The non-transferability of donor’s tax

Taxwise or Otherwise By Roselee B. Santos

Taxation law is composed of myriads of laws, regulations, rulings and other issuances -- it’s overwhelming even to professional practitioners. From time to time, however, the courts are able to cut through extraneous matters and deliver clear guidance not only for taxpayers but also for tax authorities.

One such instance is the recent case decided by the Court of Tax Appeals (CTA) on Jan. 27, 2016. The issue facing the court was whether a domestic corporation that received additional capital by way of contribution from its non-resident shareholder is liable as a donee to pay the alleged donor’s tax on the contribution.

In context, the issue arose when a non-resident foreign company shareholder contributed P30 million to the investee-taxpayer under a Capital Infusion Agreement to sustain the viability of the taxpayer’s business operations. The taxpayer’s Audited Financial Statements disclosed the amount as proceeds from donation. On that basis, the Bureau of Internal Revenue (BIR) assessed and demanded payment of deficiency donor’s tax from the taxpayer.

Considering that the taxpayer recorded the amount as a donation, the Court saw no need to settle the question of whether there was actually a donation since the taxpayer had already admitted such fact. Although it would be interesting, to say the least, to know whether capital contribution in the form of additional paid-in capital should be considered a donation, the Court considered it moot and academic.

Instead, the Court focused on resolving these questions: is donor’s tax a direct or indirect tax? Consequently, who is liable to pay for it?

Of course, it is a safe assumption that the BIR is well aware that donor’s tax is a direct tax that should be paid by the giver or contributor. In fact, the term “donor’s tax” already implies that it is a tax on the donor, and not on the recipient.

Further, all the relevant requirements to pay the tax point toward the donor as the party that must report, file, and pay the tax. Nowhere is there a requirement that the donee must pay for the tax, whether directly or in behalf of the donor.

However, in trying to justify the filing of the case against the donee, it is evident that the BIR was mindful of the fact that the donor was a foreign entity beyond its tax jurisdiction. Unable to enforce its authority on the donor, the BIR instead went after the taxpayer-donee, a domestic corporation subject to the laws of the Philippines.

The CTA disagreed with the BIR. As the tax sought to be imposed is a donor’s tax, the Court ruled that a donee may not be made liable for its payment. Section 13 of Revenue Regulation No. 2-2003 explicitly provides that the person making a donation shall be the one required to accomplish and file a donor’s tax return. This is in line with Section 98 of the Tax Code, which provides that the donor’s tax shall be levied on the transfer by any person, resident or nonresident, of a property by gift.

Thus, it is clear under the law, as well as the BIR’s regulations, that the donor’s tax is a direct tax that can only be imposed on, and paid by, the donor. Consequently, the CTA ruled that the liability for donor’s tax falls on the donor’s shoulders and is, therefore, not transferable.

This case is novel in the sense that the principle of “non-transferability of the burden of direct tax” had not been previously applied to donor’s tax. Although the Supreme Court (SC) already had occasion to explain the nature of direct and indirect taxes, jurisprudence only goes so far as to state that transfer taxes, specifically donor’s tax, are classified as direct taxes. The recent CTA case, therefore, is the first court decision to directly apply the said principle to donor’s taxes.

There were other issues left undecided by the CTA because answering the question on who should bear the tax seemed the end of it. However, it would have been equally important, if not more so, to discuss whether additional capital contribution should be considered a donation in the first place.

For now, we may have to wait for the resolution of the BIRs’ appeal to see if this other equally important issue will be tackled more directly -- pardon the pun.

Unfortunately, until the BIR reconsiders this position, other taxpayers may find it necessary to contest similar assessments or impositions.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.