COLLEGE OF BUSINESS AND ACCOUNTANCY
TOPIC:
✓ TRANSFER TAXATION
LEARNING OBJECTIVES:
At the end of this module, the student should be able to:
✓ Differentiate the types of transfer
✓ Discuss the concepts of unilateral transfers
BIBLICAL VALUES INTEGRATION:
Overhearing what they said, Jesus told him, “Don’t be afraid; just believe.”
INTRODUCTION
TRANSFER TAXATION
-Mark 5:36
Transfers refer to any transmission of property from one person to another.
A person may be a natural person or a juridical person created by law.
Types of Transfers:
1) Bilateral transfers
2) Unilateral transfers
3) Complex transfers
BODY
BILATERAL TRANSFERS
Bilateral transfers involve transmission of property for a consideration. They are referred to as onerous
transactions or exchanges.
Examples:
1) Sale - exchange of property for money
2) Barter - exchange of property for another property
The realized gains on bilateral transfers or exchanges are subject to income taxation.
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 inter vivos - the gratuitous transfer of property from a living donor to a donee. Aka “Donation”
2.
Donation mortis causa – it is the gratuitous transfer of property from a deceased person upon death to
his heirs. Aka “Succession”
COMPLEX TRANSFERS
Complex transfers are transfers for less than full and adequate consideration. These are sales made at prices which
are significantly lower than the fair value of the property sold.
What constitutes an adequate consideration?
There is no fixed quantitative rule on what constitutes an adequate consideration. The determination of whether or
not a consideration is adequate requires consideration of the facts and the circumstance surrounding the sale.
Consideration may be given to the liquidity of the asset or the availability of willing buyers.
Tax rules on transfers for adequate consideration
Transfers for adequate consideration are deemed pure exchanges and their subject to income tax, not to transfer
tax.
Transfer for less than adequate and full consideration
Transfers less than element adequate full and adequate consideration are split into its components: transfer
element and exchange element.
The transfer portion representing gratuity is an indirect donation subject to transfer tax. The onerous portion
representing a realized gain is subject to income tax.
The gratuity on complex transfers is generally considered as an inter-vivos donation. However, if the sale is made
in contemplation of the death of the seller or if title to the property is agreed to be transferred upon the death of
the seller, the gratuity is considered a mortis causa donation.
TYPES OF TRANSFER TAXES
1. Donor's tax - imposed on donation inter-vivos
2. Estate tax - imposed on donation mortis-causa
RATIONALE OF TRANSFER TAXATION
1. Tax evasion or minimization theory
2. Tax Recoupment theory
3. Benefit received theory
4. State partnership theory
5. Wealth redistribution theory
6. Ability to pay theory
The Tax Evasion Taxation or Minimization Theory
Exchanges may be structured in such a way as to defeat income taxation. This may be true especially when the
seller and the buyer are related taxpayers.
The Tax Recoupment Theory
Even without a deliberate intent to evade income tax, transfers have a natural effect of decreasing future income
tax collections of the government.
The Benefit Received Theory
When a person transfers property by donation or succession, the government is a party in the orderly transfer of
the property to the donee or heir. This is made possible by government laws which enforce or effectuate donation
and succession.
The transfer is actually exercising a privilege to transfer his property under government security of an effective
and orderly transmission under its laws which define and effect donation or succession. Without these laws, the
transfer could not have been conveniently possible.
Exercising this special privilege to transfer property either inter vivos or mortis causa is a benefit to the transferor.
In accordance with the benefit received theory, the transfer should be taxed.
The benefit received theory is the most dominant rationalization of transfer taxation.
The 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
state. 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.
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
redistributing 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.
Ability to Pay Theory
No one could gratuitously give what he could not afford. The ability transfer property is an indication of an ability
to pay tax. Hence, the transfer is subject to tax.
NATURE OF TRANSFER TAXES
1. Privilege tax
2. Ad valorem tax
3. National tax
4. Direct tax
5. Fiscal tax
Privilege tax
Transfer tax is dominantly viewed as a form of privilege tax rather than a form of penalty tax. It is imposed because
the transferor is exercising a privilege in the form of assistance rendered by government in effecting the transfer of
properties by way of donation or succession. Since the transferor is exercising a privilege, the transfer is subject to
tax.
Ad valorem tax
The amount of transfer tax is dependent on the value of the properties transferred. Thus, valuation of the property
transferred is needed in order to determine the amount of tax.
National tax
Transfer taxes are levied by the national government.
Direct tax
Transfer taxes cannot be shifted. The transfer-donor or transferor-decedent is the one subject to tax.
Fiscal tax
Transfer taxes are levied to raise money for the support of the government.
CLASSIFICATION OF TRANSFER TAXPAYERS
1. Residents or Citizens
a. Resident citizens - Filipino citizens residing in the Philippines
b. Resident aliens - Citizens of a foreign country residing in the Philippines
c. Non-resident citizens - Filipino citizens not residing in the Philippines
2. Non-resident Aliens - citizens of foreign country not residing in the Philippines
For purposes of donor’s tax, juridical person such as corporations and partnerships which donate properties
are classified as citizens or aliens and residents or non-residents depending on their place of incorporation or
operation.
A corporation or a partnership with a fixed place of business in the Philippines is a resident. If the corporation
has no fixed place of business within the Philippines, it is considered a non-resident.
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.
GENERAL RULE IN TRANSFER TAXATION
1. Residents or citizens are subject to tax on all transfers of properties regardless of their location. In other
words, they are taxable on global transfer of properties.
2. Non-resident aliens are taxable only on properties transferred which are located in the Philippines at the
date of transfer.
SITUS OF PROPERTIES
The location of the property is highly essential for purposes of transfer taxation. This is particularly important to
non-resident aliens because they are taxable only on transfers of properties located in the Philippines. For
residents or citizens, it is relevant for purposes of computing tax credits for foreign transfer taxes paid.
The following properties are considered located in the Philippines:
1. Franchise exercisable in the Philippines
2. Shares, obligations, or bonds issued by any corporation or Sociedad anonima organized or constituted in
the Philippines in accordance with its laws
3. Shares, obligations, or bonds issued 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 business situs in the Philippines
5. Shares or rights in any partnership, business or industry established in the Philippines
6. Any personal property, whether tangible or intangible, located in the Philippines
Reciprocity rule on non-resident aliens
The intangible personal properties of non-resident are exempt from Philippine transfer tax provided that the
country in which such alien is a citizen also exempts the intangible personal properties of Filipino non-residents
therein from transfer taxes.
Examples of intangible properties:
1. Financial assets
a. Cash
b. Receivables or credit
c. Investment in bonds
d. Shares of stock in a corporation
e. Interest in a partnership
2. The accounting intangible assets
a. Patent
b. Franchise
c. Leasehold right
d. Copyright
e. Trademark
TIMING OF VALUATION OF TRANSFERS
1. Donation inter-vivos are valued at the date of completion or perfection of the donation
2. Donation mortis causa are valued at the date of death
DONATION INTER-VIVOS VS. DONATION MORTIS CAUSA
A donation made during the lifetime of the donor is a donation inter-vivos. A donation mortis causa is one inspired,
or effected, by death.
A donation made during lifetime of the decedent, which is inspired or motivated by the thought of death or in
contemplation thereof is not a donation inter vivos but a donation mortis causa. If the donation is inspired by
motives associated with life, it is a donation inter-vivos.
The motive of donation is the determining factor
The motive of an inter-vivos transfer is very important in determining whether it is actually an inter-vivos transfer
or a mortis cause transfer. The donor’s motive is established out of the wording of the deed of donation prepared
by the donor to eefct the donation.
Examples of motive associated with life
1. To reward services rendered
2. To save relieve the donor of the burden of management of the property
3. To save on income
4. To see children financially independent
5. To see children enjoy the property while the decedent still lives
6. To settle family disputes
Examples of Donation Mortis Causa
1. Donation to take effect at the death of the donor
2. Donation in the last will and testament of the donor
3. Donation with retention of certain rights until death
4. Revocable transfers
5. Conditional transfers
NON-TAXABLE TRANSFERS
There are transfers of properties which are not actually donations and hence, not subject to transfer taxes.
These include:
1. Void transfers
2. Quasi-transfers
3. Incomplete transfers
Void Transfers
Void transfers are those that are prohibited by law or those transfers that are do not conform to legal requirements
for their validity. Void transfers are not taxable to either donor’s tax or transfer tax.
Quasi-transfers
There are transmissions of property which do not involve transfer of ownership. For the purpose of our discussion,
let us refer to these transmissions as "quasi-transfers." Quasi-transfers are not subject to transfer taxes.
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. The actual transfer of ownership will take effect in the future upon the
happening of certain future events or condition.
Initially, incomplete transfers are not subject to transfer taxes upon delivery, but they are subject to transfer tax in
the future when the transfer is completed upon the happening of the event or upon fulfillment of the specified
conditions.
Types of incomplete transfers:
1. Conditional transfer
2. Revocable transfer
3. Transfer in the contemplation of death
4. Transfers with reservation of title to property until death
Timing of taxation of transfer
Donations are taxable only once they are completed and perfected. Incomplete transfers may be completed intervivos or mortis causa.
Note that donations mortis causa are perfected at the point of death while donation inter-vivos are normally
completed upon delivery of the property and are perfected upon acceptance by the donee.
How are incomplete transfers completed?
1. Conditional transfers are completed inter-vivos upon the happening of the following during the lifetime of
the donor:
a. fulfillment of the condition by the transferee or
b. waiver of the same by the transferor
2. Revocable transfers are completed inter-vivos upon:
a. waiver by the transferor to exercise his right of revocation or
b. the lapse of his reserved right to revoke
3. Transfers in contemplation of death and transfers with reservation of title to property until death are
completed by the death of the decedent.
Conditional transfers and revocable transfers become donation mortis causa when the transfer is pre-terminated
by the death of the decedent. They will be included in the properties of the decedent subject to estate tax.
Timing of Taxation of Incomplete Transfers
Revocable and conditional transfers that are completed during the lifetime of the transferor constitute donations
inter-vivos subject to donor's tax at the fair value of the property at the date of their completion or perfection.
Revocable transfers and conditional transfers that are pre-terminated by the death of the transferor shall be
subject to estate tax at the point of death of the transferor.
COMPLEX INCOMPLETE TRANSFERS
Incomplete transfers are sometimes made for less than full and adequate consideration. Similar to complex
transfers, the gratuity component of the complex transfers is determined and is subject to the appropriate type of
transfer tax.
Valuation Rules: Complex Incomplete Transfers
1. Donation inter-vivos = fair value at the date of completion of transfer less the consideration given
2. Donation mortis causa = fair value at the date of death less consideration given at the date of transfer
Test of Taxability of Complex Incomplete Transfers
The following must be established must before a complex incomplete is taxable:
1. The incomplete transfer must have been paid for less than full and adequate consideration at the date of
delivery of the property.
2. The property must not have decrease in value less than the consideration paid at the completion of the
transfer.
LIFE APPLICATION:
You need to pay the transfer tax because the evidence of its payment is required by the Register of Deeds
of the province concerned before registering any deed. This is also required by the provincial assessor
before cancelling an old tax declaration and issuing a new one in its place.
SUMMARY:
There are three types of transfer: bilateral, unilateral and complex transfers. Bilateral transfers was
discussed in your Income Taxation course. We focused on the unilateral and complex transfers. Unilateral
transfers are transfer which do not involve consideration, hence, it is a gratuitous transfer. These are
subject to either estate tax or donor’s tax. If transfer was made during the lifetime of the donor, it is a
donation inter-vivos subject to donor’s tax. On the other hand, if the transfer was made after the death of
the decedent, it is donation mortis causa, subject to estate tax.
REFERENCES:
Transfer and Business Taxation - Train Law updated, 2020 ed., Rex Banggawan
Quicknotes Taxation, Latest ed., Jack De Vera