MANAGING TAX RISKS: Should you pay tax on gifts?

The biblical Magi, in the Gospel of Matthew, who came “from the east” visited Jesus after his birth, bearing gifts of gold, frankincense, and myrrh. Giving and receiving gifts is among the traditions cutting across cultures and times.

Yesterday was a Boxing Day. Or should we rather call it “unboxing day” as gifts nowadays are mostly exchanged on or before Christmas? Let’s pack this semantics discussion for another day. The gifts could be money or other valuables. It is said that originally the Boxing Day was a day for giving away Christmas-boxes (to the less fortunate ones).

So, are gifts taxable? Or should gifts be taxed? A ‘NO’ could be your response. The questions sound pretty simple, don’t they? Especially if you have in your mind small items like a card, airtime, cake, foodstuff, clothes or even some small amounts of money. The argument is that even if one wants to tax these, the cost of collecting the taxes is likely to be higher than the resulting tax revenue. Or better still, the argument could that in giving gifts there is “no economic activity” to warrant taxation. Yes, that could true.

But what if the gift is something significantly valuable? For instance, a car, a house, shares, a phone, a computer, furniture, and other similar valuable things.

What if you receive from a friend ten thousand dollars as a Christmas gift? What is your employer gives you money as a Christmas gift? Should these be taxed? Puzzled, huh?

As a matter of tax policy, gifts are, generally, taxable. Making gifts generally untaxable would have opened a window for tax avoidance schemes. Employees would have been more inclined to be “remunerated” by their employers by big gifts rather than salaries which are taxable. Likewise, to avoid stamp duty and capital gains tax, transactions of share, lands, and buildings would be easily disguised as “gifts”. Also, business incomes could also be easily disguised as gifts and avoid income tax. Of course, there are some exceptions and specific cases where gifts may not be taxed. For example, when an employee receives a gift from the employer but not as a reward for or in return for acting as or being an employee. Or gifts that employees cannot easily turn into money

Any amounts of gifts or ex-gratia payments received by a person in respect of the person’s business are taxable amounts. Also, expenses related to gifts given by a business are not deductible unless the gifts are given to a public or charitable institution in which case such gifts cannot exceed 2 percent of the business taxable income.

So, whether gifts are taxable or not is not a simple question. And which taxes are we talking about? The few examples above are in respect of income tax. But the giving or receipt of a gift may trigger implications on different other taxes - VAT, Stamp Duty (if its land, share, or building for example), Import Duty (if the gift crosses borders). So, there are several factors that need to be looked at. The nature of the gift – money, services, goods, immovable property, shares. The relationships between the persons involved – employer to employee, a supplier to customer, customer to supplier. And the underlying reasons for giving the gift, just to mention a few.

You may have received a Christmas gift or have given way Christmas gifts with significant values and you are not sure what the tax implications are. To manage your potential tax risks, consult your tax advisor sooner than later. As we close the year 2018, I wish you a Happy and Prosperous New Year 2019.

Mr. Maurus is a partner with Auditax International