IIRC from my Aludran Priest(2-3 years ago), no damage reduction spells on the priest does not stack with damage reduction. Also from what I could tell it was a straight half of the percentage of damage taken after all damage reduction on the target, not a calculation of actual HP taken.

It is a sick buff and a huge game changer. The only problem with it, IMO is that it can be held by a priest that doesn't have to be in combat. I think if was only able to be held by a priest in your group/combat with you it would balance it out a lot more. It is honestly OP'd right now, it can be held on a warrior by a priest that sits in a corner and spam heals/quaff heals themselves with no danger. If you are forced to be in combat with the person receiving the buff it helps even it out. On my max con/max HP aludran priest if I was in combat with the person I was holding devotion on I could be targeted and often was. It forced me to carry heals on me or have to cast heal at myself. Made it a little more interesting to hold. It wasn't a big deal at -all- in PVE but made a big change in PVP.