Introduction to

Transfer Taxes

Transfer and Business Taxes

Mr. James Dane T. Adayo

What is Transfer?
 Transfer refers to any transmission of property from one person to
another.
 A person may be a natural person or a juridical person created by law.
Type of transfers:
1. Bilateral transfers
2. Unilateral transfers
3. Complex transfers
Two kinds of Transfers
1. Bilateral transfers or exchanges, such as:
a. Sale
b. Barter
 
These are referred to as “onerous transactions”.
Two kinds of Transfers
2. Unilateral transfers, such as:
a. Succession - transfer of property upon death
b. Donation- gratuitious transfer of property from a deceased person upon death to his heirs
 
These are also referred to as “gratuitous transactions”.

Under current usage, unilateral transfers are simply referred to as “transfers” while bilateral transfers are
called “exchanges.” Benefits derived from onerous transactions are “earned or realized”; hence, they are
subject to income tax. Benefits derived from gratuitous transactions are not realized because of the
absence of an earning process. Benefits derived from gratuitous transactions are subject to transfer tax,
not income tax.
Two kinds of Transfers
3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are commonly referred to as
“transfers for less than full and adequate consideration”. The gratuitous portion of the transaction is subject
to transfer tax while the benefit from the onerous portion is subject to income tax.

Illustration
A taxpayer sold his car which was previously purchased for P100,000 and with a current fair value of
P180,000 for only P130,000.

The transaction will be analyzed as follows:

Fair value P 180,000

    }  P50,000 - Subject to transfer tax
Selling price 130,000
    }  P30,000 - Subject to income tax
Cost 100,000  
Types of Transfer Taxes
1. Donor’s taxes- imposed on donation inter vivos
2. Estate tax- Imposed on donation mortis-causa

Rationale of Transfer Taxation

3. Tax evasion or tax minimization theory
4. Tax recoupment theory
5. Benefit received theory
6. State partnership theory
7. Wealth redistribution theory
8. Ability to pay theory
Rationale of Transfer Taxation
1. Tax evasion or tax minimization theory
Exchanges may be structured in a way to defeat income taxation. This may be true
specially when the seller and the buyer are related taxpayers.

Example: Assume that a property with a fair value of P4,000 and tax basis of P1,000 is sold for P2,000.

Under Income taxation, only the P1,000 is the actual gain that is subject to tax.

The P2,000 difference between the fair value and selling price is given free to the seller that should have been
part of the taxable gain. As a remedy, government subject the P2,000 to transfer taxes.
Rationale of Transfer Taxation
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.

Illustration:
Alison has P5,000,000 properties which earn 10% of P500,000 annual income. He wanted to see her 5 children
become financially independent. He distributed his entire properties to them. Each child received P1,000,000
properties. Each child earns roughly P100,000 on donated properties.

The split of properties and spread of income resulted to lower future tax collection to the government. Note that
taxation of the total P500,000 income to Alison will yield greater amount of tax than the accumulated tax from
the five children. Hence, to recoup in future losses in income tax the government has to tax the transfer of the
properties.
Rationale of Transfer Taxation
3. The benefit received theory
When a person transfers property, the government is a party in the orderly transfer of the property
to the donee or heir. This is made possible by government laws.
The transferor is actually exercising a privilege to transfer property under security of an effective
and orderly transmission under its laws.

The benefit received theory is the most dominant rationalization of transfer taxation.
Rationale of Transfer Taxation
4. The State Partnership Theory
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.
Rationale of Transfer Taxation
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 social unrest,
chaos, lawlessness and wars.

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.
Rationale of Transfer Taxation
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
 National tax- imposed by the National government
 Direct tax- Cannot be shifted from one person to another
 Ad Valorem tax- Gross estate is based on valuation
 Proportional tax- the tax rate is fixed
 General/Fiscal/Revenue tax- Imposed to raise revenue
 Excise tax or Privilege tax- Tax on the right or privilege to transfer
property from one person to another
Nature of Transfer Taxes
 National tax- imposed by the National government
 Direct tax- Cannot be shifted from one person to another
 Ad Valorem tax- Gross estate is based on valuation
 Proportional tax- the tax rate is fixed
 General/Fiscal/Revenue tax- Imposed to raise revenue
 Excise tax or Privilege tax- Tax on the right or privilege to transfer
property from one person to another
Classification of Transfer Taxpayers
 1. Residents or Citizens- such as:
a. Resident citizen-Filipino citizens residing in the Philippines
b. Resident alien- Citizens of a foreign country residing in the
Philippines.
c. Non-resident citizen- Filipino citizens not residing in the Philippines
Classification of Transfer Taxpayers
 2. Non-resident aliens- citizens of a foreign country not residing in the
Philippines.
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.
Illustration 1
Mr. Mario, an American residing in the Philippines, donated a car in Mexico
to a friend and a motorbike in the Philippines to his brother in America.

All of this transfers are subject to transfer taxes particularly donors taxation.
General rule in Transfer Taxation
 1. Non-Resident aliens- are taxable only on properties transferred
which are located in the Philippines at the date of transfer.
Illustration 1
Mr. Konouman, a Japanese citizen residing in Japan, donated a
parcel of land in Japan to a resident Filipino friend and his investment in
the shares of stocks of a Philippine Corporation to his Japanese sister.

Note: Only the donation of shares of stock is taxable in the Philippines.

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 time 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 by or is effected by death

A donation made during the lifetime of the decedent which is inspired or

motivated by thought of death or in contemplation thereof is not a
donation intervivos but a donation mortis causa.
Donation inter vivos vs. Donation mortis causa
The motives of donation is the determining factor
The motives of an inter vivos transfer is very important in determining whether it is actually an
inter-vivos transfer or a mortis causa transfer. The donor’s motive is established out of the
wordings of the deed of donation prepared by the donor to effect the donation.
Examples of motives associated with life
1. To reward services rendered.
2. To relieve the donor of the burden 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.
Donation inter vivos vs. Donation mortis causa
The motives of donation is the determining factor
The motives of an inter vivos transfer is very important in determining whether it is actually an
inter-vivos transfer or a mortis causa transfer. The donor’s motive is established out of the
wordings of the deed of donation prepared by the donor to effect the donation.
Examples of motives associated with life
1. To reward services rendered.
2. To relieve the donor of the burden 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.
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