BIR Ruling [DA-280-04]

May 18, 2004 BIR RULING [DA-280-04] Sections 98 & 181 BIR Ruling No. 115-99 & 132-99 Volunteers for Development in Philippine Society (Developers) Foundation, Inc. P.O. Box 41 Kalibo 5600 Aklan Attention: Mr. Robert Naraval Executive Director Gentlemen : This refers to your letter dated September 26, 2000 requesting for advice on the tax consequences of your pending fiscal services arrangement in the US. It is represented that Volunteers for Development in Philippine Society (Developers) Foundation, Inc. (Developers Foundation) is a non-stock, non-profit social welfare institution registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. ANO91-197741 issued on November 7, 1991; that the purpose for which it was organized is to encourage the self-development of people and the sustainable management of local natural resources by rural communities in the Philippines; that you are based in Panay Island, and presently carry out the majority of your work in Aklan Province; that your primary activities include organizing and strengthening of farmers and women's groups, training in sustainable agriculture technologies, facilitating medium-term barangay development planning using participatory methods, and providing technical support for community based rural livelihood activities which can also protect the environment; that you are seeking funding from the United States in the form of cash grants from grant-making institutions based in the U.S. for your ongoing program activities; that you anticipate that the grants could originate from funding agencies such as the Conservation, Food and Health Foundation in Massachusetts, the Funding Exchange in New York or the National Council of Churches (USA); that a few US-based funding entities are considering your funding requests; that they are requiring that you arrange for a fiscal agent in the U.S. to act as custodian of any cash grants awarded in U.S. dollars, on your behalf; that the entity you hope to engage for such fiscal agency services is called the Tides Center, based in San Francisco; that on the basis of a fiscal services agreement between you and Tides, Tides would receive grant funds awarded to you, and then place said grant funds in your bank account in the Philippines by way of electronic deposit originating from a U.S. bank; the grant funds would then be used by your foundation to cover operating and program expenses directly related to its tax-exempt purposes and in fulfillment of the agreements you have made with your respective funding partners in the US; and that these expenses would very likely include program staff salaries, transportation to and from various training sites, crop seeds, food, rent of office space, supplies and materials needed for training and facilitation of groups in self-development activities, and administrative costs such as office personnel, computer equipment and photocopy services. In reply, please be informed that pursuant to Section 98 of the Tax Code of 1997, a donor's tax shall be levied, assessed, collected and paid upon the transfer by any person, resident or non-resident, of the property by gift. The said tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. However, where the donor is a nonresident, its real or personal property so transferred which are situated outside the Philippines shall not be included as part of its gross gift pursuant to Section 104 of the same Code. Such being the case, and considering that the donors are non-residents, and therefore beyond the jurisdiction of the Philippine Government to tax, the cash donations for the benefit of Developers Foundation to be held in trust by Tides are not subject to any Philippine tax ( cited in BIR Ruling No. 115-99 dated August 6, 1999 ). TcSCEa However, Section 181 of the Tax Code of 1997 provides, viz : "SEC. 181. Stamp tax upon acceptance of bills of exchange and others . Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of thirty centavos (P0.30) on each Two Hundred Pesos (P200.00), or fractional part thereof, of the face value of any such bill of exchange, or order or Philippine equivalent of such value, if expressed in foreign currency." Under the foregoing provision, a documentary stamp tax (DST) shall be imposed on any bill of exchange or order for payment of money, which purports to draw money from a foreign country but payable in the Philippines. Under the Documentary Stamp Tax (DST) Law, the mere withdrawal of money from a bank deposit, local or foreign currency account, is not subject to DST, unless the account so maintained is a current or checking account, in which case, the issuance of the check or bank draft is subject to the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In BIR Ruling dated August 25, 1982, this Office held that under then Section 24(f)(2) of the Tax Code, as amended by PD 1773, income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transaction with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks shall be exempt from all taxes, except net income from such transactions as may be specified by the Minister (now Secretary) of Finance, upon recommendation of the Monetary Board. Accordingly, since the exemption from all taxes refers only to the income derived by a foreign bank authorized by the Central Bank to engage in foreign currency deposit unit transactions in the Philippines, the bank drafts, telegraphic transfers or traveler's checks which will be issued by the said Bank in case of withdrawals from its foreign currency deposit unit account are subject to the documentary stamp taxes under Section 228 and 229 of the Tax Code, as amended (now Section 181 and 182 of the Tax Code of 1997) as amended. In the instant case, Tides, the payor is residing outside the Philippines. Tides would receive grant funds awarded to you, and then place said grant funds in your bank account in the Philippines by way of electronic deposit originating from a U.S. bank. Whether or not the withdrawal shall be subject to DST would depend on whether or not there is a transfer of funds from abroad. If Tides does not maintain a local or foreign currency account in the Philippines, the transfer of funds from a U.S. bank to Developers Foundation's bank account in the Philippines is subject to DST. On the other hand, if Tides maintains a local or foreign currency account in the Philippines from where it will draw the money intended to pay Developers Foundation and Tides makes the instruction or order to pay through an electronic message, such electronic instructions is not subject to DST since no transfer of funds from abroad or from the place where the instruction originates took place. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group