Query: Will siblings be subjected to donor taxation if they file an Extra-Judicial Settlement (EJS) with waiver of rights in favor of their mother?

In the Philippines, the issue of donor's tax arises when a transfer of property or rights is made without adequate consideration. Specifically, donor's tax is levied on the gratuitous transfer of property between living persons. In the context of an extra-judicial settlement (EJS) of an estate, where siblings waive their rights to inheritance in favor of their surviving parent, the potential application of donor's tax must be carefully considered.

1. Understanding Donor's Tax

Donor's tax in the Philippines is governed by the National Internal Revenue Code (NIRC) of 1997, as amended. This tax is imposed on the transfer of property by way of gift from one person to another, where the transfer is gratuitous (i.e., without any consideration or compensation).

2. Extra-Judicial Settlement (EJS) with Waiver of Rights

An EJS is a legal procedure used to settle the estate of a deceased person without going to court, provided there is no will and the heirs are in agreement on the distribution of the estate. When heirs waive their rights to the inheritance, they effectively renounce their entitlement to a portion of the estate, allowing it to be transferred to another party, often another heir or the surviving spouse.

3. Tax Implications of Waiving Rights

In the scenario where siblings waive their rights in favor of their mother, the following points are critical in determining whether donor's tax applies:

Gratuitous Transfer: The waiver of rights by the siblings in favor of their mother is considered a gratuitous act. As such, it may be viewed as a donation under the tax code, potentially triggering donor's tax.
Consideration: If the waiver is done without any form of consideration or compensation, it strengthens the case for this transaction being a donation.
Relationship and Tax Rates: Donor's tax rates vary depending on the relationship between the donor and the donee. Transfers between parent and child generally attract a lower donor's tax rate compared to transfers between more distant relatives or non-relatives.

4. Exemptions and Thresholds

The NIRC provides certain exemptions and thresholds for donor's tax:

Annual Exemption: Each donor is entitled to an annual exemption of PHP 250,000 for total net gifts made during the calendar year.
Exempt Donations: Donations made to certain institutions or for specific purposes (such as charitable donations) may also be exempt from donor's tax.

5. Filing and Payment of Donor's Tax

If the waiver of rights is deemed to be subject to donor's tax, the following steps must be taken:

Filing: The donor must file a donor's tax return (BIR Form No. 1800) within 30 days after the date of donation.
Payment: The donor's tax must be paid at the time of filing the return. The tax rate ranges from 6% to 15% depending on the net gifts exceeding the annual exemption.

Conclusion

Siblings who file an EJS with a waiver of rights in favor of their mother may be subjected to donor's tax if the transfer is gratuitous and without consideration. It is crucial to evaluate the specific circumstances and consult with a tax professional to ensure compliance with the relevant tax laws and regulations. Proper documentation and timely filing are essential to avoid penalties and interest on unpaid taxes.