SGV & Co.

January 22, 2008 BIR RULING [DA-026-08] 34 (H); 101 (A); 196 DA-562-06; DA-611-06; DA-576-06 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated September 12, 2007 requesting on behalf of your client, Philippine Associated Smelting and Refining Corporation, ("PASAR"), with principal office at Leyte Industrial Development Estate (LIDE), Isabel, Leyte, confirmation on the tax implications arising from its donation of several parcels of land to the Province of Batangas to be developed as a world class encampment site/training facility and youth camp consistent with the Medium Term Regional Development Plan of ensuring decent facilities for sports, arts and culture for the youth. It is represented that PASAR is a registered enterprise with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 82-40 dated September 23, 1982. PASAR's registered activity is the manufacturing of copper cathodes and its by-products namely: dore metal, sulfuric acid, granulated slag, iron concentrate slag, tellurium, palladium, platinum, gypsum, EP dust, selenium powder and copper tellurideare. THAICD On February 1, 2007, PASAR entered into an Agreement to Donate Parcels of Land ("Agreement to Donate") with the Province of Batangas (the "Donee") whereby PASAR offered to donate, and the Donee has agreed to accept the donation of several parcels of land all located in Imelda, San Juan, Batangas to be used in undertaking priority activities of the government or in economic development according to the national priority plan determined by the National Economic and Development Authority ("NEDA"). Based on the 2005 Audited Financial Statements of the Company, the aforementioned land has not been used in operations and booked as non-current assets, hence, classified as capital asset. SaIEcA In a Letter dated August 17, 2007 signed by Mr. Severino C. Santos, Regional Director of NEDA, he recognized the importance of the property to the province, to develop it as a world class encampment site/training facility and youth camp. The development plan of the province in relation to the donated land is consistent with the Medium Term Regional Development Plan of ensuring decent facilities for sports, arts and culture for the youth. In a Certification dated August 24, 2007 signed by Mr. Benjamin DJ. Nepales, Provincial Secretary of the Sangguniang Panlalawigan ng Batangas, he certified that the New Sangguniang Panlalawigan ng Batangas passed a Resolution No. 054, Year 2007, authorizing the Provincial Governor Honorable Vilma Santos-Recto to enter into a Deed of Donation with PASAR. In view thereof, on August 30, 2007, the parties executed a Deed of Donation for several parcels of land all located at Imelda, San Juan, Batangas to be used in undertaking priority activities of the government or in economic development according to the national priority plan determined by the NEDA. Based on the foregoing, you are requesting confirmation of your opinion as follows: IHaSED 1. The donation of several parcels of land in favor of the Province of Batangas is exempt from donor's tax pursuant to Section 101 (A) (2) of the 1997 Tax Code, a amended; 2. The donation by PASAR to the Province of Batangas is deductible in full from its gross income subject to regular corporate income tax pursuant to Section 34 (H) (2) (a) of the 1997 Tax Code, as amended; and 3. The Agreement to Donate and Deed of Donation executed between PASAR and the Province of Batangas are not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended. HDcaAI In reply thereto, please be informed as follows: 1) The aforementioned donation by PASAR to the Province of Batangas is exempt from donor's tax in accordance with Section 101 (A) (2) of the Tax Code of 1997, as amended, which provides that 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 shall be exempt from tax. (BIR Ruling No. 021-96 dated February 21, 1996) ECDaAc 2) Section 34 (H) of the Tax Code of 1997, as amended, provides viz .: "Sec. 34. Deductions from Gross Income . Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26, 27(A), (B), and (C) and 28(A)(1), there shall be allowed the following deductions from gross income: IcESaA xxx xxx xxx (H) Charitable and Other Contributions. xxx xxx xxx (2) Contributions Deductible in Full. . . . xxx xxx xxx (a) Donations to the Government. Donations to the 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), in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;" TaCEHA Thus, with regard to the deductibility of donations for income tax purposes, under the above-quoted provision, the same are deductible in full if they are given to the Government or to any of its agencies or political subdivision to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development as described in the priority plan prepared by the NEDA. In view of the forgoing, since the donation made by PASAR to the Province of Batangas is recognized by NEDA to be consistent with its Medium Term Regional Development Plan, said donation, therefore, is deductible in full from its gross income. PASAR, being a domestic corporation, is subject to the regular income tax rate of 35% based on the net taxable income ( i.e., gross income less allowable deductions) derived from non-registered activities as provided under Section 27 (A) of the 1997 Tax Code, as amended. PASAR may claim in full as tax deduction in the year of the donation the value of the property donated to the Province of Batangas against its gross income subject to regular corporate income tax pursuant to Section 34 (H) (2) (a) of the 1997 Tax Code, as amended. (BIR Ruling DA-562-06 dated September 19, 2006; DA-600-06 dated October 10, 2006; and BIR Ruling DA-611-06 dated October 11, 2006) THCSEA 3) The above donation made by PASAR in favor of the Province of Batangas is not subject to the documentary stamp tax (DST) imposed under Section 196 of the Tax Code of 1997, as amended. As consistently held by this Office, donation to a local government is exempt not only from the imposition of the donor's tax but also from the imposition of DST. Under the existing provision of the Tax Code of 1997, as amended, and rationalizing that because the donation redounds to the benefit of the government and serves the best interest of the public, donation to the local government is exempt from DST under Section 196 thereof. Accordingly, the Agreement to Donate and the Deed of Donation executed between PASAR and the Province of Batangas are not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended. However, a DST of P15 shall be imposed under Section 188 of the Tax Code of 1997, as amended, for each notarial acknowledgement on said documents. (BIR Ruling DA-576-06 dated September 22, 2006) cEAaIS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cHATSI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service