We shall discuss the tax on donations, which to many people will be considered as the price of generosity. There are people who are either born wealthy or become wealthy through sheer hard work and good fortune.
Although it is easier said than done, it is a fact that there are countless ways to get rich. Manny Pacquiao grew his wealth through sports, while the likes of Manny Pangilinan and Manny Villar had their respective breakthroughs in business and investments (maybe, the name attracts money?)
Several lawyers, doctors, artists, and teachers, among other professions, got to increase their fortunes from their respective fields of practice. Some had it easier, like Pepito Manaloto, who hit a lottery jackpot, turning his P20.00 into millions.
Indeed, it feels better to give than to receive. The act of giving brings an altruistic feeling or a sense of fulfillment on the part of the giver. Besides, being generous invites good karma. So, what if some kind-hearted people decided to let go of their valuable properties, either real or personal, for a good cause? Is there a price to letting go?
More to this, this article would explore the current governing provisions of law on donations and their corresponding applicable taxes.
What is Donation?
To put it simply, a donation is a gift. It is one of the modes of acquiring ownership in the Philippines.1 Under the Civil Code, it is defined as “an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.”2 The parties in a donation are called the donor and the donee. The former is the one who donates, and the latter is the one who receives the donation.
As a mode of acquiring ownership, donation results in an effective transfer of title over the property from the donor to the donee, and it is perfected from the moment the donor knows of the acceptance by the donee.3 Once accepted, the donee becomes the absolute owner of the property donated.4
Example: Robin donated his old car to his friend Raffy, which the latter accepted. The moment Robin acquired knowledge of Raffy’s acceptance, the ownership of the subject car was deemed transferred to the latter by virtue of a valid donation.
In sum, as can be gleaned from the above example, the donation is perfected from the moment the donor knows of the acceptance by the donee.5
Is donation a contract?
There is no doubt that a donation is a contract. Being a contract, it must therefore have the requisites of a valid contract under the Civil Code. To render the donation valid, the following requisites must be present:
- Capacity to make the donation at the time of the perfection of the contract;
- Cause or consideration;
- Donative intent or animus donandi;
- There must be a delivery;
- Donee must accept or consent to the donation; and
- Form as prescribed by law, which is either oral or written.
Capacity of Donor and Donee
According to Article 735 of the Civil Code, “all persons who may contract and dispose of their property may make a donation.” This capacity shall be determined as of the time of the making of the donation.6
In other words, the law requires that a person must be in possession of the capacity to contract and the capacity to dispose of his property and is not specifically barred from making a donation.
Therefore, those who are barred by law from entering a contract cannot donate, such as unemancipated minors, insane or demented persons, and deaf-mutes who do not know how to write.7
It is worthy to note that a person with schizophrenia may make a valid donation because he is presumed to be capable of attending to his property rights and there is no total loss of control of his mental faculties.8
Furthermore, the donations cannot comprehend future property.9 By “future property,” it is understood to be anything which the donor cannot dispose of at the time of the donation.10 In simple terms, the donor must have ownership over the property at the time of disposal through donation. Otherwise, the same will be rendered void. Clearly, “no one can give what he does not have”.
With regard to the donee, all persons, whether natural or juridical, who are not specially disqualified by law may become one, even conceived or unborn children.11
Cause or consideration
Donations are acts of liberality, hence gratuitous. But there are also remuneratory or compensatory and onerous donations. Gratuitous donations are those the cause of which is the pure liberality of the donor.12
It is remuneratory or compensatory when it is given out of gratitude on account of the services rendered by the donee to the doner, provided they do not constitute a demandable debt.13
Onerous donations are those which impose upon the donee a reciprocal obligation, or to be more precise, this is the kind of donation made for a valuable consideration, the cost of which is equal to or more than the thing donated.13
Donative intent or animus donandi
Donative intent is a creature of the mind.14 It cannot be perceived except by the material and tangible acts that manifest its presence.15 In other words, for a donation to exist, the intent to donate must be effectively carried out.
In Abello vs. CIR,16 the Supreme Court held that the fact that the donors would somehow benefit in the future from the election of the candidate to whom they made campaign contributions, in no way amounts to a valuable consideration so as to remove political contributions from the purview of a donation, as their candidate was under no obligation to benefit them.
Delivery of the object
The subject matter or object of a donation may be movable or immovable, provided that the donor is the owner at the time the donation was made, either orally or in writing. The donation may be made orally or in writing when the donated property is movable.
Yet, if it is made orally, the simultaneous delivery of the thing or the document representing the right donated is required. Simultaneous delivery is not required when the donation is made in writing.
Acceptance of Donation
As discussed above, the donation is perfected from the moment the donor knows of the acceptance by the donee.5 It is noteworthy to note that one cannot force someone to donate, in the same manner that one cannot be forced to accept a donation.
The latter may sound impractical, but the rejection of donation from someone, like a political rival or an enemy, might be the best decision to make to save the recipient’s pride. In simple terms, therefore, there must be a concurrence of reciprocal consent of the parties, and it does not become perfect until it is accepted by the donee. Like in any other contract, the offer and the acceptance must be both present to render a donation valid.
Formalities required by law
The donation of movable properties may be made orally or in writing, but only if the amount of such movable properties does not exceed five thousand pesos (P5,000.00). Otherwise, the same should be in writing.17
Regarding the donation of immovable properties, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy.18
What is the Distinction between Donation inter vivos and Donation mortis causa?
According to Article 729 of the Civil Code, “when the donor intends that the donation shall take effect during the lifetime of the donor, though the property shall not be delivered till after the donor’s death, this shall be a donation inter vivos. x x x”19
In other words, if the donation takes effect during the donor’s lifetime or independently of the donor’s death, meaning that the full or naked ownership of the donated properties passes to the donee during the donor’s lifetime, not by reason of his death but because of the deed of donation, then the donation is inter vivos.20
According to Article 728 of the Civil Code, “donations which are to take effect upon the death of the donor partake of the nature of testamentary provisions and shall be governed by the rules established in the Title on Succession. “
Conversely, if the donation is made in contemplation of the donor’s death, meaning that the full or naked ownership of the donated properties will pass to the donee only because of the donor’s death, then it is at that time that the donation takes effect, and it is a donation mortis causa which should be embodied in a last will and testament.21
Simply put, aside from the form, it is the time of effectivity which distinguishes a donation inter vivos from a donation mortis causa.22 The effectivity of such is determined by the time when the full or naked ownership of the donated properties is transmitted to the donees.23
The distinction between the two types of donations is vital to determining a donation’s validity or revocation. In donation inter vivos, the execution and acceptance must comply with the formalities prescribed by Articles 748 and 749 of the Civil Code, except when it is onerous, in which case the rules on contracts apply.
If it is mortis causa, the donation must be in the form of a will, with all the formalities for the validity of wills; otherwise, it is void and cannot transfer ownership. In case of doubt, the conveyance should be deemed a donation inter vivos rather than mortis causa, in order to avoid uncertainty as to the ownership of the property subject of the deed.24
Are donations taxable or Are there Tax on Donations?
We have now discussed that a person, out of the liberality, may gratuitously dispose of his property in favor of another who accepts the same. In this light, we may ask, “what is the interest of the state on the donations made by a person toward another?” As the famous quote attributed to Benjamin Franklin says, “there were only two things certain in life: death and taxes”.
The State imposes a tax on these donations in the form of an excise tax. In the broad sense under the Philippine taxation, an excise tax is a tax levied on the exercise by persons of privileges conferred by law.25
Since donation is an exercise of a privilege within the basket of rights of an owner,26 specifically the right to dispose of his property, the state can impose a tax on these donations when made by the donor.
The imposition of the tax is true on both the occasion of donation inter vivos and donation mortis causa. In both, the person gratuitously disposing of his properties is exercising a privilege and it will just differ as to when the transfer would take effect.
However, these two types of donations are not subject to the same type of tax. Donations mortis causa are subject to the laws and rules of estate taxes. On the other hand, donation inter vivos are subject to what is called as donor’s tax. The latter will be the focus of the succeeding discussion.
[to be continued….]
- Article 712, Civil Code of the Philippines[↩]
- Article 725, Civil Code of the Philippines[↩]
- Vda. De Arceo vs. CA, G.R. No. 81401 May 18, 1990, 185 SCRA 489 [1990][↩]
- Ibid.[↩]
- Article 734, Civil Code of the Philippines[↩][↩]
- Article 736, Civil Code of the Philippines[↩]
- Article 1327, Civil Code of the Philippines[↩]
- Catalan vs. Basa, G.R. No. 159567, July 31, 2007[↩]
- Article 751, Civil Code of the Philippines[↩]
- Id.[↩]
- Article 742, Civil Code of the Philippines; Quimiguing vs. Icao, G.R. No. 26795, July 31, 197034, SCRA 132, 134[↩]
- Republic vs. Silim, G.R. No. 140487, April 2, 2001[↩]
- Ibid.[↩][↩]
- Rabuya p. 627.[↩]
- Id.[↩]
- G.R. No. 120721, February 23, 2005[↩]
- Article 748, Civil Code of the Philippines[↩]
- Article 749, Civil Code of the Philippines[↩]
- Article 729 of the Civil Code of the Philippines[↩]
- Rabuya, p. 634; Castro vs. Court of Appeals, G.R. No. L-20122, April 28, 1969, 27 SCRA 1076[↩]
- Ibid.[↩]
- Rabuya, p. 636[↩]
- Alejandro vs. Geraldez, G.R. No. L-33849 August 18, 1977, 78 SCRA 245, 253[↩]
- Puig vs. Peñaflorida, G.R. No. L-15939, January 31, 1966, 15 SCRA 276, 283[↩]
- Fort Bonifacio Development Corporation vs. Commissioner of Internal Revenue, G.R. Nos. 164155 & 175543, February 25, 2013[↩]
- Article 428, Civil Code of the Philippines[↩]