BIR Ruling [DA-036-03]

February 6, 2003 BIR RULING [DA-036-03] 34 (H) 077-90; 019-90; 003-2001; DA-191-2001 National Dairy Authority NDA Building, BAI Compound, Visayas Avenue 1100 Diliman, Quezon City Attention: Salvacion M. Bulatao Administrator Gentlemen : This refers to your letters dated November 14, 2001 and September 23, 2002, requesting for a BIR opinion on the following: 1. Full deductibility (from the donor's gross income) of the amount of donations to the National Dairy Authority (NDA) in connection with the latter's Milk Feeding Program, certified by the National Economic and Development Authority (NEDA) as a priority project included in the National Priority Plan; 2. Exemption of the donor from the payment of donor's tax levied under the Tax Code of 1997; and 3. Whether or not the following tax credits, allowed under Sections 17 and 18 of Republic Act No. 7884 (R.A. 7884), are valid and in harmony with the Tax Code of 1997: (i) tax credit of ten percent (10%) of the value of the volume of locally produced milk purchased by processors from dairy cooperatives; in excess of the volume prescribed by the NDA; and (ii) presumptive input tax credit of four percent (4%) of the value of milk producers' gross purchases from small farmers and small farmers' dairy cooperatives. Records show that on February 20, 1995, Congress approved Republic Act No. 7884, entitled "An Act Creating the National Dairy Authority To Accelerate The Development Of The Dairy Industry In The Philippines, Providing For A Dairy Development Fund, And For Other Purposes." It is the avowed policy under the said law that the Philippines shall strive for national self-sufficiency in milk and dairy products as a vital feature in the attainment of a self-reliant and independent Philippine economy in the provision of proper nutrition and the generation of more employment opportunities. One of the objectives of the law is to encourage and promote the active participation of farm families, rural cooperatives and the private sector, recognizing them as principal agents in the development of the Philippine dairy economy. To achieve the objectives of the law, the NDA was created as an attached agency to the Department of Agriculture (to be the central policy and directing body tasked to ensure the accelerated development of the Philippine dairy industry) and tax incentives were provided for under Sections 17 (tax credits) and 18 (full deductibility of donations, etc.). Thereafter, the NDA embarked on its "Milk Feeding Program", which was certified by the NEDA on August 2002 as a priority project included in the Philippine Government's National Priority Plan. The milk feeding programs assisted by the NDA procure milk from dairy farmers. These programs not only address malnutrition but also boost the market and generate income for dairy farmers. The NDA extends services to the dairy farmers, not for profit, but in accord with its mandate to strive for national self-sufficiency in milk and dairy products as a vital feature in the attainment of a self reliant and independent Philippine economy. Based on the foregoing, you seek an opinion from the BIR to allow the NDA to fully implement the provisions of R.A. 7884. In reply, please be informed as follows: 1. Pertinent portions of Section 34(H) of the Tax Code of 1997 provide: "SEC. 34. Deductions from Gross Income. "xxx xxx xxx "(H) Charitable and Other Contributions. "(1) In General. Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations, in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the case of a corporation of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. "(2) Contributions Deductible in Full. Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full: (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. "xxx xxx xxx" In relation, Section 18 of R.A. 7884 provides that: "SEC. 18. Exemption from Taxes and Duties. "xxx xxx xxx" "Any donation, contribution, bequest, subsidy or financial aid which may be made to the Authority shall constitute an allowable deduction from the income of the donor for income tax purposes and shall be exempt from donor's tax, subject to such conditions as provided under the National Internal Revenue Code, as amended. "xxx xxx xxx" Thus, with regard to the deductibility of donations for income tax purposes under Section 34(H) of the Tax Code of 1997, 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. EHSAaD Such being the case, donations made by private companies to NDA-assisted Milk Feeding may be deductible in full for income tax purposes based on the NEDA certification, dated August 26, 2002, stating that the Milk Feeding Program has been approved for inclusion in the National Priority Plan of the NEDA. Full deductibility of donations shall, however, be allowed only on the effective date of actual inclusion of the Milk Feeding Program in the National Priority Plan. Therefore, donations made before the inclusion of the Milk Feeding Program in the plan shall be deductible in an amount not in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the taxpayer's taxable income derived from business as computed without benefit of this deduction, pursuant to Section 34(H) of the Tax Code of 1997. 2. With respect to the donor's tax on donations made to NDA, Section 101(A)(2) of the Tax Code of 1997, in relation to Section 18 of R.A. 7884, as quoted above, provides: "SEC. 101. Exemption of Certain Gifts. The following gifts or donations shall be exempt from the tax provided for in this Chapter: "(A) In the Case of Gifts Made by a Resident. "xxx xxx xxx "(2) 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; and "xxx xxx xxx" In accordance with such, and since the donee, NDA, is an entity created under R.A. 7884, attached to a government agency, the Department of Agriculture, and not conducted for profit, donations made to NDA for the Milk Feeding Program under R.A. 7884 are exempt from the payment of donor's tax, ( BIR Ruling No. 003-2001, dated February 5, 2001 and BIR Ruling No. DA-191-2001, dated October 17, 2001 ) 3. Your third question requires further study since it involves privileges granted only under R.A. 7884 and which are not granted under the Tax Code. Our response shall be made in another ruling. cADSCT This ruling is being on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group