Introduction

In the Philippine tax system, donor's tax serves as a mechanism to regulate gratuitous transfers of property, ensuring that such transfers are not used to evade estate taxes or other fiscal obligations. Governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963 (TRAIN Law) and subsequent legislation, donor's tax is imposed on the donor for the privilege of transferring property by way of gift during their lifetime. Deeds of donation, as formal legal instruments under Philippine civil law, are central to this tax regime, as they document inter vivos transfers without valuable consideration.

This article comprehensively examines the computation of donor's tax in the context of deeds of donation, highlighting key issues that arise in practice. It covers the legal framework, valuation methodologies, exemptions, deductions, procedural requirements, common pitfalls, and judicial interpretations. Understanding these elements is crucial for donors, donees, legal practitioners, and tax authorities to ensure compliance and minimize disputes with the Bureau of Internal Revenue (BIR).

Legal Basis and Scope of Donor's Tax

Donor's tax is outlined in Title III, Chapter II of the NIRC (Sections 98 to 104). It applies to any transfer of real or personal property, tangible or intangible, where the donor intends to gratuitously dispose of the property without expecting anything in return. The tax is levied on the donor, not the donee, and is based on the fair market value (FMV) of the property transferred.

For deeds of donation, the Civil Code of the Philippines (Republic Act No. 386) defines donation as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it (Article 725). Donations must be in writing if the value exceeds P5,000 (Article 748), and for immovable property, a public instrument is required (Article 749). The deed of donation triggers donor's tax liability upon perfection of the donation, which occurs when the donee accepts the gift and the donor has knowledge of such acceptance.

The scope includes:

Direct donations (e.g., land, cash, shares).
Indirect donations (e.g., forgiveness of debt, assumption of liability).
Donations mortis causa (treated as testamentary dispositions subject to estate tax if revocable).
Cross-border donations involving non-residents.

Exclusions: Sales, exchanges, or transfers for adequate consideration are subject to capital gains tax or value-added tax instead.

Tax Rates and Thresholds

Prior to the TRAIN Law, donor's tax rates were progressive, ranging from 2% to 15% for relatives and up to 30% for strangers. The TRAIN Law simplified this to a flat 6% rate on the total net gifts exceeding P250,000 in a calendar year, regardless of the relationship between donor and donee. This applies to donations made on or after January 1, 2018.

Gross Gift: FMV of the property at the time of donation.
Deductions: Dowry (up to P10,000 for each child in case of marriage), encumbrances assumed by the donee, and diminutions in value stipulated in the deed.
Net Gift: Gross gift minus deductions.
Taxable Amount: Aggregate net gifts over P250,000 per year.
Formula: Donor's Tax = (Aggregate Net Gifts - P250,000) × 6%.

For multiple donations in a year, all net gifts are cumulated, regardless of donees. If the donor is married, donations from conjugal property are attributed half to each spouse unless otherwise specified.

Valuation of Donated Property: Core Computation Issues

Valuation is the most contentious aspect of donor's tax computation, as it directly affects the tax base. The NIRC mandates that the FMV be determined as of the date of donation, using the higher of:

The zonal value set by the BIR for real property (per Revenue District Office).
The assessed value from the local government unit (LGU).
For personal property, the BIR Commissioner's schedule or, if none, the actual market value.

Issues in Real Property Valuation

Discrepancies Between Zonal and Assessed Values: Zonal values are often higher than LGU assessments, leading to inflated tax bases. Donors may challenge BIR valuations via appraisal, but this requires substantial evidence.
Improvements and Accessories: Buildings or improvements on land must be valued separately, often using replacement cost less depreciation.
Undeveloped or Agricultural Land: Valuation may involve productivity assessments, causing disputes if the property's potential use (e.g., conversion to residential) is considered.
Timing of Valuation: If market conditions fluctuate post-donation but pre-assessment, donors argue for adjustments, though BIR typically sticks to donation-date FMV.

Issues in Personal Property Valuation

Shares of Stock: Listed shares use the closing price on the donation date or nearest trading day. Unlisted shares require book value or adjusted net asset value, often leading to audits.
Intangibles (e.g., Intellectual Property): Valued based on earning potential or arm's-length transactions, prone to subjective interpretations.
Foreign Currency or Assets: Converted to Philippine pesos using Bangko Sentral ng Pilipinas rates, with forex gains potentially taxable.
Art, Jewelry, or Collectibles: Require expert appraisals, which BIR may reject if not from accredited appraisers.

Undervaluation in the deed of donation is a common issue, as it may trigger deficiency assessments, penalties (25% surcharge), and interest (12% per annum). The BIR can revalue property within three years (or ten if fraud), extending to deeds executed years prior.

Exemptions and Deductions: Reducing the Tax Base

Certain donations are exempt from donor's tax under Section 101 of the NIRC:

To the Government: Donations to national or local government units, including barangays, for public purposes.
To Accredited Entities: Non-profit institutions for educational, charitable, religious, cultural, or social welfare purposes, provided no more than 30% of the donation is used for administration and the entity is BIR-certified.
Political Contributions: Certified by the Commission on Elections during election periods.
International Organizations: Per treaties or agreements.
Dowry Exemption: Limited to P10,000 per legitimate child upon marriage.

Deductions include:

Encumbrances or charges on the property if assumed by the donee.
Diminutions in value as stipulated in the deed, if reasonable.

Issues arise when exemptions are claimed improperly:

Conditional Donations: If conditions make the donation revocable, it may be reclassified as subject to estate tax.
Mixed Donations: Part-sale, part-donation transactions require apportionment, with only the gift portion taxed.
Family Corporations: Donations of shares to relatives may be scrutinized for tax avoidance, especially if control is retained.

Procedural Requirements and Compliance

Deeds of donation must be notarized and registered with the Registry of Deeds for immovables or the appropriate agency for movables. Donor’s tax must be paid within 30 days from the donation date via BIR Form 1800, filed at the Revenue District Office where the donor resides.

Joint Filing for Spouses: Required for conjugal property donations.
Supporting Documents: Include the deed, proof of FMV (e.g., tax declarations, appraisals), and acceptance by the donee.
Electronic Filing: Mandatory under Revenue Regulations for certain taxpayers.

Non-compliance leads to:

Surcharges: 25% for late filing/payment, 50% for willful neglect.
Interest: 12% per annum from due date.
Penalties: Up to P50,000 for failure to file or fraudulent returns.

Common Computation Issues and Disputes

Aggregation and Calendar Year Rule

Donors often overlook aggregating multiple donations, leading to underpayment. For example, donating P200,000 in January and P100,000 in July results in tax on P50,000 (P300,000 - P250,000) × 6% = P3,000.

Related Party Transactions

Donations between spouses or relatives may be deemed simulated sales if undervalued, attracting capital gains tax (6% on FMV) instead.

Cross-Border Issues

Non-resident alien donors are taxed only on Philippine-situs property. Resident aliens and citizens are taxed worldwide. Double taxation may arise without relief under treaties.

Revocation and Re-donation

If a donation is revoked, the tax paid is not refunded, but the property's return may trigger another tax event.

Inflation and Economic Factors

FMV disputes intensify during economic volatility, as BIR zonal values lag behind market realities.

Judicial and Administrative Interpretations

Supreme Court rulings emphasize intent: In Commissioner of Internal Revenue v. Court of Appeals (G.R. No. 123206, 1999), the Court held that donations must be gratuitous; any consideration reclassifies them.

BIR Rulings (e.g., DA-123-18) clarify that online donations via digital platforms are taxable if exceeding thresholds.

Revenue Memorandum Orders update valuation guidelines, such as RMO 15-2020 on real property zonal values.

Practical Advice for Mitigation

To avoid computation issues:

Obtain pre-donation BIR rulings for complex valuations.
Use accredited appraisers for non-standard properties.
Document all deductions and exemptions meticulously.
Consult tax professionals for aggregated donations.

In summary, donor's tax computation for deeds of donation demands precise valuation, awareness of exemptions, and strict adherence to procedures. Missteps can result in significant liabilities, underscoring the need for thorough planning in gratuitous transfers under Philippine law.