Chapter 11: Introduction to transfer taxation

Transfers

- Refer to any transmission of property from one person to another

o Bilateral transfers
For a consideration
Onerous transactions or exchanges
Subject to income taxation
Sale - exchange of property for money
Barter - exchange of property for another property
o Unilateral transfers
Without consideration
Gratuitous transactions or transfers
Subject to transfer taxes
Donation
o From a living donor to a donee
o Donation inter vivos
o Subject to donors tax
o Valued at the date of completion or perfection of the donation
o Made during the lifetime of the donor
o Taxable only once they are completed and perfected
Succession
o From a deceased person upon death to his heirs
o Either by operation of law or by virtue of will
o Donation mortis causa
o Subject to estate tax which has a higher tax rate than the donors tax
o Valued at the date of death
o Effected by death
o Completed upon delivery of the property
o Perfected upon acceptance by the donee
o Complex transfers
For less than full and adequate consideration
Consideration of the facts and the circumstance
Consideration to the liquidity of the asset or the availability of willing buyers
Tax rules for adequate consideration
Deemed pure exchanges and are subject to income tax
Tax rules for less than adequate and full consideration
Split into transfer element and exchange element
o Transfer portion - indirect donation subject to transfer tax
Classified as either mortis causa or inter vivos depending on the
intent
o Onerous portion - realized gain subject to income tax
Generally considered as inter vivos
However, if made in contemplation of death or agreed to be
transferred upon death of the seller, then mortis causa
o Non-taxable transfers
Not actually donation
Void transfers
o Prohibited by law
Transfer of property not owned
Donation between spouses
Donations that do not manifest all essential requisites
Donations that do not conform to formal requirements
Quasi-transfers
o Do not involve transfer of ownership
Transmission of a property by a person with a right of usufruct
over the property to the owners of the naked title
Transmission of a property by a trustee to the real owner
Transmission of a property from the first heir to a second heir in
accordance with the desire of a predecessor
Incomplete transfers
o Ownership is not transferred at the point of delivery
 o Actual transfer of ownership will take effect in the future upon the
happening of certain future events or conditions
o Subject to transfer tax in the future when the transfer is completed upon
the happening of the event
o Completed inter vivos or mortis causa
Conditional transfers
Subject to donors tax at the fair value of the property at
the date of their completion or perfection
Completed inter vivos upon the happening of the following
during the lifetime of the donor:
o Fulfillment of the condition by the transferee
o Waiver of the same by the transferor
If pre-terminated by the death of the transferor, it shall be
subject to estate tax at the point of death of the transferor
Revocable transfers
Subject to donors tax at the fair value of the property at
the date of their completion or perfection
Completed inter vivos upon:
o Waiver by the transferor to exercise his right of
revocation
o The lapse of his reserved right to revoke
If pre-terminated by the death of the transferor, it shall be
subject to estate tax at the point of death of the transferor
Transfer in contemplation of death - completed by the death of the
decedent
Transfers with reservation of title to property until death -
completed by the death of the decedent
o Complex incomplete transfers
Incomplete transfers are sometimes made for less than full and adequate consideration
Similar to complex transfers, the gratuity component is determined and is subject to the
appropriate type of transfer tax
Donation inter vivos - fair value at the date of completion of transfer less the
consideration given
Donation mortis causa - fair value at the date of death less the consideration
given at the date of transfer
Test of taxability
Incomplete transfer must have been paid for less than full and adequate
consideration at the date of delivery of the property
Property must not have decrease in value less than the consideration paid at the
completion of the transfer

Rationale of transfer taxation

1. Tax evasion or minimization theory

To avoid exchanges that may be structured to defeat income taxation
2. Tax recoupment theory
To recoup on future losses in income taxes caused by transfers
3. Benefit received theory
Transfers are made possible by government laws
4. State partnership theory
The government is an indirect partner behind wealth accumulation
5. Wealth redistribution theory
Governments strive toward equitable wealth redistribution as a basic policy
6. Ability to pay theory
The ability to transfer property is an indication of an ability to pay tax

Nature of transfer taxes

1. Privilege tax
Imposed because the transferor is exercising a privilege in the form of assistance rendered by the
government
2. Ad valorem tax
Amount of transfer tax is dependent on the value of the properties transferred
3. Progressive tax
 Determined based on a schedule of tax rates
4. National tax
Levied by the national government
5. Direct tax
Cannot be shifted
6. Fiscal tax
Levied to raise money for the support of the government

Classification of transfer taxpayers

1. Residents or citizens - subject to tax on all transfers of properties regardless of their location
a. Resident citizen
b. Resident alien
c. Non-resident citizen
2. Non-resident aliens - taxable only on transferred properties located in the Philippines at the date of
transfer
3. Juridical persons - depends on their place of incorporation or operations

Situs of properties

1. Residents or citizens - purposes of computing tax credits for foreign transfer taxes paid
2. Non-resident aliens - taxable only on transfers of properties located in the Philippines

Properties considered located in the Philippines

- Franchise exercisable in the Philippines

- Shares issued in the Philippines in accordance with its laws
- Shares issued by any foreign corporation, 85% of which is located in the Philippines
- Shares acquired business situs in the Philippines
- Shares in any partnership established in the Philippines
- Any personal property, whether tangible or intangible, located in the Philippines

Reciprocity rule on non-resident aliens

Intangible personal properties of non-resident alien is exempt provided that Filipino non-residents intangible
personal properties are also exempted from transfer taxes.

Examples

- Financial assets - Accounting intangible assets

o Cash (Bills and coins) o Patent
o Receivables or credit o Franchise
o Investment in bonds o Leasehold right
o Shares of stock o Copyright
o Interest in a partnership o Trademark

The motive of donation is the determining factor.

Motives associated with life Motives associated with death

1. To reward services rendered 1. Donation to take effect at the death of donor
2. To relieve the donor of the burden of 2. Donation in the last will and testament of the
management of the property donor
3. To save on income tax 3. Donation with retention of certain rights until
4. To see children financially dependent death
5. To see children enjoy the property while the 4. Revocable transfers
decedent still lives 5. Conditional transfers
6. To settle family disputes