Tax implications of donations

The human tragedy brought about by Super Typhoon Yolanda has resulted in an outpouring of sympathy from companies and individuals who have been donating to various humanitarian and government agencies. The Bureau of Internal Revenue (BIR) has commented on the taxes due on donations.  To be sure, many companies are aware of the implications of donor’s tax, the value-added tax (VAT), and the deductibility of donations. But lest the BIR be “misunderstood” for enforcing the law, some details should be provided on these laws, rules and regulations which govern donor’s tax, and other tax implications of donations. Moving from there, maybe some of these rules can be reconsidered in the light of the current state of national calamity.

The general law is that a donor’s tax of 30 percent of the net gift is imposed on donations made to a stranger.  A stranger is anyone who IS NOT a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or relative by consanguinity in the collateral line within the fourth degree of relationship). On the other hand, any donation above P100,000 made to a “non-stranger” is subject to a donor’s tax at rates provided in the Tax Code.

Now that we have cleared that hurdle, the following donations made by either residents, or non-residents who are not citizens of the Philippines, are exempt from donor’s tax:

1. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government, including government owned and/or controlled corporations.  Examples of said entities are the National Disaster Risk Reduction and Management Council under Republic Act (RA) No. 10121, and Department of Social Welfare and Development.  NOTE, however, that the BIR requires that a BIR Ruling should be issued on a per transaction and case to case basis (BIR Ruling No. 165-12, 09 March 2012).

2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, collectively referred to as NGOs, provided that these are qualified donee institutions (i.e., they have a BIR Certificate of Registration/Ruling confirming their tax exempt status, and acknowledging their accreditation with the Philippine Council for NGO Certification, Inc.).  NOTE that the donations have to be used specifically for one or more of the purposes for which the donee entity was created or organized.  In the context of aid to victims of the super typhoon, these purposes would probably be “charitable activities” and “social welfare purposes”.  NOTE FURTHER that under Revenue Memorandum Order No. 20-2013, existing certificates of registration/rulings issued by the BIR prior to 30 June 2012 have to be “revalidated” before 31 December 2013.

Gifts to other entities when there exists a special law exempting the entity from donor’s tax.  An example would be the Philippine National Red Cross (PNRC), under RA No. 10072.

The next question would be whether the donations are deductible from the gross income of the donors.  Deductions are only allowed in full if the donations were made to the following entities:

Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA).

Foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws.

The NGOs mentioned above.

Otherwise, donations to the government for activities not covered by a National Priority Plan, or to “non-qualified” NGOs would be deductible only to the extent of 10% in the case of individuals, and 5% in the case of corporations, of the donor’s taxable income derived from trade, business or profession as computed without the benefit of the deduction stated in Section 34(H)(1) and (2) of the Tax Code.  Note that Section 5(c) of RA No. 10072 provides that donations to the PNRC to support its purposes shall be deductible from the gross income of the donor.

Note that deeds of donation are generally subject to the documentary stamp tax (DST) at the rate of PhP15.00 per deed.

Finally, donations subject to the VAT in two cases:

When the donation in kind is imported into the Philippines, and When the (local) donation consists of goods or properties originally intended for sale or for use in the course of business.

All that having been said, maybe the following rules should be reconsidered:

The need to get a BIR Ruling confirming that the donation to the government entity is exempt from donor’s tax.  This requires the submission of documents substantiating the donation to the government.  While the BIR appears to be doing its best to release rulings, the magnitude of donations currently being done will create an even larger workload for the concerned BIR divisions tasked to draft these rulings.  Can’t substantiation be done instead when, and if ever the donor is subject to an audit investigation?  Can the BIR consider drafting an issuance which would state which specific documents would be needed to substantiate the donation, for exemption from donor’s tax and for deductibility of the donation, without the need for a BIR Ruling?

All existing certificates of registration/rulings issued to accredited or qualified NGOs dated prior to 30 June 2012 will expire on 31 December 2013.  Does this mean that the allowances for deduction and exemption from donor’s tax on donations to these NGOs will no longer be allowed?  While some of us may understand the need to re-certify NGOs (based on the current political situation), can’t this deadline be extended?  There are NGOs that are in the proverbial thick of the distributing relief goods and services, and the need for their continued aid isn’t expected to lessen by the end of the year.  Will an extension of the deadline have that bad an effect on the BIR’s verification and collection efforts?

 RA No. 10121 basically provides that the VAT on importations of donations consigned to the NDRRMC shall be addressed by the prevailing General Appropriations Act.  In other words, the VAT on importations will be shouldered by the National Government.  Shouldn’t the VAT on local donations also be covered under this rule?

To be fair to the BIR, I am sure that these questions are at the top of the BIR leadership’s minds.  While some entities may be ready to shoulder all taxes in the spirit of unconditionally providing humanitarian aid, wouldn’t reconsideration of the above rules be fair to the donors and their beneficiaries?

Andrew James Gerard D. Ruiz is a Senior Manager from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com.

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.