CHAPTER 12: INTRODUCTION TO TRANSFER TAXATION

TRANSFERS- refers 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 – involve transmission of a 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

2) UNILATERAL TRANSFERS - involve the transmission of property by a person without consideration. They
are commonly referred to as gratuitous transactions or simply transfer. The right or privilege to transfer
properties is subject to “transfer taxes”. TYPES OF UNILATERAL TRANSFERS:
1.) DONATION – is the gratuitous transfer of 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
will be gratuitously 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”.

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 circumstances
surrounding the sale.
The adequacy of the price is influenced by the liquidity or the availability of willing buyers of the concerned
property. Hence, a discount of 20% to highly saleable goods like gold would be construed as gift due to its
relative liquidity while this may not be the case in selling big real estates.
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.
Transfers for less than adequate and full consideration
Transfer 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.

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 taxation. However, it is
not taxed in the absence of donative intent on the part of the seller 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
a natural effect of decreasing future income tax collections of the government.

3. 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 done or heir. This is made possible
by government laws which are enforce or effectuate donation and succession.

The transferor 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 the 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.

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 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.

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 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.
 6. ABILITY TO 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.

NATURE OF TRANSFER TAXES

1. PRIVILEGE TAX - transfer tax is a form of privilege tax rather than a form of penalty tax. It is imposed
because the transferor (donor or decedent) is exercising a privilege in the form of assistance
rendered by the government in effecting the transfer of properties by way of donation or succession.
2. 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 the tax.
3. PROPORTIONAL TAX – transfer taxes under the TRAIN Law are imposed at flat 6% of the net estate
or gift.
4. NATIONAL TAX – Transfer tax are levied by the national government. Local government units (LGU)
are legally precluded from imposing the same.
5. DIRECT TAX – Transfer taxes cannot be shifted. The transferor-donor or transferor-decedent is the
one subject to tax.
6. FISCAL TAX – Transfer taxes are levied to raise money for the support of the government.

CLASSIFICATION OF TRANSFER TAXPAYERS AND THEIR EXTENT OF TAXATION

1. Residents or Citizens- such as:

a. Resident Citizens
b. Resident Aliens -foreigners
c. Non – Resident Citizens
There are taxable on global transfers of property.
2. Non – resident Aliens
These are taxable on Philippines transfers of property
The citizenship of juridical persons determined by the incorporation tests. Juridical persons that are organized
in the Philippines are considered Philippine Citizen. Those organized abroad or 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 situs means location “site”
Transfer occur in the location of the property.
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.

Global Donations means properties donated wherever situated across the globe. Estate means properties of
the decedent at the point of death. Global Estate means properties of the decedent wherever situated across
the globe at the point of death.
PROPERTIES LOCATED IN THE PHILIPPINES
The following properties are considered locates in the Philippines:
1. Interest in a domestic business
a. Shares, obligations, or bonds issued by any corporation are 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 acquires 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
The intangible personal properties of non-resident aliens are exempt from Philippine transfer taxes 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 2. ACCOUNTING INTANGIBLE ASSETS

a. Cash a. Patent
b. Receivable or audit b. Franchise
c. Investment in bonds c. Leasehold right
d. Shares of stock in a corporation d. Copyright
e. Interest in a partnership e. Trademark

It must be pointed out that bills and coins (i.e., cash) are mere representation of purchasing power. They are
intangibles rather than tangible assets.

All these will be subject to estate tax since reciprocity exemption applies only to non-resident aliens to the
exclusions of resident aliens.
CLASSIFYING DONATION AS INTER-VIVOS OR MORTIS CAUSA
The timing of the gratuitous transfer of ownership or legal title over property to another determines the
classification of the transfer.
If ownership over property is voluntarily transferred by the owner during his lifetime, this is donation inter-
vivos. If the owner retained ownership until the moment of his death, death will transfer it his successor in
interest. This transfer is donation mortis causa.

TRANSFER IN CONTEMPLATION OF DEATH

A donation that is inspired or motivated by the thought of death of the decedent is donation mortis causa. If
the donation is inspired by motives associated with life, 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 causa transfer. The donors motive is established out of the wordings of the deed of donation
prepared by the donor to effect the donation.
Thought of Death
The presence of express wordings in the deed of donation which indubitably manifest that the donation is
inspired by the the decedent’s thought of death will qualify a donation as a donation mortis causa.
ILLUSTRATION
On his death bed, Don Pedro made a written donation saying “Death is imminent upon me. I would like to ensure
that Pablo will have my sports car as his legacy. For this, I am donating my car to Him.”
Though the donation is made during the lifetime of Don Pedro, the donation is inspired by the thought of death.
This is a transfer mortis causa subject to estate tax upon Don Pedro’s death.
The evaluation of the decedent’s motive is done in particular when the decedent made a donation just several
months prior to his death and had a severe illness, suffering from critical injury, or of too advanced age.
Transfers in contemplation of death actually pass ownership over the property to the transferee at the date of
donation but the same is taxable to estate tax not to the donor’s tax because it is a donation mortis causa.
Motives associated with life:

The following motives precludes a transfer from being classified as one in contemplation of death:
1. To reward services rendered
2. To relieve the donor of the burden of management of the property
3. To save on income tax
4. To see children financially independent
5. To see children enjoy the property while the decedent still lives
6. To settle family disputes

Illustration
Rhad distributed a significant part of his properties worth P500M to his children. In the deed of donation, he
cited excessive income tax and his intent to save income tax as reasons to his donation.
The donation is a donation inter-vivos subject to donor’s tax.
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. The ‘last will and
testament’ is a document expressing the decedent’s desire on how his properties will be distributed after his
death.
Similarly, a donation that is made during the lifetime of the decedent with a stipulation that ownership shall
transfer upon his death, the same is a donation mortis causa
Illustration
During his lifetime, Don Juan transferred a property to his favorite granddaughter, Karen. Don Juan allowed
Karen to obtain possession of the property but under condition that ownership will not transfer until his death.
The transfer of property during the lifetime of the donor is not intended to take effect in ownership
immediately but at the point of death. The transfer is a donation mortis causa subject to estate tax.
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 happening of certain future events or satisfaction of certain conditions.
Initially, incomplete transfers are not subject to transfer taxes upon delivery of property. They are subject to
transfer tax in the future when the actual transfer of ownership occurs.
Types of incomplete 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 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 condition 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 evoke.
3. 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 subject to the appropriate type of transfer tax.
Test of Taxability of Complex Incomplete Transfers
The following must be established 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. At the completion of the transfer, the property must not have decrease in value below the consideration
paid.
NON-TAXABLE TRANSFERS
These are transfers of properties which are not actually donations and hence, not subjects to transfer taxes,
such as:
1. VOID TRANSFERS are those that are prohibited by law or those that do not conform to legal
requirements for their validity. Void transfers do not transfer ownership over property and are
therefor not subject to transfer tax.
Examples of void transfers:
1) Donation of properties not owned by the donor
2) Donation between spouses
3) Donations which do not manifest all essential requisities to validity such as donations refused by
the donee
4) Donations that do not conform to formal requirements such as oral Donation of real properties

2) QUASI TRANSFERS – there transmissions of property which will never involve transfer of ownership.
For the purpose of our discussion, let us refer to these transmissions as “quasi-transfers”. Quasi-
transfers are not taxable.
Examples:
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 the property from the first heir to a second heir in accordance with the desire
of a predecessor.