Donor’s tax is the tax levied by the Bureau of Internal Revenue on any donation or gift. It is imposed on voluntary transfers of property between two or more individuals who are both still alive at the time the transfer occurred. It is the donor, or giver, who is responsible for paying this tax. Learn more about this issue below so you’re not remiss in paying the correct tax dues to the BIR. Staying informed on BIR problems and solutions can help you avoid paying penalties.
The Idea behind Theoretical Justice
When it comes to taxing systems like these, a main guiding principle is theoretical justice. This principle argues that all tax laws should and must be equitable, meaning within the capacity of taxpayers to pay. Therefore, those who are with less shall be taxed less, and those who have more should be taxed more. But, there are certain conditions and instances where this principle may no longer apply, such as when you find yourself indebted to the government for waiving your right to accept an inheritance of a property from the estate of a deceased person.
Revenue Memorandum Circular (RMC) No. 94-2021 clarified the specific treatment for an heir’s renunciation of his or her share of inheritance from a specific property. Generally, renunciation cases are granted donor’s tax exemption. This can happen when an heir agrees to be the recipient of a property valued lower than what it should have been as his rightful share if all properties are distributed equally among heirs. In this case, there is only partial renunciation, as the heir is only letting go of his share of certain properties and not his entire share of the estate.
Partial Renunciation Waiver Explained
A partial renunciation waiver is a concept that occurs when an heir agrees to receive a specific property, with an amount less than their rightful share. It is called such since you are only letting go of a certain share of certain properties.
To help you better understand, assume that a decedent left an inheritance of three real properties to three heirs, who are each entitled to acquire an equal share of the estate. Say you are one of the heirs, you would receive a third of the total estate. Take a look at the accounting breakdown of assets below.
Property 1 | 4,500,000 |
Property 2 | 6,000,000 |
Property 3 | 3,000,000 |
Total Value | 13,500,000 |
Number of Heirs | 3 |
Supposed Share of Each Heir | 4,500,000 |
But, say you and the rest of the heirs agreed to split the inheritance in such a way that one would renounce his part of the properties so each heir renounces their share in the other two properties and receives only one from the three properties. This scheme will then cause one heir to be subject to the donor’s tax.
Heir 1 | Heir 2 | Heir 3 | |
Supposed Share | 4,500,000 | 4,500,000 | 4,500,000 |
Received Value of Property | 4,500,000 | 6,000,000 | 3,000 |
Forgone Value Subject to Donor’s Tax | – | (1,500,000) | 1,500,000 |
Excluded from Donor’s Tax | 250,000 | ||
Total Amount Subject to Donor’s Tax | 1,250,000 | ||
Tax Rate | 6% | ||
Donor’s Tax Due | 75,000 | ||
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The computations above show that after the partial renunciation, a tax rate of 6% is imposed on the donor since the total value is more than the allowable tax-exempted amount of 250,000 pesos. The donor, heir 3, who donates 1,500,000 of their supposed share to heir 2, is taxed for this transfer. To most, it would appear as if the burden of paying the donor’s tax was given to the person who received the lowest value of a property, and one may guess that this undermines the principle of theoretical justice. However, note that the donor’s tax works differently from income tax, the latter with the tax exemption capped at P250,000.
Waiver of Rights Show Ability to Pay Taxes
Though some may see this as contradicting the principle of theoretical justice, in reality, the heir that waives their right to a part of the entire property signifies their ability to pay taxes. Partial renunciation is often voluntarily done so that other heirs can gain bigger and larger shares.
That said, those who engage in this kind of transfer should be aware of all resulting consequences, and that those who are privileged to indirectly or directly transfer one property to another must bear the tax burden. The principle of theoretical justice is not blindly imposing on high-income earners, rather it is the implication that those in better-off situations should be capable of bearing tax liabilities.
Before you decide to waive your rights, know how much the burden will be on you. Find out the specific accounting and the exact number you will have to pay to make an informed choice. Talk to our team of accounting experts for assistance. We’d be happy to help you iron out the details of this transaction.
