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Tax Notes1
Tax Notes1
Tax Notes1
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Transfer refers to any transmission of property from one person to another
A person maybe natural(individuals) or a juridical person (corporaon, partnership or joint venture)
Types of Transfers:
1. Bilateral – transmission of property for a consideraon (referred to as onerous transacon or exchanges:
Ex: Sales – exchange for money
Barter – exchange of property for another property
3. Complex – transfers for less than full and adequate consideraon. These are sales made at prices which are
signicantly lower than the Fair Value of the property sold.
Tax rules:
a. Adequate consideraon: Deemed pure exchanges and are subject to income tax, not to transfer tax
b. Less than full and adequate consideraon: transacon is split into two components, transfer element
and exchange element
Illustraon:
Fair Value P 50,000 This is subject to
Gratuity(indirect donaon) 20,000 Transfer tax Transfer element
Consideraon(SP) 30,000
Less: Cost or tax basis 10,000
Realized Gain 20,000 Income tax Exchange element
The transfer element is generally considered as an inter vivos donaon, but it is a donaon mors
causa if:
a. sale is made in contemplaon of death of the seller
b. the tle to the property is agreed to be transferred upon the death of the seller
2. Tax recoupment theory – Even without deliberate intent to evade income tax, transfers have a natural
eect of decreasing future income tax collecons of the govt.
Illustraon:
Mr. A owns a P10M property, earning a 10% annual income(subject to RIT) or P1M yearly income.
He divided the enre properes to his 5 children. Each child received P5M property and each child earns a
roughly P200,000 yearly income.
Note that the split of the properes will result to lesser tax collecon by the govt. BECAUSE of the
progressive tax imposed upon individuals. To recoup on future losses in income taxes caused by transfers,
the gov’t. taxes the transfer of the properes.
3. Tax Benet Theory – this is the most dominant raonalizaon of transfer taxaon.
When a person transfers property by donaon or succession, the gov’t. is a party in the orderly transfer of
property to the done or heir. This is made possible by government laws which enforce or eectuate
donaon and succession.
4. The State Partnership Theory - The govt. is an indirect partner behind all forms of wealth accumulaon.
Since the government ensures a civilized and orderly society where wealth accumulaon and commercial
undertaking, the govt, should take its fair share by taxing the transfer of the wealth to other persons .
5. Wealth Redistribuon Theory – equitable distribuon of wealth is widely accepted as an element of social
progress and stability. Taxaon is a common tool in redistribung wealth to society.
6. Ability to pay Theory – The ability to transfer property is an indicaon of an ability to pay tax.
Comparison of two types of transfer tax
Donor’s Tax Estate Tax
Subject transfer Inter-vivos Mors Causa
Nature Annual One me tax
Taxpayer Donor Decedent
Who actually pay Donor himself Executor, administrator or heirs in behalf
the tax of the decedent
Situs of Taxaon:
Transfer occur in the locaon of the property.
In mors causa, properes are transferred at the place they are located at the point of death of the decedent, not
the place of decedent’s death.
Likewise, properes transferred inter-vivos in the place where they are located at the date of donaon, not in the
place the donor executed the deed of donaon.