Tax Articles

Taxing a Person’s Liberality

By Atty. Rodel C. Unciano

Article 725 of the Civil Code of the Philippines defines donation as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. Based on this definition, a gift or a donation, in order to be considered as one, should be made as an act of liberality or without any consideration or compensation being received in exchange therefor.

As it has been said, tax and death are the two (2) things certain in life. And so, the liberality of a person is not free from the eyes of the taxman. Under Section 98 of the Tax Code, donor’s tax shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of property by gift. The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Thus, every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible shall be liable for the donor’s tax.

While donation or gift is generally subject to donor’s tax, the Tax Code also provides some exemptions from the imposition of said tax. Examples of the donations/gifts exempt from the donor’s tax are those enumerated in Section 101 of the Tax Code, such as gifts made to the government, educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization. There are just some prescribed conditions or requirements for the donations to some of these agencies/institutions to be qualified as exempt from the donor’s tax.

Aside from the donations to the agencies/institutions specifically enumerated in the Tax Code which may be exempted from tax, there are also other donations made to certain institutions which are likewise exempt from the imposition of donor’s tax by way of express provision provided under the charter creating such institution.

Following the current provisions of the Tax Code, the exemption from donor’s tax is dependent on the status of the donee, not on the status of the donor. Hence, to determine whether the donation is exempt from donor’s tax or not, it is necessary to determine whether the donee falls under any of the qualified exempt donees as enumerated in the Tax Code or under special laws. In a number of rulings issued by the BIR, it has been ruled that a tax-exempt donee who later on donates the same property donated to it to a non-exempt donee shall be liable for donor’s tax pursuant to Section 98 of the Tax Code.

So, while donations to qualified donee agencies/institutions may be exempt from the donor’s tax, the donation by that same donee institution does not necessarily exempt the donation from the donor’s tax. In other words, it is the qualification of a donee institution that exempts the donation made to it from donor’s tax. A donor cannot use its own exemption for the exemption of its own donation. The donation made by a qualified donee institution may only be exempt from the donor’s tax if the recipient of such donation is likewise a qualified exempt donee agency/organization/institution.

A question to ask: Are donations and financial assistance given to the victims of calamities or disasters subject to donor’s tax?

Apparently, the recipients, who are victims of calamities, are individuals who would receive such donations in their individual capacity. As such, they do not fall under any of the instances enumerated in the Tax Code that may qualify them as exempt donees. Neither do they fall under any of the instances based on special laws where exemption from donor’s tax could possibly be invoked. The individual recipients of the gifts or donations cannot therefore be considered as exempt donees under the provisions of our present tax laws. It is unfortunate that there is no tax-exemption provision of the Tax Code that may be invoked.

This, I think, is a vacuum in our tax laws that should be filled-up. While it is my view that these gifts given to victims of calamities are exempt from donor’s tax, there seems to be no clear legal basis under our present tax laws. In this country, we have so many organizations which have been established for the sole purpose of giving aids and assistance to victims of calamities with the sole objective of giving the victims hope to regain life. Unfortunately, there is no precedent to justify tax exemption simply because the acts are done in the furtherance of the purposes to which these entities have been established.

It helps therefore that this be considered in our legislations to avoid any tax issue arising from the liberality of well-meaning citizens of helping the unfortunate victims of calamities. This will likewise encourage more able citizens to do their share of helping those in dire need of help.