COLLEGE OF ACCOUNTANCY

C-AE25 BUSINESS TAXATION

First Semester AY 2023-2024

A. Course Code & Title : C-AE25 BUSINESS TAXATION

B. Module No. & Title : Module 9 – Introduction to Transfer Tax
C. Time Frame (Weeks/Hours) : 1 week (3 hours)

D. Overview

This learning material provides a discussion on the concept of the different types of transfer of
properties; the nature of transfer taxes and the rationalization of transfer taxes in the Philippines.

E. Desired Learning Outcomes

After the learning session, you should be able to

a) Determine the different kinds of transmission of properties and the applicable tax
b) Identify the types of taxpayers and their scope of taxation
c) Explain the rules of the situs of properties for purposes of transfer taxation
d) Distinguish the non-taxable transfer and their nature

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the following UA Core
Value/s:

✓ Servant Leadership
✓ Integrity
✓ Excellence
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Forms
✓ Group Chat
✓ Other tools _______________

H. Content/Discussion

Faculty: LIGAYA T. DAVID Page 1

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Lesson 1 - Concept of Transfer

Transfers refer to any transmission of property from one person (natural or judicial) to another. Natural
person refers to the individual taxpayer while juridical person refers to an entity created by operation of law
such as a corporation, partnership, or joint venture.

Types of Transfers
A. Bilateral Transfers - refer to the transmission of properties for a consideration. They are also known
as onerous transactions or exchanges. Examples of these transactions are sale, barter, or exchange of
properties. Since there is consideration involved, these are subject to business and income taxes.

B. Unilateral Transfers - refer to the transmission of properties from one person to another without any
consideration. They are also known as gratuitous transactions. Although there is no consideration involved,
these are subject to transfer tax (estate tax or donor’s tax ). Examples of unilateral transfers are donation and
succession.

1. Donation - gratuitous transfer of properties from a living donor to a donee. ( inter vivos)

2. Succession - gratuitous transfer of properties of a deceased person upon his death to his heirs (mortis
causa)

C. Complex Transfers - refer to transfers for less than full and adequate consideration. These are subject
to income tax and transfer tax. The realized gain is subject to income tax, while the transfer component is
subject to transfer tax.

Illustration SP
1.1 Mr. Kiko Man sold a property with an FMV of P100,000 and a cost of P80,000 for P120,000.

The transaction is a bilateral transfer and subject to income tax since the consideration received was more
than the FMV, and there was realized gain on sale
Gross Selling Price P120,000
Less: Cost 80,000
Realized Gain P 40,000 - subject to income tax

1.2 Mr. Kiko Man donated a lot with FMV of P500,000 to his son, Wookie for passing the CPA Licensure
Examination (CPALE).

The transaction is a unilateral transfer (Donation) and it is subject to Transfer Tax (Donor’s Tax)
because there was no consideration involved. SP
1.3 Mr. Kiko Man, sold a property with an FMV of P100,000 and a cost of P50,000 for P70,000.

The transaction is a complex transfer and it is subject to transfer tax and income tax
Fair Value P 100,000
Gratuity (Donation) 30,000 ( Transfer Tax )
Gross Selling Price P 70,000
Less: Cost 50,000
Realized Gain P 20,000 (Income Tax)
Lesson 2 - Rationale of Transfer Taxation

Faculty: LIGAYA T. DAVID Page 2

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

These are the reasons why transfer taxes are imposed on gratuitous transfer of properties.

A. The Tax Evasion or Minimization Theory

Some exchanges of properties may be intentionally priced at less than the FMV to evade or avoid the
payment of income tax. Thus, transfer taxes are imposed in order for the government to recover from the loss
of income tax.

B. The Tax Recoupment Theory

There are instances when taxpayers do not have the deliberate intent to avoid the payment of taxes
whenever they transfer properties to another person. But those transmissions of properties may result in a
decrease in the future tax collection of the government. Thus, transfer taxes are imposed.

Illustration

Mr. Chang has a 5-door apartment earning P1,000,000 annually. He wants to see his four sons enjoy their
share on the income derived from the apartment. So he decided to divide the property among his son. Thus
the annual income will also be divided among the sons.

Since we apply the graduated tax rate in determining the income tax due of an individual taxpayer, the above
transmission of the property will result in lesser income tax collection of the government because the income will
be divided among the four sons. So to recoup for the loss of income tax collection, the government imposes a
transfer tax on the transmission of the property (donor’s tax)

C. The Benefit Received Theory

When properties are transferred either by donation or succession, the government is involved in the
orderly transmission of the property from the donor to the donee or from the decedent to the heirs. Because of
the security of an effective and orderly transmission of property, the transfer should be subject to tax.

D. The State Partnership Theory

The government ensures that we have a society where we can accumulate wealth in an orderly and
civilized manner. Thus, we consider the State as an indirect partner behind this wealth accumulation. So it is
just proper that when a person transfers his properties to another, the State will take its share on the wealth in
the form of transfer tax.

E. Wealth Redistribution Theory

One of the elements of a sound tax system is equitable distribution of wealth. And taxation is a common
tool in redistribution of wealth among us. So when a person transfers his properties, the transmission should
be taxed in order for us to get our share on the wealth.
F. Ability to Pay Theory

If someone has the ability to transfer his property to another, it means he has the ability to pay taxes.
Thus, the transfer tax is imposed.

Faculty: LIGAYA T. DAVID Page 3

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

(PAVPDF) NATURE OF TRANSFER TAXES

1. Privilege Tax

Transfer taxes are imposed because the transferor (donor or decedent) is exercising his right to transfer
property
2. Ad Valorem Tax
the higher the amount the higher the rate
The amount of tax depends on the value of the property transferred.
.

3. Proportional Tax

Transfer taxes under the TRAIN LAW are computed at 6% of the net estate or net gift.
4. National Tax

Transfer taxes are imposed by the national government

5. Direct Tax

Transfer taxes cannot be shifted.

6. Fiscal Tax

Transfer taxes are levied to raise revenue for the support of the government.

CLASSIFICATION OF TAXPAYERS

1. Residents or citizens – Filipinos or foreigners who are permanently residing in the Philippines. They
are subject to tax on the transmission of all properties regardless of location.
subject to transfer tax within and outside PH
A. Resident citizen

B. Resident aliens

C. Non-resident citizens

2. Non-resident aliens – foreigners who are not permanently residing in the Philippines. They are subject
to tax on the transfer of properties located in the Philippines, except for intangible personal properties which
are subject to reciprocity rule XPU : IPP

Reciprocity Rule: The intangible personal properties of non-resident alien are exempted from transfer tax in the
Philippines, provided that the country of origin of the said alien also provides similar exemption on intangible
personal properties of Filipino non-residents therein.

SITUS OF TRANSFER - location of the property. Properties are transferred mortis causa in the place where they
are located. For properties transferred inter vivos, they are transmitted where they are located at the time of
donation.
mortiscavia place where located
Illustration
-

-
&

Inter virus located at time of donation

-

1.5 Mr. Park, a resident alien, donated a car in Korea and a parcel of land in the Philippines to his only son,
Jimmy
Since the donor is a resident alien, both the donation of a car in Korea and Land in the Philippines will be subject
to donor’s tax.

Faculty: LIGAYA T. DAVID Page 4

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

1.6 Mr. Park, a Korean, and resident of Seoul, South Korea, donated a parcel of land in Korea and a car in the
Philippines to his only son, Jimmy

Since the donor is a non-resident alien, the donation of a parcel of land in Korea is not subject to tax while the
donation of a car in the Philippines is subject to tax.
1.7 Mr. Park, Korean and resident Seoul, South Korea, donated his Investment in Bonds in the Philippines to his
son, Jimmy. South Korea provides exemption on the transfer of investments held by a Filipino citizen.

The donation is not subject to tax since the property donated is an intangible personal property donated by a non-
resident alien whose country of origin provides exemption on intangible personal properties owned by a Filipino
citizen.

CLASSIFICATION OF PROPERTIES

1. REAL PROPERTIES - properties attached to the soil with permanence. They are immovable properties.

Example - Land, Building, House and Lot, Apartment

2. TANGIBLE PERSONAL PROPERTIES - properties that could be transferred from one place to another.
morable
Example - vehicles, appliances, pieces of jewelry, clothes, watches, equipment, furniture, and fixtures
3. INTANGIBLE PERSONAL PROPERTIES - properties that do not have physical existence.

O
Example - cash, receivables, investments, interest in a partnership, patents, franchise, leasehold rights,
trademarks
Intangible properties located in the Philippines:
A. Interest in domestic business

B. Foreign securities under the following conditions:

1. Shares, obligations, or bonds issued by a foreign corporation, 85% of the business of which is
located in the Philippines

2. Shares, obligations, or bonds issued by a foreign corporation if such shares, obligations, or

bonds have acquired a business situs in the Philippines

3. Franchise exercisable in the Philippines

CLASSIFICATION OF DONATION

1. DONATION INTER VIVOS - gratuitous transfer of ownership occurs during the lifetime. It is subject to
donor’s tax.

2. DONATION MORTIS CAUSA - gratuitous transfer of ownership occurs upon the death of the decedent.
It is subject to estate tax.

A. Transfer in contemplation of death - the determining factor is the thought of death

B. Transfer intended to take effect at death
C. Incomplete transfers

Faculty: LIGAYA T. DAVID Page 5

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

NON TAXABLE TRANSFERS - transfer of properties which are not actually donations, so they are not subject to
transfer tax
1. VOID TRANSFERS - those that are prohibited by law

Donation of property not owned by the donor

A. Donation between spouses
B. Donations which do not manifest all essential requisites to validity such as donations refused by donee
C. Donations that do not conform to formal requirements such as oral donations of real properties.

2. QUASI TRANSFERS - these are the transmission of property which will never involve the transfer of
ownership

A. Transmission of the property by the usufructuary to the owner of the naked title
B. Transmission of the property by a trustee to the real owner
C. Transmission of the property from the first heir to a second heir in accordance with the will of the
predecessor.

4 Progress Check
1. PROBLEM: Identify the mode of transmission in the following cases:
A. Mr. Agustin sold his investment in stock costing P500,000 for P600,000. FMV at the date of sale is
P550,000.
B. Mr. Jim Kim donated P500,000 to Lung Center of the Philippines to help the hospital in acquiring
surgical masks.
C. Mr. Pagcu died due to COVID-19. He was not able to execute a last will and testament. He left properties
valued at P15M.
D. Mr. Reves sold his car to his bestfriend, Rudy for P500,000. The FMV of the car at the time of sale was
P1.2M. He bought the car two years ago for P1.5M.

2. Problem: Determine whether the following transmission of properties are taxable or not
taxable:
a. Mr. Puno, a resident of Manila sold a parcel of land for P1.5M
b. Mr. Smith, an American, and resident of New Jersey, USA, sold his investment in a domestic corporation
for P500,000 to his best friend, Roy.
c. Mr. Manio, Filipino citizen, donated his parcel of land in USA worth P2.5M to his only son, Jonjon.
d. Mr. Ruegas, Filipino and resident of Singapore, died on June 15, 2020. He left all his properties in
Singapore to his wife, Rose Ann.
e. Mr. Aki Koh, a Chinese and resident of Shanghai, China donated cash of P1M to his bestfriend Aro, as
wedding gift. China provides tax exemption to Filipino citizens on their donation of properties in China.

5 Assignment: Answer Multiple Choice Theory Part 1 and Multiple Choice Problems Part 2

6 Evaluation

A. Mr. Bonifacio, a resident citizen, died due to a vehicular accident on May 15, 2020. He was
survived by his wife and two children. The inventory of his properties as of June 15, 2020 was provided
by his wife.

Faculty: LIGAYA T. DAVID Page 6

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Cash P 1,500,000
Investment in stocks 600,000
Car 800,000
Other personal properties 200,000

Cash includes the amount donated by his parents on May 20,2020 amounting to P400,000. FMV of the
investment in stock at the time of his death was P500,000.

Required: Compute the amount of Gross Estate.

B. Mr. Ramos made the following donations on June 12, 2020

Philippines Abroad

Cash P 500,000 P 200,000

Investment in bonds 300,000
Vehicle 600,000
Land 800,000
Pieces of jewelry 50,000 300,000

Required: Compute the total amount of donation inter vivos assuming the donor is
1. Resident citizen
2. Resident alien
3. Non-resident alien with reciprocity rule

I. References

TRAIN LAW

CREATE ACT

Aduana, N. L. (2016). Simplified and Procedural Handbook on Transfer and Business Taxation.

Ampongan, O. E. (2015). CPA Review in Taxation. Iriga City, Philippines: Ampongan, Omar Erasmo G.

Ampongan, O. E. (2016). Transfer, Business & local Taxation. Iriga City, Philippines: Ampongan, Omar Erasmo
G.

Ballada, W., & Ballada, S. (2015). Transfer and Business Taxation. Manila City, Philippines: Domdane.

Banggawan, R. B. (2019). Business and Transfer Taxation Laws Principles and Applications. Baguio City,
Philippines: Real Excellence Publishing.

De Leon, H. S., & De Leon, H. M. (2016). The Law on Transfer and Business Taxation (with Illustrations,
Problems, and Solutions). Manila City, Philippines: REX Book Store.

Duncano, D. A. (2017). Easy Guide to taxation for Entrepreneurs. Mandaluyong City: Anvil Publishing, Inc.

Faculty: LIGAYA T. DAVID Page 7

COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Duncano, D. A. (2016). National Internal Revenue Code of 1997 As Amended Updated with Annotations.
Mandaluyong City, Philippines: Anvil Publishing, Inc.

Reyes, V. D. (2013). Philippine Business and Transfer Taxes. Philippines: Philippine Business and Transfer
Taxes.

Reyes, V. D. (2015). Taxation: Law and Accounting for the CPA Reviewees and the Bar Reviewer.

Tabag, E. D., & Garcia, E. J. (2017). Transfer and Business Taxation. Quezon City, Philippines: MaxCor
Publishing House, Inc.

Valencia, E. G., & Roxas, G. F. (2013-2014). Transfer and Business Taxation Principles and Laws with Accounting
Principles. Baguio City, Philippines: Valencia Educational Supply.

Module prepared by : LIGAYA T. DAVID

Reviewed/updated by : LIGAYA T. DAVID

Faculty: LIGAYA T. DAVID Page 8