Passing on generational wealth is subject to corresponding taxes, called donor’s tax. According to tax services in Manila, this is levied by the BIR on a gift or donation. It is imposed on the voluntary transfer of the property between two or more people who live at the time the transfer was made. Learn more about the concepts behind the donor’s tax in this article.
The Concept of Theoretical Justice
One of the principles that can help achieve a good taxing system is theoretical justice. It is a principle that argues that tax laws should be equitable. That means that it should be based on the ability of the taxpayer to pay. Those who have less should be taxed less and those who have more capability to pay taxes should be taxed more.
According to tax and audit services in the Philippines, this principle is not always applied. One of the instances that it is not applied is when you end up being indebted to the government for waiving your right to receive a part of the inheritance of a property out of the estate of a deceased.
Letting Go of Inheritance
What happens when you waive your right to a part of an inheritance? The RMC or Revenue Memorandum Circular No. 94-2021 issued by the BIR on August 10 clarifies the donor’s tax treatment when a situation like this happens.
The RMC acknowledges the exemption of the donor’s tax when this happens. Tax and accounting services in the Philippines shared that this has led to the introduction of the concept of partial renunciation.
Defining Partial Renunciation/ or Waiver
It is a concept that happens when you, for example, are an heir that agreed to receive a certain property with an amount lower than your rightful share. Partial renunciation is involved because you are not letting go of your entire share but only some identified properties from the estate.
To illustrate and explain further, assume that a decedent left three real properties to three heirs entitled to an equal share of the estate. Each of the heirs should receive a third of the properties. If you are one of the heirs, you should receive a third of the properties.
However, you and the other heirs have decided and agreed upon yourselves to split the inheritance wherein one will renounce his part of the properties so each one of you will receive one of each of the properties. This then will make one heir subject to the donor’s tax for the partial renunciation.
The table above shows that after the partial renunciation, a 6% tax rate is imposed because the total value exceeds the tax-exempt amount of PHP 250,000. It would appear as if the tax burden was passed on to the person who receives the least which contradicts the theoretical justice principle. While income tax is based on the income of a person, donor’s tax is imposed on the freedom of the heir to directly or indirectly dispose of a property as a gift.
Donor’s Tax is Vastly Different from Income Tax
Although some people would see this as contradictory to the principle of theoretical justice, it’s important to take note that in reality, the person or heir who willingly waived his right to a part of the entire property signifies that heir’s ability to pay taxes. Partial renunciation is voluntarily done so the other heirs could obtain a bigger share. According to accounting services in the Philippines, heirs who do this should be aware of the consequences of their decision.
People who are privileged enough to directly or indirectly transfer one property to another must be prepared to shoulder the tax burdens imposed by the BIR to avoid potential problems. It is important to note that the principle of theoretical justice should not be understood as just imposing taxes on high-income earners. The theoretical justice implies that those who are in a better situation should bear the tax liabilities.
If you are considering letting go of your share of real estate, speak with our team of tax and accounting experts first because there’s a price involved when giving up your rights to property as an heir. Let’s calculate how much partial renunciation fees you’re set to pay. Take advantage of our tax and accounting services in Pasig. We offer a free 30-minute consultation.