The Ungiving

I never thought that I would need to use the four letter word L-O-V-E in an argument among opposing counsels in a commercial transaction. But I did, with good effects. (To be fair, the word love even finds its way in the Philippine Constitution, and thus is also legal lingo.)

In this case, the other party argued that the cost of the transaction includes donor’s tax because there is a donation involved. In this transaction (using theoretical numbers), the buyer is purchasing for P100 (strike price) a property that has a market value of P200. The buyer can do this as he paid for the right to fix the price at P100 a few years ago (option contract).

In a purchase option contract, the buyer bets the price will go up, so he protects himself from price increase by paying an option fee to buy the property at an acceptable strike price. The seller agrees to this if he feels this ensures his income from a sure buyer. Or if the buyer does not proceed with the purchase later, the seller still earns an option payment at the outset.

Back to the case—the seller argues that he needs to pass on the donor’s tax because there is a donation as the strike price is lower than the market value of the property.
In tax law, if you sell property for less than adequate price, that transaction can in part be considered a donation. This actually makes sense. Did you ever come across those earlier crafted transactions where valuable property (like cars) is sold for one peso to transfer title? Those contracts are poorly crafted and they even look like hoax. They should be subjected to donor’s taxes.

The law says donations or gift giving is an act of liberality. The real consideration is the generosity of the giver. The real consideration is love, arguably. So when a transaction is being done for a legitimate business purpose, it is not done out of love, but for profit. And when property is bought at a strike price, that is the only price at which the sale can be enforced.

An example, with which I bet my readers identify more, are those “midnight madness” sales. They are too common now that quarterly “sales” have become regular. But at 30% to 70% discount, they create a scene of madness nonetheless. The retailer who offers a huge discount does not make a donation to the extent of the discount. The discount is not for the buyer, but for the seller so that he can dispose of his inventory and recover some costs. Because of the business motive, no generosity or donation can be alleged to be taking place.

As it is the season, it is apt to touch on some complexities of gift giving in the corporate world. There is no issue that one has the right to refuse gifts. But if you don’t, can someone refuse it for you? Yes, based on sound corporate practices. Gift giving and receiving is regulated to avoid exerting improper influence, as well as being influenced by factors other than on the merits. This obviously is beyond prohibiting employees from receiving commissions or freebies from suppliers. It includes any gift from a business contact, even during the Christmas season, except for those which are within the threshold. We have observed that allowable thresholds employed by corporations range between P2,500 and P5,000. If they exceed the corporation’s threshold, they should be reported to the company’s ethics officer who will decide if the recipient can keep the gift or do the following:

Gift to gift: he will be required to surrender the gift, which the corporation can give to charity; or
Gift to hope: the gift will be raffled off during a Christmas party of the employees and the original gift recipient will hope his name is drawn in the raffle.
But gift to secret: where the recipient will keep the gift secret is of course discouraged or not allowed. While corruption in the private ranks is not yet criminalized (unlike bribery or corruption of public officials), keeping one’s job seems to be incentive enough, while keeping decency and integrity intact seems to be the ultimate prize.

It may interest my readers to know that as early as 2003, the Philippines became a signatory to the United Nations Convention Against Corruption (UNCAC). The UNCAC encourages signatory countries to adopt policies, laws, against both public and private corruption. There is now a pending bill that seeks to make private corruption a criminal act. And the bill begins by calling gifts as “advantages”. Suddenly, gifts sounded evil.

Indeed, in the corporate world today, if integrity is our aspiration, we may really need to satisfy ourselves with: “it’s the thought that counts”. After all, the main consideration in gift giving is a legal term called l-o-v-e.