Introduction

In the Philippine tax system, donor's tax and estate tax are two distinct forms of transfer taxes imposed on the gratuitous transfer of property. These taxes are governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on January 1, 2018. Prior to the TRAIN Law, these taxes followed a progressive rate structure, but the amendments simplified them to a flat rate while introducing certain thresholds and exemptions.

Donor's tax applies to inter vivos transfers (transfers during the lifetime of the donor), while estate tax pertains to mortis causa transfers (transfers upon death). Understanding the distinctions between these taxes is crucial for estate planning, compliance with tax obligations, and avoiding penalties. This article provides a comprehensive overview of both taxes, including their legal bases, applicability, computation, exemptions, filing requirements, and related considerations under Philippine law.

Legal Basis

Both donor's tax and estate tax are rooted in Sections 84 to 104 of the NIRC. The TRAIN Law amended these provisions to impose a uniform 6% tax rate on net transfers exceeding specific exemptions. Revenue Regulations (RR) issued by the Bureau of Internal Revenue (BIR), such as RR No. 12-2018 for donor's tax and RR No. 12-2018 (as amended) for estate tax, provide detailed guidelines on implementation. Judicial interpretations from the Supreme Court, such as in cases like Estate of Cynthia A. Arcay v. CIR (G.R. No. 166227, 2008), emphasize the finality of these taxes on gratuitous transfers.

What is Donor's Tax and When Does It Apply?

Donor's tax is a tax imposed on the privilege of transferring property by way of gift or donation during the donor's lifetime. It is levied on the donor, who is the person making the gratuitous transfer. The tax is designed to prevent the circumvention of estate tax through lifetime gifts that deplete the estate before death.

Applicability

Donor's tax applies to any gratuitous transfer of property, whether real, personal, tangible, or intangible, where the donor receives no adequate and full consideration in money or money's worth. Key scenarios include:

Direct Donations: Gifts of cash, real estate, shares of stock, or other assets to family members, friends, or charitable institutions.
Indirect Donations: Transfers that appear as sales but lack full consideration, such as selling property below fair market value (FMV) to a relative, where the difference is treated as a donation.
Debt Forgiveness: Waiving a debt owed by another person, which is considered a donation of the debt amount.
Transfers in Trust: Irrevocable trusts where the donor relinquishes control, potentially triggering donor's tax on the transferred assets.
Political Contributions: Donations to political candidates or parties during election periods, subject to specific rules under the Omnibus Election Code and BIR regulations.
Cross-Border Transfers: Donations by resident citizens or aliens of property located in the Philippines, or by non-residents of Philippine-situs property.

Donor's tax does not apply to transfers for adequate consideration (e.g., bona fide sales) or to certain exempt donations, as discussed below. It is computed on a calendar-year basis, aggregating all donations made within the year.

Tax Rate and Computation

Under the TRAIN Law, donor's tax is imposed at a flat rate of 6% on the total net donations exceeding PHP 250,000 per calendar year. The net donation is the FMV of the property at the time of donation, less any allowable deductions (primarily debts assumed by the donee).

Formula: Tax Due = 6% × (Total Gifts - PHP 250,000 Exemption - Deductions)
Valuation: For real property, use the higher of zonal value (per BIR) or assessed value (per local government). For shares, use book value for unlisted or FMV for listed. For other assets, use FMV.
Spousal and Relative Exemptions: Donations between spouses or to relatives within the fourth degree of consanguinity (e.g., parents, children, siblings) are subject to the same rate but may qualify for the annual exemption.
Multiple Donees: Each donation to different donees is computed separately, but the PHP 250,000 exemption is per donor per year, not per donee.

For example, if a donor gives PHP 1,000,000 worth of property to a child in one year, the tax is 6% of (PHP 1,000,000 - PHP 250,000) = PHP 45,000.

Exemptions and Deductions

Annual Exemption: The first PHP 250,000 of net donations per year is exempt.
Dowries: Donations for marriage (dowries) up to PHP 10,000 per child are exempt, but this is rarely invoked post-TRAIN.
Charitable Donations: Gifts to accredited donee institutions (e.g., non-profit organizations under Section 30 of the NIRC) are exempt if no more than 30% is used for administration.
Government Donations: Transfers to the Philippine government or its political subdivisions for public purposes are exempt.
Political Donations: Certified political contributions during elections are exempt up to certain limits.
Deductions: Mortgages or encumbrances on the donated property assumed by the donee are deductible.

What is Estate Tax and When Does It Apply?

Estate tax is a tax on the privilege of transmitting the decedent's estate to heirs or beneficiaries upon death. It is imposed on the estate itself, not on the heirs, and is paid from the estate's assets before distribution.

Applicability

Estate tax applies to the transfer of the decedent's gross estate at the time of death, regardless of whether the transfer is by will, intestate succession, or other means. It covers:

Resident Decedents: The worldwide estate of Filipino citizens or resident aliens.
Non-Resident Aliens: Only property situated in the Philippines (e.g., real estate, shares in Philippine corporations).
Types of Property: Includes real property, tangible and intangible personal property, proceeds from life insurance (if the beneficiary is the estate or executor), retirement benefits, and rights to usufruct.
Revocable Transfers: Properties transferred during life but where the decedent retained control (e.g., revocable trusts) are included in the gross estate.
Transfers in Contemplation of Death: Gifts made within three years before death may be scrutinized if intended to avoid estate tax, though the TRAIN Law removed the presumption for transfers beyond one year.
Joint Properties: For married decedents, only the decedent's share of conjugal or community property is taxed, excluding the surviving spouse's share.

Estate tax does not apply if the net estate is PHP 5,000,000 or less, or to certain exempt transfers.

Tax Rate and Computation

The TRAIN Law imposes a flat 6% rate on the net estate exceeding PHP 5,000,000.

Formula: Tax Due = 6% × (Gross Estate - Deductions - PHP 5,000,000 Exemption)
Gross Estate Valuation: FMV at the time of death, using similar rules as donor's tax (zonal values for realty, etc.).
Net Estate: Gross estate minus allowable deductions.

For instance, if the net estate is PHP 10,000,000, the tax is 6% of (PHP 10,000,000 - PHP 5,000,000) = PHP 300,000.

Exemptions and Deductions

Standard Deduction: PHP 5,000,000 for all estates.
Family Home: Up to PHP 10,000,000 deduction for the decedent's family home.
Medical Expenses: Up to PHP 500,000 for expenses incurred within one year before death.
Claims Against the Estate: Valid debts of the decedent.
Funeral Expenses: Actual expenses, capped at 5% of gross estate or PHP 200,000, whichever is lower.
Judicial Expenses: Costs of estate administration.
Vanishing Deduction: For property previously taxed (e.g., inherited within five years), a deduction phased out over time.
Exempt Transfers: Bequests to government or accredited institutions for public purposes; certain retirement benefits under RA 4917; life insurance proceeds where the beneficiary is irrevocable and not the estate.

Key Differences Between Donor's Tax and Estate Tax

Aspect	Donor's Tax	Estate Tax
Timing of Transfer	During lifetime (inter vivos)	Upon death (mortis causa)
Taxpayer	Donor	Estate (administered by executor/heirs)
Exemption Threshold	PHP 250,000 per year	PHP 5,000,000 per estate
Aggregation	Annual basis, all donations	One-time, entire estate
Valuation Date	Time of donation	Time of death
Purpose	Tax on gifting privilege	Tax on inheritance transmission
Inclusions	Only donated property	Entire estate, including prior gifts in certain cases
Deductions	Limited (e.g., encumbrances)	Extensive (e.g., debts, funeral, medical)

These differences highlight how donor's tax encourages planned gifting to reduce future estate tax liability, but excessive lifetime donations may trigger immediate tax.

Filing and Payment Requirements

Donor's Tax: The donor files BIR Form 1800 and pays within 30 days after the donation. For multiple donations in a year, an amended return may be needed by year-end.
Estate Tax: The executor, administrator, or heirs file BIR Form 1801 and pay within one year from death (extended from six months pre-TRAIN). Extensions up to 5 years may be granted for hardship, with interest.
Installment Payments: Allowed for estate tax if the estate lacks liquidity, subject to BIR approval.
Amnesty and Compliance: The Estate Tax Amnesty under RA 11213 (extended to June 2023) allowed settlement of unpaid estate taxes without penalties. Non-compliance leads to deficiency assessments.

Penalties for Non-Compliance

Failure to file or pay on time incurs:

Surcharge: 25% (or 50% for willful neglect/fraud).
Interest: 6% per annum (reduced from 12% post-TRAIN).
Compromise Penalties: For minor violations.
Criminal Penalties: For tax evasion, including fines up to PHP 100,000 and imprisonment.

The BIR may issue assessments within three years (or ten for fraud), and estates cannot be distributed without a Certificate Authorizing Registration (CAR).

Strategic Considerations in Estate Planning

In the Philippine context, individuals often use donor's tax strategically to minimize estate tax. For example, annual gifts up to PHP 250,000 per donee can deplete the estate tax-free over time. However, anti-avoidance rules may reclassify abusive transfers. Consulting a tax professional is advisable for complex scenarios, such as involving offshore assets or family corporations.

Conclusion

Donor's tax and estate tax serve as mechanisms to ensure equitable taxation on wealth transfers in the Philippines. While both now feature a simplified 6% rate, their application hinges on the timing and nature of the transfer. Proper understanding and compliance mitigate financial burdens and facilitate smooth asset succession.