TRANSFER TAXATION

Types of transfers
1. Bilateral transfers - involve transmission of property for a consideration ex. Sale,
Barter
2. Unilateral transfers - involve the transmission of property by a person without
consideration. ex. Donation, Succession
3. Complex transfers - transfers for less than full and adequate consideration.

UNILATERAL TRANSFERS
1. Donation - gratuitous transfer of property from a living donor to a donee - Donation
Inter Vivos
2. Succession - gratuitous transfer of the properties of the deceased person upon his
death to his heirs. - Donation Mortis Causa
Inter Vivos (Subject to donor’s Mortis Causa (Subject to
tax) estate tax)
Transferor Living Donor Decedent
Nature Voluntary Involuntary
Reason Gratuity Death
Scope of the Selected Properties Only All properties of the
Transfer decedent at the date of
death
Property Given Gift Estate
Transferee Donee Heir
Transfer Tax Donor’s Tax Estate Tax
Time of Valuation Date of Donation Date of Death
The transfer element is generally considered as an inter-vivos donation, but it is a donation
mortis-causa if:
A. The sale is made in contemplation of the death of the seller, or
B. If the title to the property is agreed to be transferred upon the death of the seller.

RATIONALE OF TRANSFER TAXATION

1. Tax evasion or minimization theory -
Exchanges may be intentionally priced to evade or minimize income taxes. The indirect
donation in an exchange is actually a lost gain which will evade taxation. To plug this tax
loophole, the government subjects the gratuity to tax. However, it is not taxed in the absence
of donative intent on the part of the seller of such as when the sale is made in the normal
course of business.

2. Tax Recoupment theory

Even without a deliberate intent to evade income tax, transfers have natural effect of
decreas future income tax collections of the government.
Illustration:
Alison has P10,000,000 properties which earn 10% or P1,000,000 yearly income. Desiring to
make his 5 children become financially indpendent, he divided his entire properties to them.
Each child received P2,000,000 properties. Each child earns roughly P200,000 on the
donated properties.

3. Benefit received theory

Each person has the right to transfer properties to another person either by reason of
liberality or by death and for each mode of transfer benefit is derived by the transferor. Such
transfer therefore is subject to tax.

4. State Partnership Theory

The state ensures a civilized and orderly society where commercial undertaking and wealth
accumulation flourish. The government therefore is an indirect partner behind all forms of
wealth accumulation by any person within the rate. Thus, when a person transfers part or the
whole of his wealth, the government should take its fair share by taxing the transfer of the
wealth to other persons.

5. Wealth Redistribution Theory

Equitable distribution of wealth is widely accepted as an element of social progress and
stability. Societies with high inequities in wealth distribution are normally associated with high
social unrest, lawlessness, insurgencies, wars, and chaos.
Thus, governments strive toward equitable wealth distribution as a basic policy. Taxation is a
common tool in redistributiong wealth to society. When one transfers his wealth, the transfer
should be taxed so that part of the wealth will be redistributed to benefit society.
6. Ability of Pay Theory
No one could gratuitously give what he could not afford. The ability to transfer property is an
indication of an ability to pay tax. Hence, the transfer is subject to tax.

COMPARISON OF THE TWO TYPES OF TRANSFER TAX

Donor’s Tax Estate Tax

Subject Transfer Inter-Vivos Mortis Cause
Nature Annual Tax One Time Tax
Taxpayer Donor Decedent
Who actually pay the tax Donor Executor, administrator, or
heirs in behalf of the
decedent

Nature of Transfer Tax

1. Excise/Privilege tax - subject matter - right of person to transfer property (liberality or
death)
2. Ad Valorem Tax - value of property is the basis of determining the tax
3. Proportional Tax - tax rate is fixed
4. National Tax- imposed by the national government
5. Direct Tax – it cannot be passed on to others
6. Fiscal Tax – it aimed at raising revenues

CLASSIFIC ATION OF TRANSFER TAXPAYERS AND THEIR EXTENT OF TAXATION:

1. Residents or Citizens - global transfers
2. Non-resident Aliens - Philippine transfers

Resident Citizen, Non-Resident Citizen, Resident Alien – all properties located within and
outside of the Philippines
Non Resident Citizen – properties located within the Philippines

SITUS OF TRANSFER - Transfers occur in the location of the property Examples:

1. A resident alien who has P10,000,000 properties in the Philippines and P40,000,000
properties in Japan died in an airplane crash in Malaysia
P10,000,000 - transferred in the Philippines
P40,000,000 - transferred in Japan
Location of the Property:
1. Real Property - where the property is located
2. Tangible Personal Property - where the property is located
3. Intangible Personal Property

A. Interest in a domestic business - within the Philippines

1. Shares, obligations, or bonds issued by the corporation organized or constituted in the
Philippines in accordance with its laws.
2. Shares or rights in any partnership, business or industry established in the Philippines.

B. Foreign securities, under certain conditions (within the Philippines)

1. Shares, obligations, or bonds issued by any foreign corporation at least 85% of the busine
is located in the Philippines.
2. Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations, or bonds have acquired business situs in the Philippines.

C. Franchise/trademark/patent/copyright exercisable in the Philippines - within the

Philippines