Introduction

In the Philippine legal and tax framework, the transfer of property ownership can occur through various instruments, with the Deed of Sale and Deed of Donation being two of the most common. A Deed of Sale involves the transfer of property for a valuable consideration, typically money, while a Deed of Donation entails the gratuitous transfer of property without any expectation of payment or compensation. Both transactions are governed by the Civil Code of the Philippines and are subject to taxation under the National Internal Revenue Code (NIRC), as amended by Republic Act No. 10963 (TRAIN Law) and subsequent revenue regulations.

Understanding the tax implications is crucial for property owners, donors, donees, buyers, and sellers to ensure compliance and avoid penalties. This article provides a comprehensive comparison of the taxes applicable to these deeds, focusing on national taxes such as capital gains tax, donor's tax, documentary stamp tax, and withholding taxes. Local taxes, like transfer taxes imposed by local government units (LGUs), are also touched upon where relevant. Note that tax rates and rules may be subject to updates from the Bureau of Internal Revenue (BIR), and professional advice is recommended for specific cases.

Legal Basis and Requirements for Each Deed

Before delving into taxes, it is essential to outline the legal foundations.

Deed of Sale

A Deed of Sale is a contract of sale under Articles 1458 to 1544 of the Civil Code, where the seller transfers ownership of property to the buyer in exchange for a price. It must be in writing for real property transfers exceeding PHP 500 (Article 1403) and notarized for enforceability against third parties. Registration with the Register of Deeds is required to bind third persons (Republic Act No. 496, as amended).

Deed of Donation

A Deed of Donation is governed by Articles 725 to 755 of the Civil Code, defining donation as an act of liberality where the donor divests himself of property in favor of the donee, who accepts it. For immovable property, it must be in a public instrument (notarized) and accepted in the same or another public instrument. Registration is also necessary for validity against third parties. Donations are irrevocable except in cases of non-fulfillment of conditions, ingratitude, or reduction due to inofficiousness.

Both deeds require payment of taxes before registration, as the BIR issues a Certificate Authorizing Registration (CAR) only after tax clearance.

Taxes Applicable to Deed of Sale

Transfers via Deed of Sale are treated as sales of capital assets (if not ordinary assets like inventory) and attract several taxes.

Capital Gains Tax (CGT)

Rate and Basis: Under Section 24(D) of the NIRC, a final tax of 6% is imposed on the gross selling price or the current fair market value (FMV), whichever is higher. FMV is determined by the zonal value (from BIR) or the assessed value (from the local assessor), whichever is higher.
Who Pays: The seller pays CGT, unless the property is the principal residence and qualifies for exemption under Section 24(D)(2), where proceeds are used to acquire a new residence within 18 months.
Exemptions: Sales of principal residences (up to certain conditions), sales to the government, or expropriations may be exempt. For corporations, CGT applies similarly, but if the asset is ordinary, it's subject to regular income tax.
Computation Example: If a property is sold for PHP 5 million, but zonal value is PHP 6 million, CGT is 6% of PHP 6 million = PHP 360,000.

Creditable Withholding Tax (CWT) or Expanded Withholding Tax (EWT)

Rate: Varies from 1.5% to 6% on the gross selling price or FMV, whichever is higher, depending on the seller's status (e.g., habitual seller vs. non-habitual). Per Revenue Regulations No. 8-2018, for non-habitual sellers, it's generally 6%.
Who Pays/Withholds: The buyer withholds and remits to BIR. This is creditable against the seller's income tax.
Purpose: Ensures collection at source.

Documentary Stamp Tax (DST)

Rate: Under Section 196 of the NIRC, 1.5% of the consideration or FMV, whichever is higher.
Who Pays: Typically the seller, but parties may agree otherwise.
Computation: For a PHP 5 million sale (assuming FMV not higher), DST = 1.5% x PHP 5 million = PHP 75,000.

Local Transfer Tax (LTT)

Rate: Up to 0.75% in cities (e.g., 0.5% in Manila) or 0.5% in provinces, based on the gross selling price or FMV, under Section 135 of the Local Government Code (LGC).
Who Pays: Usually the seller, paid to the LGU before CAR issuance.

Other Considerations

Value-Added Tax (VAT): If the seller is engaged in real estate business and the property is ordinary asset, 12% VAT applies on the selling price (Section 109).
Registration Fees: Minimal fees for notarization and registration with the Register of Deeds.

Total tax burden for a typical Deed of Sale can range from 7.5% to over 20% if VAT applies, depending on circumstances.

Taxes Applicable to Deed of Donation

Donations are gratuitous transfers, taxed differently to prevent tax evasion (e.g., disguising sales as donations).

Donor's Tax

Rate and Basis: Under Section 99 of the NIRC, a flat 6% on the FMV of the property donated, regardless of relationship (amended by TRAIN Law; previously progressive and exempt for relatives).
Who Pays: The donor.
Exemptions: Donations to government, accredited NGOs, or for educational/religious purposes may be exempt or deductible (Section 101). Annual exemptions up to PHP 250,000 for net gifts.
Computation Example: Donating property with FMV PHP 5 million incurs 6% = PHP 300,000 donor's tax.
Multiple Donations: Aggregated per calendar year; excess over PHP 250,000 taxed at 6%.

Donee's Tax Implications

No direct tax on the donee for receiving the donation, but if resold later, it becomes a capital asset with basis as the FMV at donation time for CGT purposes.

Documentary Stamp Tax (DST)

Rate: Under Section 196, 1.5% of the FMV (since no consideration).
Who Pays: Typically the donor.
Note: Same as in sales, but based solely on FMV.

Local Transfer Tax (LTT)

Applicability: Under Section 135 of LGC, LTT applies to donations as "transfers," at the same rates as sales (0.5%-0.75% of FMV).
Who Pays: Donor or donee, depending on LGU rules.

Other Considerations

Estate Tax Avoidance: Excessive donations may be scrutinized as advances on inheritance, potentially subject to estate tax upon donor's death if deemed inofficious.
No VAT or Withholding Tax: Since no sale, these do not apply.
Registration Fees: Similar to Deed of Sale.

Total tax for a Deed of Donation is generally around 8% (6% donor's + 1.5% DST + LTT), but exemptions can reduce it.

Comparative Analysis

Tax Rates and Bases

Deed of Sale: CGT (6% on selling price/FMV), DST (1.5%), CWT (up to 6%), LTT (0.5-0.75%), possible VAT (12%). Base is higher of selling price or FMV.
Deed of Donation: Donor's Tax (6% on FMV), DST (1.5%), LTT (0.5-0.75%). Base is FMV only.
Key Difference: Sales involve a consideration, triggering CGT and potential VAT, while donations use donor's tax. If FMV > selling price in a sale, taxes are higher; in donations, always on FMV.

Aspect	Deed of Sale	Deed of Donation
Primary Tax	CGT 6%	Donor's Tax 6%
DST	1.5% on higher of price/FMV	1.5% on FMV
Withholding Tax	CWT 1.5-6% (creditable)	None
VAT	12% if ordinary asset	None
LTT	0.5-0.75% on higher of price/FMV	0.5-0.75% on FMV
Exemptions	Principal residence, government sales	NGOs, government, annual PHP 250k
Total Effective Rate	7.5-25%+ depending on VAT	~8% typical

Who Bears the Tax Burden

In sales, seller pays CGT and DST, buyer withholds CWT.
In donations, donor pays all taxes, donee receives tax-free.

Timing and Payment

Both require tax payment before BIR issues CAR for registration. Deadlines: 30 days from notarization for donor's/CGT filing.

Potential for Abuse and BIR Scrutiny

Disguising sales as donations to avoid CGT/VAT is common but illegal (Section 100, NIRC). BIR may reclassify if evidence of consideration exists, imposing deficiencies plus penalties (25-50% surcharge, interest).
Donations among strangers taxed at 30% if over PHP 250,000 (but TRAIN unified to 6%).

Advantages and Disadvantages

Sale Advantages: Generates income; exemptions for residences.
Sale Disadvantages: Higher taxes if VAT applies; withholding.
Donation Advantages: Lower overall tax if no VAT; useful for estate planning.
Donation Disadvantages: Irrevocable; potential reduction if inofficious.

Other Relevant Considerations

BIR Requirements and Procedures

Both need eCAR (electronic CAR) system. Forms: BIR Form 1706 (CGT), 1800 (Donor's Tax), 2000 (DST).
Valuation: BIR zonal values prevail; appraisals may be required.
Penalties: Late filing incurs 25% surcharge, 12% interest p.a., possible compromise fees.

Impact on Inheritance and Estate Planning

Donations reduce estate tax liability (6% on net estate under TRAIN), but collation applies for legitimate heirs.
Sales do not affect estate directly but realize gains.

Special Cases

Parent-to-Child Transfers: Donations common; no stranger tax since 6% flat.
Corporate Transfers: Similar rules, but corporations pay regular tax if ordinary assets.
Foreclosed Properties: Treated as sales.
Tax Treaties: For non-residents, may reduce rates.

Recent Developments

Under TRAIN Law (2018), unification of rates simplified comparisons, removing kinship-based exemptions in donor's tax.

Conclusion

The choice between a Deed of Sale and Deed of Donation hinges on intent—monetary gain vs. liberality—but tax implications are pivotal. Sales generally incur higher taxes due to potential VAT and withholding, while donations offer a streamlined 6% flat rate but on FMV. Taxpayers must weigh these against legal requirements, potential reclassifications, and estate planning goals. Consulting a tax lawyer or CPA is advisable to navigate nuances and ensure compliance with Philippine laws.