BIR Ruling [DA-271-00]

June 28, 2000 BIR RULING [DA-271-00] Police Director Victor G. Batac Director for Police Community Relations Philippine National Police Camp Crame, Quezon City S i r : This refers to your letter addressed to Deputy Commissioner Estelita C. Aguirre, requesting clarification on the fourteen (14) specific issues pertaining to the projected establishment of a Foundation for the Philippine National Police (PNP). Hereunder are our answers to the questions raised by you, viz: 1. Granting that you are a donee institution duly accredited by PCNC and registered with the BIR, donations, contributions or gifts actually made within the taxable year to the Foundation shall be deductible from the taxable income of the donor, subject to the conditions imposed under Section 3(2) of Revenue Regulations No. 13-98 implementing Sec. 34(H) of the Tax Code of 1997 relative to the Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income. Likewise, donations and gifts made in favor of the Foundation shall be exempt from the donor's tax: Provided, however, that not more than 30% of the said donations and gifts for the taxable year shall be used by the Foundation for administration purposes, pursuant to Section 101(A)(3) of the Tax Code of 1997. 2. The requirements for accreditation of the Foundation as a donee institution may be secured from the Philippine Council for NGO Certification (PCNC), being the organization tapped by the Department of Finance to certify and evaluate all requests for accreditation. 3. The request of some donors to consider a fixed percentage of their donation as tax credit instead of full deductibility is not possible. The law says that donations, contributions or gifts actually made within the taxable year to an accredited NGO shall be allowed full deductibility from the donor's taxable income. A tax credit is in the nature of a tax refund which is treated as a tax return for erroneous payment. If donations to the Foundation are allowed as tax credit, the government would, in effect, be refunding to the donor/s an amount it collected. Hence, donations to the Foundation cannot be allowed as tax credit from the income of the donor/s. 4. Pursuant to Section 45 of the Tax Code of 1997, the deductions provided for in this Title II thereof (Tax on Income) shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. Thus, donors to the Foundation may not defer to another period (fiscal year or calendar year), the availment of their deduction from their gross income of the whole or part of their donations. 5. Funds given by the donor to the Foundation with the agreement that the whole or part of it shall be treated as trust fund, and that only the income of said trust fund shall be donated to the Foundation presupposes that the Foundation invested said funds in a trust account or similar arrangement. In such case, the income of said trust fund shall be subject to the 20% final withholding tax either under Section 24(B)(1) or 24(D)(1) in relation to Section 57(A), all of the Tax Code of 1997. The income of funds held in trust which is donated to the Foundation shall be exempt from the donor's tax pursuant to Section 101(A)(3) of the Tax Code of 1997, as amended, subject to the condition that not more than thirty percent (30%) of said gifts shall be used by such donee (Foundation) for administration purposes. Since the funds are properly recorded and expressed in terms of pesos, its valuation will not provide any problem. 6. On your question regarding the valuation of donations made in property, the value of the said donations shall be the fair market value thereof at the time of the donation. In case, however, of real property, the value shall be the zonal value determined by the CIR or the fair market value as shown in the schedule of values fixed by the Provincial or City Assessors, whichever is higher, pursuant to Sec. 102, in relation to Sec. 88(B), both of the Tax Code of 1997. It is different, however, in the case of valuation of the charitable contribution for purposes of deduction from the gross income of the donor. Section 34(H)(3) of the Tax Code succinctly provides that the amount of any charitable contribution of property other than money shall be based on the acquisition cost or book value of said property. Accordingly, real estate property, stocks and other personal properties which the Foundation will receive as donation shall be valued at their acquisition cost or book value, as the case may be. 7. The periodic donation (monthly, quarterly and annually) of funds to the Foundation by some donors are not subject to income and donor's tax pursuant to Sections 30 and 101 (A)(3), both of the Tax Code of 1997. For income tax purposes, however, all donations made in a particular year shall be aggregated as if they had been made at one time and shall be deductible from the taxable income of the donor/s in the year made, pursuant to Section 45 of the Tax Code of 1997. 8. Pursuant to Section 30 of the Tax Code of 1997, notwithstanding the exemption from income tax of corporations enumerated therein on income received by them as such, the income of whatever kind and character of said organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to the tax imposed under the Tax Code of 1997. Accordingly, the interest income, dividends, gains from sale of stocks, sale of real property, yield or interest from treasury bills of the Foundation shall be subject to tax under the Tax Code of 1997 even if said income shall be used in furtherance of the purposes for which the Foundation was established. 9. Section 105 of the Tax Code of 1997 provides that any person who imports goods shall be subject to the value-added tax (VAT) imposed in Section 107 thereof. Accordingly, the procurement by the Foundation of the equipment needs of the PNP abroad shall be subject to VAT considering that the importation of the said equipment by the Foundation is not among the VAT exempt transactions under Sec. 109 of the Tax Code of 1997. As to whether or not the said importation of equipment by the Foundation may be included in the "tax expenditure subsidy of the PNP which is deemed automatically appropriated" pursuant to Sec. 13 of the General Provisions of R.A. 8760 (GAA for CY 2000), please be informed that the Foundation is a separate entity from the PNP, and it cannot, therefore, enjoy the tax subsidy being enjoyed by the PNP under the GAA for CY 2000. 10. The Foundation may qualify under Section 30(G) of the Tax Code provided that it is not organized for profit and operated exclusively for the promotion of social welfare; hence, income received by it as such shall not be subject to income tax. However, the Foundation shall be subject to the corresponding internal revenue taxes on income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof. Likewise, interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to 20% final withholding tax, provided, however, that interest income of the Foundation under the expanded foreign currency deposit system shall be subject to a final withholding tax of 7 1/2 pursuant to Section 27(D)(1), in relation to Section 57(A), both of the Tax Code of 1997. 11, 12, & 13. These questions should be addressed to the attention of the Fiscal Incentives Review Board (FIRB) of the Department of Finance. 14. The "Build-Operate-Transfer" (BOT) scheme, under R.A. No. 6957, is a contractual arrangement entered into by a private sector proponent with the government for the financing, construction, operation and maintenance of an infrastructure facility for a fixed period, after which the infrastructure facility is transferred to the government. The scheme is therefore applicable to infrastructure projects with the government and we find no tax benefit or concession which can be availed of by the Foundation or by the PNP under this scheme insofar as procuring equipment or systems is concerned. It is suggested, however, that particular queries on the BOT scheme be addressed to the National Economic and Development Authority. It is hoped that we have sufficiently answered all your questions. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group