BIR Ruling [DA-061-05]

February 22, 2005 BIR RULING [DA-061-05] Philippine Council for NGO Certification 6/F SCC Bldg., CFA-MA Compound 4427 Interior Old Sta. Mesa Road Sta. Mesa, Manila Attention: Ms . Fely I. Soledad Executive Director Gentlemen : This refers to your letter dated January 14, 2005 requesting for an opinion on the following: (1) Is there a limit to what a corporation can donate within a taxable year? (2) If so, what is the percentage, and how is the percentage reckoned? From the corporation's gross or taxable income? In reply, please be informed that the Tax Code of 1997 does not provide for a provision on the limitation of amount of donation. The Tax Code, however, provides for the limitation of amount of deductibility of donation from taxable income. Pursuant to Section 34() thereof in relation to Batas Pambansa Blg. 45, a donation to the Government of the Philippines or to any of its agencies 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 for the rehabilitation of veterans or to social welfare institutions, or to non-government organizations, 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 to be determined by the National Economic and Development Authority (NEDA), no part of the net income of which inures to the benefit of any private stockholder or individual, shall be deductible in full from the donor's taxable income. If the donation is not in accordance with the said annual priority plan, the same is not deductible in full for income tax purposes, but only to the extent of an amount not in excess of ten percent (10%) in the case of an individual donor, and five percent (5%) in the case of a corporate donor, of the donor's or contributor's taxable net income as computed without the benefit of said contribution or donation. IDEHCa Nevertheless, Section 752 of the Civil Code of the Philippines provides that no person may give or receive, by way of donation, more than he may give or receive by will. The donation shall be inofficious in all that it may exceed this limitation. However, the donation cannot be attached for inofficiousness till after the death of the donor. Pursuant to Section 750 of the same Code, a person cannot donate all his present property, even if he has no compulsory heirs, but he must reserve enough to support himself and those who are entitled to receive support from him, as well as to pay his creditors. Moreover, Section 36(9) of the Corporation Code of the Philippines provides that every corporation has the power and capacity to make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civil or similar purposes provided that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity. Under the Code, the only limitations imposed on the authority of a corporation to make donations are: (1) the amount thereof must be reasonable, and (2), the donations must not be in aid of any political party or candidate or for purposes of partisan political party or candidate or for purpose of partisan political activity. It is not required by law that the donation should inure to the direct financial benefit of the corporation, nor that the donation be taken from corporate earnings as long as it is "reasonable" under the circumstances; hence, it may be paid out of capital although stockholders and creditors who may feel aggrieved are not denied the right to question the exercise of the power (The Law on Partnerships and Private Corporations by Hector S. de Leon, 1993 ed., pp. 274-275). The Securities and Exchange Commission has ruled that a private corporation can appropriate part of its funds for socio-economic development program for community projects as its donation and accept financial grants for the purpose because such activity is within the scope of its corporate powers by express provision of the Corporation Code. The Commission, however, added that the Board of Directors should use good judgment in the exercise of the power to make donations; that donation be reasonable in amount in the light of the corporation's financial condition; bear some reasonable relation to the corporation's interest, and not to be so remote and fanciful as to excite the opposition of the shareholders whose property is being used; and that when doubtful as to the amount involved, the shareholders may review the exercise of such corporate power and may inquire into its reasonableness, and if found excessive to afford adequate relief therefrom (SEC Opinion dated July 19, 1991 addressed to Victorias Milling Co., Inc; Comments on the Corporation Code of the Philippines by Ruben E. Agpalo, 1st ed., pp. 166-168). In the case of Pirovano, et al . vs . De la Rama Steamship Co . (96 Phil 335), one of the issues raised was whether the defendant corporation can give by way of donation the proceeds of insurance policies taken on the life of Enrico Pirovano, former President and General Manager of the Company, to his minor children under the law or its articles of incorporation, or is that donation an ultra vires act? The Supreme Court held that granting arguendo that the donation given to the Pirovano children is outside the scope of the defendant corporation, or the scope of the powers that it may exercise under the law, or it is an ultra vires act, still it may be said that the same cannot be invalidated, or declared legally ineffective for that reason alone, it appearing that the donation represents not only the fact that the same has been expressly ratified in a resolution duly approved by the latter. By this ratification, infirmity of the corporate act, if any has been obliterated thereby making the act perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and consummated and no creditors are prejudiced, or if there are creditors affected, the latter have expressly given their conformity. In the case of St . Stephen's Assn . vs . Collector of Internal Revenue , 2 SCRA 465 and Pirovano vs . Collector of Internal Revenue , CTA Nos. 347 and 375, January 31, 1962, the Supreme Court held that the law taxes gifts made by an individual. Therefore, a gift made by a corporation is not taxable to the corporation, but treated as made by the individual stockholders in proportion to their shareholding. CcAHEI In view of the foregoing, it is the opinion of this Office that the corporation can donate any amount provided that the amount to be donated will not prejudice its creditors. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group