WHEN IT COMES TO DONATIONS

Let's see how well you know tax regulations with this tricky scenario.

Mr. Albay converted the frontage of his house, which is his primary residence, into a shop that sells pandesal. To ensure everything was done properly, he registered as a VAT-registered sole proprietor with the BIR.

As Mr. Albay aged, he decided to prepare for the future by donating his primary residence (including the successful bakeshop) to his son.

Question: Which taxes will the donation be subjected to?

A. Donor's Tax

B. Income Tax

C. VAT + Income Tax

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Nobody got the correct answer because it's not in the options presented 😅✌🏻. The correct answer is VAT + Donor's Tax.

It seems counter-intuitive, but it's because the BIR will view the donation of a property (used in business) as a sale. This is even if the property is the donor's primary residence.

Initially, my answer was VAT+Income Tax. But after careful review, the donor didn't get any money from her daughter (since it's donated), so there's no income to tax.

However, VAT is PAYABLE for the donation.

In BIR RMC No. 99-2023, the BIR explicitly cites a Q&A example.

"The lot where the taxpayer's bakeshop is established is inherited by the taxpayer proprietor from his ancestors. The said lot was donated to his daughter, for which he paid donor's tax. However, the operation of the bakeshop remained under the name of the taxpayer-transferor. Is the donation of the lot be considered a "deemed sale" subject to VAT?

Answer: Donation by a VAT-registered person of a property classified as an "ordinary asset" shall be considered a transaction "deemed sale," hence, subject to VAT pursuant to Section 106 (B)(I) of the NIRC, as amended, and Section 4.106-7 of Revenue Regulations No. 16-2005, as amended.

In this case, the donated lot is classified as an "ordinary asset" as it is used in the course of business of the donor-taxpayer (Section 39(a) of the NIRC, as amended; Section 2(b)(4) of Revenue Regulations 7-2003).

Thus, if the donor-taxpayer is a VAT-registered person, the donation of the lot is considered a transaction "deemed sale" subject to VAT. If the donor-taxpayer is not a VAT-registered person, the donation is exempt from VAT.

Further, while the lot was donated to the taxpayer's daughter, the same is still being used in the operation of the business of the taxpayer. Therefore, the classification of the lot after the donation remains to be an "ordinary asset" in accordance with Section 3(f)(1) of Revenue Regulations 7-2003."

Lesson: NEVER USE PERSONAL PROPERTIES FOR YOUR BUSINESSES.