BIR Ruling [DA-048-06]

February 15, 2006 BIR RULING [DA-048-06] R.A. No. 7278; BIR Ruling No. 018-00; S30-04-01; S30-013-06; 013-04; & DA-408-04 Boy Scouts of the Philippines 181 Natividad Almeda-Lopez St. Ermita, Manila Attention: Mr. J. Rizal C. Pangilinan Secretary General Gentlemen : This refers to your letters dated July 22, 2005 and October 28, 2005 requesting for rulings that donations given to Boy Scouts of the Philippines (BSP) are exempt from donor's tax, and the sale of its Davao property is exempt from capital gains tax. Documents show that BSP was created by virtue of Republic Act (R.A.) No. 7278, otherwise known as "An Act to Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define Its Powers and Purposes." In deciding the issue of whether the employees of BSP are embraced within the Civil Service and are accordingly governed by the Civil Service Law and Regulations, the Supreme Court in Boy Scouts of the Philippines v. National Labor Relations Commission (196 SCRA 176, decided on April 22, 1991) held that "the BSP may be regarded as both a 'government-controlled corporation with an original charter' and as an 'instrumentality' of the Government within the meaning of Article IX(B)(2)(1) of the Constitution." It is a non-stock, non-profit public corporation the purpose of which is "to promote through organization and cooperation with other agencies, the ability of boys to do useful things for themselves and others, to train them in scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility, courage, self-reliance, discipline and kindred virtues, and moral values, using the method which are in common used by boy scouts." Section 8 of R.A. No. 7278 provides, viz: "SEC. 8. Any donation or contribution which from time to time may be made to the Boy Scouts of the Philippines by the Government or any of its subdivisions, branches, offices, agencies or instrumentalities or by a foreign government or by private entities and individuals shall be expended by the National Executive Board in pursuance of this Act. ETHaDC The corporation shall be entitled to the following tax and duty privileges. (a) Exemption from income tax pursuant to Section 26(e), (g), and (h) of the National Internal Revenue Code, as amended; (b) Exemption from donor's tax pursuant to Section 94(a)(3) of the National Internal Revenue Code, as amended; (c) Full deductibility of donations from the donor's gross income for purposes of computing taxable income; and (d) Tax and/or duty exemption of donations from foreign countries as provided under relevant laws such as, but not limited to Section 105 of the Tariff and Customs Code of the Philippines, as amended, Section 103 of the National Internal Revenue Code, as amended. Any other provisions of law to the contrary notwithstanding, there shall be no discrimination in tax treatment of the Boy and Girl Scouts of the Philippines." Currently, BSP has been experiencing some financial difficulties stemming from its non-inclusion in the budgetary appropriations of the Government. Thus, the whole management is doing its best to find some ways to augment its budgetary constraints. One of these means is to tap individuals and business entities that are supportive to the cause of the organization. In reply, please be informed as follows: Donation to BSP is exempt from donor's tax . Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984, and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of government-owned or controlled corporations and all other units of government and private entities. Although Executive Order No. 93 effective March 10, 1987 also withdrew all tax and duty incentives granted to government and private entities, we note, however, that R.A. No. 7278 amending Commonwealth Act No. 111, granting tax privileges to BSP was approved on March 24, 1992, thereby lifting, in effect, the withdrawal of tax exemption of BSP, in particular. Since R.A. No. 7278 extended the benefit of Section 94(a)(3) of the NIRC (now Section 101(A)(3) of the Tax Code of 1997) and Section 30(h) of the same Code (now Section 34(H) of the Tax Code of 1997) to BSP, contribution/donation to BSP shall be exempt from donor's tax subject to the condition that not more than 30% of said gift shall be used by the donee for administration purposes. However, in case of donation of real property, the Register of Deeds shall annotate this condition at the back of the Transfer Certificate of Title (TCT) because failure to comply with the said condition (compliance with the level of administrative expense) shall be a ground for the revocation of the donation pursuant to Article 764 of the New Civil Code. Section 185 of Regulations No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations, implementing Title VII of the Tax Code, provides that conveyances of realties not in connection with a sale, to trustees or other persons without consideration are not taxable. Accordingly, the deed of donation is not subject to the documentary stamp tax (DST) prescribed under Section 196 of the Tax Code, as amended, but only to the DST of P15.00 imposed under Section 188 of the Tax Code of 1997. Moreover, contributions/donations made in favor of BSP shall be entitled to full deductibility from the gross taxable income of its donors. ASHEca On the other hand, donation in cash coming from a non-resident shall not be subject to any Philippine tax since non-residents are beyond the taxing jurisdiction of the Philippine Government (cited in BIR Ruling No. 115-99 dated August 6, 1999). In this connection, it may be stated that should such donation materialize, a non-resident donor is required to submit to this Office a copy of the Deed of Donation covering the aforesaid gift with the signature of the authorized representative of the non-resident donor, notarial commission and signature of the Notary Public acknowledging the instrument of donation duly authenticated by the Philippine Consulate General of the donor's residence. Sale of BSP's Davao property is subject to capital gains tax . The last paragraph of Section 30 of the Tax Code of 1997 (then Section 26 of the Tax Code, as amended), which BSP invokes as its legal basis to support its claim for tax exemption, clearly subjects to tax the income of whatever kind and character derived by any organization otherwise exempt under the same section, from any of its properties or activities conducted for profit, regardless of the disposition made of such income. Specifically, the Tax Code provides thus: "SEC. 30. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxx xxx xxx (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; xxx xxx xxx Notwithstanding, the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any properties, real or personal, or from any of the activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code ." (Emphasis supplied.) The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 (then Section 26), particularly, does not leave any room for interpretation; the income from any of the organization's properties is subject to tax under the Tax Code, regardless of the disposition made of such income. In relation to this, Section 30 of Revenue Regulations No. 2, as amended, provides, among others, that the income of such tax-exempt corporation which is considered as income from its properties, real or personal, includes profits from the sale of property. In other words, the sale by BSP of its real property shall be subject to the corresponding income tax imposed under the Tax Code of 1997. The Constitution mandates that "charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." [Section 28(3), Article VI, Constitution] (Emphasis supplied) SADECI Although the above-quoted constitutional provision seems to grant a sweeping tax exemption, the Supreme Court of the Philippines, in the case of Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965, held that the phrase "exempt from taxation" similarly contained in the 1935 Constitution should not be interpreted to mean exemption from all kinds of taxes. Thus, although in that case the cash received was actually spent by the parish priest for the intended purpose of constructing a new Catholic church, the Court nevertheless ruled against the exemption applied for in view of the interpretation it has given the Constitutional provision. The Highest Tribunal ruled that the exemption provided by the Constitution is only from the payment of taxes assessed on such properties enumerated as property or realty taxes. Finally, it held that there was no clear, positive or express grant of exemption privilege by law in favor of petitioner therein, hence, the denial. In view of the above Supreme Court decision, this Office ruled in BIR Ruling No. 121-91 dated June 25, 1991 that the excess of the selling price over the acquisition cost of the property (i.e. the profit/income) to be sold by the Society of Divine Word and used exclusively for religious purposes shall be subject to income tax/capital gains tax. The same BIR Ruling No. 121-91 expressly revoked BIR Ruling No. 569-88 dated November 29, 1988. On the other hand, BIR Ruling No. 569-88 expressly revoked BIR Rulings Nos. 65-80, 66-80, 67-80 and 165-84. Other BIR Rulings, DOJ Opinion, and the Manila Polo Club (CTA Case No. 298 decided on August 31, 1959) and Xavier School, Inc. (CTA Case No. 1682 decided on October 8, 1969) cases which exempted from income tax the gain derived from the sale of property based on an "isolated transaction" and using the proceeds thereof to purchase another property for a new site in furtherance of the purposes for which the respective organizations in the said cases were established, are subordinate to the Supreme Court case of Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965. Moreover, government-owned or -controlled corporations, agencies or instrumentalities of the government are no longer exempt from taxation and shall be liable to pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in similar business, industry or activity (Section 27(C) of the Tax Code of 1997). In view of the foregoing, this Office hereby rules that the sale by BSP of its Davao property is subject to capital gains tax based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or buildings pursuant to Section 27(D)(5) of the same Code (Section 4(c)(i), Revenue Regulations No. 7-2003). 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 as null and void. DcIHSa Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue