BIR Ruling [DA-262-05]

June 16, 2005 BIR RULING [DA-262-05] 101 (A) (2) & 34 (H) (2) (a); DA-005-03, 220-03, & 062-99 Defense & Protection Systems (Phil.), Inc. No. 64 Bautista St., AFPOVAI-Phase 2 AFP Officer's Village, Fort Bonifacio Taguig City Attention: Mr. Jose Mari C. Castaneda President & General Manager Gentlemen : This refers to your letter dated February 7, 2005 stating that your company, Defense & Protection Systems (Phil.), Inc ., is a domestic corporation incorporated on September 19, 2002; that your company is involved in trading, sales and distribution of security equipment, particularly x-ray machines, handled and walkthrough metal detectors, trace detectors for explosives drugs and chemical warfare as well as undertake repair, maintenance and consultancy in security equipment; that in the conduct of your business, you have established very good business relationship with various government agencies particularly those involved in handling security matters as well as threat from various terrorists groups and other similar security threats; that these government agencies include Philippine National Police (PNP)-Aviation Security Group, Department of Transportation and Communications (DOTC), National Council on Civil Aviation Security, Philippine Army, Manila International Airport Authority, Davao City International Airport, Cebu City Port, Subic Bay Metropolitan Authority and other airports in the country; that as a proactive member of the defense industry, you feel that you could give more to the Government than the present line of products that you offer; and that you are in the process of donating equipment to the Government that may serve as support for the equipment now on their roster. Based on the foregoing, you now request for a ruling on the following issues: 1. What benefits can you derive in undertaking donations to the government or any of its attached agencies? Can you deduct such donation from your income in full? 2. If given the ruling, may you use this to manifest exemption from payment of certain applicable taxes? 3. What documents do you need whenever you make donations to the government? 4. May you presume that all donations to the Government is tax-exempt? In reply, please be informed of the following: On the matter of your donation to certain government agencies 1. Pursuant to Section 101(A)(2) of the Tax Code of 1997, to wit: "Section 101. Exemption of Certain Gifts . The following gifts or donations, shall be exempt from the tax . . . : (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." Such being the case, your donation to government agencies are exempt from payment of donor's tax pursuant to the aforecited provision. On the matter of Deductibility Pursuant to Section 34(H)((2)(a) of the Tax Code of 1997, to wit: "Section 34. Deductions from Gross Income . . . . (H) Charitable and Other Contributions . xxx xxx xxx (2) Contributions 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, 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) . . ." Therefore, any donation, contribution, bequest and grant which may be made to the government agencies shall be deductible in full from the income of the donor for income tax purposes, if said donation, contribution, bequest or grant is in accordance with the annual priority plan determined by the NEDA, otherwise the deduction shall be subject to the limitation provided in Section 34(H) of the Tax Code of 1997, i.e., an amount not to exceed 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 said deduction. 2. This ruling covers only exemption from the payment of donor's tax and the deductibility from your gross income of any donation made to the Government and its agencies or political subdivisions including fully owned government corporations subject to conditions prescribed by law. In short, this will not exempt you from the payment of VAT, percentage tax or other taxes where it is applicable. 3. For purposes of Section 101(A)(2) and 34(H)(2)(a) of the Tax Code of 1997, donations made to the government should be covered by a Deed of Donation and must be duly supported by a certification from the concerned government agency that the donation/s shall be used in undertaking priority activities of the government or in economic development according to a national priority plan determined by the NEDA. AHCTEa 4. Yes, it is presumed that donations to the government is exempt from tax pursuant to Section 101(A)(2) of the Tax Code of 1997. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group