Deductibility of donations
Deductibility of donations by: Elbert S. Cruz
Corporate social responsibility (CSR) has been a popular catchphrase in the business community. Some companies even create a separate department for it. The CSR philosophy stresses the importance of moral, ethical, and philanthropic responsibilities of companies whose focus is typically on the accumulation of wealth and compliance with the laws of the state. CSR must be a collective action not only by stockholders but also by various stakeholders, such as employees, suppliers and customers.
The nobility of giving donations to groups with special needs and interests has long been acknowledged by government, which has provided tax rules allowing good-hearted donors to enjoy certain tax privileges -- i.e., deductibility of donations and exemption from donor’s tax. Hence, these tax benefits should motivate business entities and encourage them to continue their CSR programs if these are accorded to them.
However, tax deductibility based on generosity and compassion is not always guaranteed because the donor is constrained by the requirements of tax deductibility as mandated by law. Lawmakers have decided to institute certain controls intended to prevent corporations from claiming non-existent or dubious donations to reduce their taxable income, and, on the other hand, to ensure that recipients of donations faithfully use the funds for the intended causes.
Full deductibility of donations is allowed only for donations to accredited nongovernment organizations (NGOs). For donations to NGOs that do not pass the accreditation requirements, the deduction is allowed only to the extent of 10% for an individual donor, and 5% for a corporate donor, of the donor’s business income as computed without the benefit of this deduction.
Hence, it has been a best practice for companies to deal with non-stock, non-profit corporations or organizations in the implementation of their CSR. The term "NGO" has been defined as corporation or association or organization referred to under Section 30 (E) and (G) of the Tax Code as created or organized under Philippine laws exclusively for the following purposes: religious, charitable, scientific, athletic, cultural, rehabilitation of veterans and social welfare, where no part of the net income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
Revenue Regulations No. (RR) 13-1998 has set the rules on the deductibility of contributions or gifts actually paid or made to accredited donee institutions in computing taxable income. The NGO must be accredited with the Philippine Council for NGO Certification, Inc. (PCNC). PCNC has been duly designated by the Secretary of Finance as the accrediting entity for NGOs. As the accrediting entity, it shall examine, evaluate and accredit non-stock, non-profit corporations and NGOs as a pre-requisite for their registration with the Bureau of Internal Revenue (BIR) as qualified-donee institutions. The PCNC is tasked to issue a Certificate of Accreditation to a non-stock, non-profit corporation/NGO after the determination that it meets the criteria for accreditation.
To be allowed full deductibility, the regulations further require the following conditions:
(i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received.
(ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed 30% of the total expenses for the taxable year;
(iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose/s, or to the State for public purpose/s, or would be distributed by a competent court of justice to another accredited NGO
to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized;
(iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property;
(v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization.
Donations and gifts to accredited non-stock, non-profit corporations/NGOs shall be exempt from donor’s tax provided that not more than 30% of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes.
A certificate of donation shall be issued on every donation or gift received by these accredited institutions. Within 30 days after the receipt of the Certificate of Donation, the donor must give a notice for every donation worth over P1,000,000 to the Revenue District Officer where his place of business is located. Donors and accredited non-stock, non-profit corporation/NGO shall file donations and contributions given and received respectively, at the time of filing their income tax returns.
For foreign donations, the Department of Finance (DoF) opinion dated May 16, 2011 states that, in general, all donations coming from abroad are subject to the payment of duties, taxes and other charges before they are released from customs custody. Only the following donations to NGOs may be granted customs duty exemption: (1) Donations to duly accredited relief organization of the Department of Social Welfare and Development pursuant to Sec. 105(1) of the Tariff and Customs Code of the Philippines; (2) Donations to non-stock/non-profit charitable and/or religious institution, including government and private hospitals duly registered with the Department of Health, upon favorable recommendation by the National Economic and Development Authority, in accordance with its existing rules and regulations. However, both donations are subject to the payment of value-added tax (VAT) under Section 107 of the National Internal Revenue Code, as amended. The only transactions which are exempt from VAT pursuant to Section 109(q) of the Tax Code of 1997 are those transactions under international agreements to which the Philippines is a signatory or those under special laws such as Republic Act No. 7277.
If corporations really want to exercise their moral, ethical and community responsibilities to the groups with special needs and concerns, tax benefits (or the lack thereof) would not be a hindrance to their cause. Helping our needy countrymen to alleviate their plight should be unconditional or even in the absence of any monetary considerations. Happy Independence Day.