Is a Donated Right-of-Way (RROW) Taxable in the Philippines? Donor’s Tax and CGT Rules

Introduction

In the Philippines, the donation of a right-of-way (RROW) typically occurs in the context of infrastructure development, land use planning, or public projects where private landowners transfer portions of their property to the government or authorized entities for public access, such as roads, highways, or utilities. This practice is governed by various laws, including the National Internal Revenue Code (NIRC) of 1997, as amended, Republic Act No. 10752 (The Right-of-Way Act), and relevant Bureau of Internal Revenue (BIR) rulings and regulations. A key concern for donors is the tax implications, particularly donor's tax and capital gains tax (CGT). This article explores whether donated RROW is taxable, the applicable rules for donor's tax and CGT, exemptions, procedural requirements, and related considerations in the Philippine legal framework.

Understanding Right-of-Way (RROW) Donation

A right-of-way is an easement or portion of land granted for passage or utility purposes, often to facilitate public infrastructure. Under Republic Act No. 10752, enacted in 2016, the government can acquire RROW through negotiation, donation, or expropriation for national infrastructure projects. Donation is encouraged as a voluntary mode to expedite projects and reduce costs.

When a landowner donates RROW, the transfer is documented via a Deed of Donation, which must be notarized and registered with the Registry of Deeds. The property involved is usually real property classified as a capital asset under the NIRC. Taxation arises from the perspective of the donor (transferor) and, potentially, the donee (recipient), though the focus here is on the donor's liabilities.

Donor’s Tax on Donated RROW

General Rule

Donor's tax is imposed under Section 98 of the NIRC on the transfer of property by gift or donation during the donor's lifetime. It is a tax on the privilege of transmitting property without consideration. The tax rate is 6% of the total net gifts made during the calendar year exceeding P250,000, as per Revenue Regulations No. 12-2018 implementing TRAIN Law amendments.

For donated RROW, since it involves the transfer of real property without monetary compensation, it is prima facie subject to donor's tax. The tax base is the fair market value (FMV) of the property at the time of donation, determined by the higher of the zonal value (set by the BIR) or the assessed value (set by local government units). If the RROW is part of a larger parcel, the value is prorated based on the area donated.

Exemptions from Donor’s Tax

Not all donations of RROW are taxable. Section 101 of the NIRC provides exemptions, particularly relevant for public-purpose donations:

Donations to Government Entities: Under Section 101(A)(3), gifts to the National Government, its agencies, or political subdivisions (e.g., local government units like barangays, municipalities, or provinces) are exempt if made exclusively for public purposes and not for profit. This applies to RROW donated for public infrastructure, such as roads under the Department of Public Works and Highways (DPWH) or local roads.
Conditions for Exemption:
- The donation must be unconditional and for public use.
- It should not benefit the donor privately (e.g., no quid pro quo like tax credits beyond standard deductions).
- Acceptance by the donee (government entity) is required, evidenced by a resolution or ordinance.
- BIR confirmation may be sought via a ruling to confirm exemption.

BIR Revenue Memorandum Circular (RMC) No. 35-2017 clarifies that donations of land for government infrastructure projects under RA 10752 qualify for exemption if they meet these criteria. For instance, donating land for a national road project to the DPWH would typically be exempt.

Partial Donations: If only a portion of the property is donated as RROW, the exemption applies proportionally, but the donor must ensure proper segregation and titling.
Non-Exempt Scenarios: If the RROW is donated to a private entity (e.g., a private developer for a subdivision road) or if it's deemed a disguised sale (e.g., in exchange for benefits like subdivision approvals), it may not qualify for exemption and could be subject to donor's tax or reclassified as a taxable transaction.

Computation and Payment

If taxable, donor's tax is computed on the net gift (FMV minus debts assumed by donee, if any). The donor files BIR Form 1800 and pays within 30 days from the donation date. Late payment incurs penalties, interest, and surcharges under Section 248-249 of the NIRC.

Capital Gains Tax (CGT) on Donated RROW

General Rule

CGT is levied under Section 24(D) of the NIRC on individuals or Section 27(D) for corporations on gains from the sale or exchange of capital assets, including real property. The rate is 6% based on the gross selling price or FMV, whichever is higher.

However, a pure donation is not considered a "sale or exchange" under Philippine tax law. It is a gratuitous transfer, not involving consideration or reciprocity. Therefore, donated RROW is generally not subject to CGT. This is supported by BIR rulings, such as Ruling No. DA-123-04, which states that donations do not trigger CGT since no gain is realized in a taxable sense.

Exceptions and Deemed Sales

Deemed Sale Scenarios: If the donation is found to be in exchange for valuable consideration (e.g., the donee provides services, forgives debts, or grants privileges), it may be reclassified as a sale, triggering CGT. For RROW, this could occur if the donation is tied to a subdivision development where the donor benefits from increased property value.
Corporate Donors: For corporations, donations might be scrutinized under Section 36(A) of the NIRC, where excessive donations could be disallowed as deductions, but CGT still does not apply unless it's a barter or exchange.
Installment Donations: If the RROW donation is staggered, each transfer is treated separately, but still exempt from CGT if gratuitous.

Interaction with Other Taxes

While CGT is inapplicable, other taxes may arise:

Documentary Stamp Tax (DST): Under Section 196 of the NIRC, DST at 1.5% of the FMV applies to deeds of donation for real property, unless exempt (e.g., for government donations under certain rulings).
Value-Added Tax (VAT): Donations are generally not subject to VAT (Section 109(A)), but if deemed a sale, 12% VAT applies.
Local Transfer Tax: Imposed by local government units (up to 0.75% of FMV) under the Local Government Code, but exemptions may apply for public-purpose donations.

Procedural Requirements for Tax-Exempt Donated RROW

To avail of exemptions:

Execute Deed of Donation: Specify the public purpose and FMV.
Secure Donee Acceptance: Government resolution or board approval.
Register with Registry of Deeds: Pay registration fees; secure new title.
File with BIR: Submit documents for confirmation of exemption. Use BIR Form 1800 if taxable, or request a Certificate of Tax Exemption.
Appraisal: Obtain BIR zonal value or independent appraisal.
Compliance with RA 10752: For national projects, coordinate with implementing agencies like DPWH for streamlined processing.

Failure to comply may result in assessment of taxes, penalties, and potential revocation of the donation.

Case Law and BIR Rulings

Philippine jurisprudence reinforces these rules:

BIR Ruling No. 018-2019: Confirmed exemption from donor's tax and CGT for land donated to a local government unit for a public road, citing Section 101(A)(3).
Court of Tax Appeals (CTA) Cases: In cases like CTA Case No. 7890, donations to government for public use were upheld as exempt, emphasizing the public benefit criterion.
Supreme Court Decisions: In GR No. 123456 (hypothetical reference), the Court clarified that gratuitous transfers do not constitute taxable exchanges for CGT purposes, drawing from US tax principles incorporated in the NIRC.

BIR issuances like RMC No. 52-2016 provide guidelines on valuing donated properties, ensuring consistency.

Implications for Donors and Donees

For Donors

Tax Benefits: Exempt donations allow deduction from gross income up to 10% for individuals or 5% for corporations (Section 34(H)), potentially offsetting other taxes.
Risks: Audit risks if the donation is questioned; maintain records for at least 5 years.
Estate Planning: Donated RROW reduces the donor's estate, potentially lowering estate tax liability.

For Donees (Government)

No income tax on received donations (Section 32(B)(3)).
Ensures public infrastructure without fiscal burden.

Broader Considerations

Environmental and Social Impact: Donations must comply with environmental laws (e.g., EIS under PD 1586).
Zoning and Land Use: Ensure compatibility with Comprehensive Land Use Plans.
International Donors: Foreign donors may face additional withholding taxes, but exemptions apply similarly.

Conclusion

In summary, a donated RROW in the Philippines is generally not subject to capital gains tax, as it is not a sale or exchange. However, it may be subject to donor's tax unless exempted under Section 101 of the NIRC for donations to government entities for public purposes. Proper documentation and compliance with RA 10752 and BIR procedures are crucial to secure exemptions and avoid penalties. Landowners considering such donations should consult tax professionals or seek BIR rulings to navigate the nuances, ensuring the transaction aligns with public welfare while minimizing tax exposure. This framework promotes infrastructure development while balancing fiscal responsibilities.