P10M properties in the Philippines and P40M properties in Japan died in an airplane
crash in Malaysia.
The P10M properties is deemed transferred mortis causa in the Philippines while the P40M properties is also deemed
transferred mortis causa in Japan.

2. While in Korea, a non-resident Filipino donated his car in Japan worth P5,000,000 to his American best friend.
The P5M is deemed transferred inter-vivos in Japan.

General Rule in Transfer Taxation

Taxpayers Inter-vivos Mortis causa
Resident or citizens Global donation Global estate
Non-resident aliens Philippine donation Philippine estate

Illustration 1
Mr. Lugaw, an American residing in the Philippines, donated a car in Mexico to a friend and a motorbike in the
Philippines to his brother in America.
Since the taxpayer is a resident, both the donation of a car abroad and the donation of a motorbike in the Philippines are
subject to transfer tax. Since the donor is living, the transfers are donations inter-vivos subject to donor’s tax.

Illustration 2
Eddie Wow, a non-resident Filipino citizen, died leaving a building in the United States and an agricultural land in
the Philippines for his heirs.
Since the taxpayer is a citizen, the transfer mortis causa of the building in the US and the agricultural land in the Philipp ines
is subject to Philippine estate tax.

Illustration 3
Mr. Kobid, a Japanese citizen residing in Japan, donated a parcel of land in Japan to a resident Filipino friend.
He also donated his investment in the shares of stocks of a Philippines corporation to his Japanese sister.
Since the donor is neither a Philippine resident nor a citizen, only the donation of domestic shares of stock in the Philippines
is subject to transfer tax. Also, since the donor is living at the date of donation, the transfer is a donation inter-vivos subject
to donor’s tax.

Illustration 4
Mr. Bo Kung, a Chinese citizen residing in Hong Kong, died leaving a building in Hong Kong and a car in the
Philippines.
The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to transfer tax. Since the transfer is
effected by death, it is a donation mortis causa subject to estate tax.

Properties located in the Philippines

The following properties are considered located in the Philippines:
1. Interest in a domestic business
a. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the
Philippines in accordance with its laws
b. Shares or rights in any partnership, business or industry established in the Philippines

2. Foreign securities, under certain conditions:

a. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the
Philippines.
b. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have
acquired business situs in the Philippines

3. Franchise exercisable in the Philippines

4. Any personal property, whether tangible or intangible, located in the Philippines

Reciprocity Rule on Non-Resident Aliens

Examples of intangible properties:
1. Financial assets (cash, receivables or credit, investment in bonds, shares of stock in a corporation, interest in
a partnership)
2. Accounting intangible assets (patent, franchise, leasehold right, copyright, trademark)

Illustration 1
Mr. Gato, a Japanese citizen, donated the following properties in the Philippines:

Car; Cash in bank; Shares of stocks of a domestic corporation

Under Japanese laws, non-resident Filipinos are exempt on transfers of intangible properties in Japan

Since the reciprocity exemption applies, Mr.Gato is subject to donor’s tax only on the donation of the car. The donation of
the intangible personal properties such as cash and shares of stocks are exempt.

Note: non-resident alien’s intangible properties (PH) under reciprocity rule, whether the transfer is donation or
estate there is no donor’s tax or estate tax to impose.

What if Mr. Gato died leaving those properties mentioned above?

Only the tangible property would be subject to estate tax.

What if in the previous illustration Mr. Gato is a resident alien, died leaving those properties
All of the properties will be subject to estate tax since reciprocity exemption applies only to non-resident aliens.

Transfers intended to take effect upon death

 A donation that is made on the decedent’s last will and testament is a donation mortis causa. Similarly,
a donation that is a made during the lifetime of the decedent with a stipulation that ownership shall
transfer upon his death, the same is a donation mortis causa.

Incomplete Transfers
 Incomplete transfers involve the transmission or delivery of properties from one person to another, but
ownership is not transferred at the point of delivery.

Types of income transfers

1. Conditional transfers
2. Revocable transfers
3. Transfers with reservation of title to property until death

How are incomplete transfers completed?

1. Conditional transfers
a. fulfillment of the condition
b. waiver of the condition

2. Revocable transfers
a. waiver by the transferor to exercise his right of revocation
b. the lapse of his reserved right to revoke

3. Transfers with reservation of title to property until death are completed by the death of the decedent.

*1 and 2 transfers become donation mortis causa when the transfer is pre-terminated by death.

Timing of Taxation of Incomplete Transfers

Illustration:
On June 1, 2019, Don Condesion donated a luxury car with a value of P5M to his son, Sonny, under a condition
that Sonny must be a topnotcher in the October 2019 CPA Board Exam. To motivate Sonny, Don Condesion
delivered the car to him on June 1, 2019.

*June 1, 2019-no donor’s tax even if there is a physical transfer of the car
*Assuming Sonny topped the Board Exam on October 2019, there is a completed donation subject donor’s tax.
*If Sonny failed the exam, there is no donation at all.
*If Don Condesion waived his condition, the donation will be perfected at that time he waived the condition.
*If Don Condesion died before the exam, the car would be transferred mortis causa as part of his estate and would be subject to estate
tax.

Illustration 2
On February 14, 2019, GeneRoss transferred a phone to Clara but subject to revocation if GeneRoss so
pleases.

Although there is an actual physical transfer of property on February 14, 2019, the same cannot be subject to donor’s tax since there is no
transfer of ownership at that date.

Assuming GeneRoss waived his right to revoke, the donation shall be subject to donor’s tax at its fair value at the time of waiver. If
GeneRoss revoked the property, there is no donation to speak of.

Assuming GeneRoss died without revoking the phone, the same would be transferred mortis-causa and would be included part of his
estate subject to estate tax at its fair value at the point of death.

Complex Incomplete Transfers

 Incomplete transfers are sometimes made for less than full and adequate consideration.

Test of Taxability of Complex Incomplete Transfers

1. There is adequate consideration at the date of delivery of the property.
2. At the completion of the transfer the property must have not have decrease in value below the consideration
paid.

Valuation of complex incomplete transfers

Mortis causa- FV at death less consideration upon transfer
Inter-vivos- FV at completion or perfection of donation less consideration upon transfer

Illustration:
In October 1, 2017, Mr. Intoy transferred his car worth P1M to Mr. Bitoy but for a minimal consideration of
P300,000 only. The transfer shall be revocable by Mr. Intoy in 4 years.

Case 1: Waiver before death

On November 1, 2019, Mr. Intoy intimated to Mr. Bitoy that he was waiving his right of revocation. The fair value
of the car was P800,000 less P300,000. Hence, P500,000 shall be subject to donor’s tax.
Since Mr. Intoy was still living upon the perfection of the transfer, the transfer is a donation inter-vivos. It shall be valued at P800,000 less
P300,000. Hence, P500,000 shall be subject to donor’s tax.

Case 2: Death without revocation

Assume instead that Mr. Intoy died on November 1, 2019 without saving his right to revoke the transfer. The fair
value of the property was P850,000 at that time.
Since the revocable transfer is pre-terminated by death, it is a donation mortis causa. It shall be valued at P850,000 less P300,000.
Hence, P550,000 shall be subject to estate tax.

Illustration 2
Artison has a rare Egyptian artifact which has a fair value of P3M. He gave the artifact to Gustoko for a
consideration of P2,950,000 but revocable if Gustoko did not graduate as cum laude. Gustoko subsequently
graduated cum laude when the artifact was worth P4M.

*Adequate consideration= bona fide sale

Illustration 3
Leon sold a gold bullion with a fair value of P2.5M to Carlo at a price of P1.8M but revocable within one year. The
one-year period lapse when the gold bullion had a fair value of P1.7M.

*FV upon completion is less than the consideration, there is no gratuity subject to donor’s tax. In case of mortis
causa, there is still no estate tax in this case.

Non-Taxable Transfers
1. Void transfers
2. Quasi-transfers

Void transfers are those that are prohibited by law or those do not conform to legal requirements for their validity.
Void transfers do not transfer ownership over property and are therefore not subject to transfer tax.

Ex.
Donation of properties not owned
Donation between spouses
Donation refused by the done
Donations that do not conform to formal requirements such as oral donation of real properties.

Quasi-transfers
-there is no also transfer of ownership.
1. Transmission of the property by the usufructuary to the owner of the naked title.
2. Transmission of the property by a trustee to the real owner.
3. Transmission of property by first heir to the second heir (owner of naked title) according to predecessor’s
desire.