BIR Ruling [DA-457-99]

August 11, 1999 BIR RULING [DA-457-99] Office of the Governor Province of Negros Oriental Dumaguete City Attention: Hon . George P . Arnaiz Governor Gentlemen : This refers to your letter dated January 28, 1999 requesting for an opinion as to whether or not a business foundation to be organized by the Province of Negros Oriental and some Local Government Units in cooperation with the private sector will be exempt from the payment of income tax and whether the actual contributions to be made by the members to the proposed foundation be allowed as deductible business expenses. prcd It is represented that the proposed business foundation will have as its primary objective the conduct of investment promotion and marketing activities for the province; that it will be registered with the Securities and Exchange Commission as a non-stock, non-profit organization; that the proposed foundation shall be funded through contributions by the LGUs of Negros Oriental and twelve (12) other private business corporations and individuals; that all funds raised by the foundation shall be used solely for the purposes as enumerated in the draft Articles of Incorporation; that the purposes for which the foundation will be formed are as follows: 1) To conduct investment promotion and marketing activities for Negros Oriental; 2) To undertake policy research and advocacy activities to enhance the business environment of Negros Oriental; 3) To conduct other activities such as networking/establishing linkages with other entities (local and foreign) for the purpose of developing further the local economy. Based on the foregoing, you now request for a ruling or opinion with respect to the following: 1) "Will actual contributions made by the members to the proposed Foundation be allowed as a deductible expense under the R.A. 8424?" 2) "Is the above described Foundation exempt from payment of income taxes and the filing of the annual income tax return under the R.A. 8424?" In reply thereto, please be informed that this Office cannot make a categorical ruling in the light of the hypothetical nature of the stated premise. Based on the records submitted, our opinion at this time would be as follows: 1. Contributions to accredited non-government organization may be allowed as deductible expenses under Section 34(H) of the Tax Code of 1997. However, this is subject to the limitations provided under Section 34(H)(1) of the Code, as follows: "Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies of any political subdivision thereof 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 or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations, in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of 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 this and the following subparagraphs". prcd However, please be advised that the term 'non-government organization' as defined under Section 34(H)(2)(c) of the Code, refers to domestic corporation or organization organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. We note that the purpose for which your Foundation is proposed to be organized is for "investment promotion and marketing activities" which is not among the recognized purposes of a qualified NGO described in the law. The provision of Section 34 of the Code is implemented by Revenue Regulations No. 13-98 dated December 8, 1998, a copy of which is enclosed for your ready reference. LexLib 2. As regards exemption from income tax, please be informed that if the proposed foundation would be in the nature of a business league, chamber of commerce, or board or trade, not organized for profit and no part of its net income inures to the benefit of any private stockholder or individual, as contemplated under Section 30(F) of the Tax Code of 1997, then it would be exempt from the payment of income tax on income received by it as such organization and therefore need not file an income tax return concerning such income. However, it will be subject to the corresponding internal revenue taxes imposed under the Code on its income derived from any of its properties, real or personal, or any activity conducted for profit, regardless of the disposition thereof, which income should be returned for taxation. 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 will be subject to the 20% final withholding tax, provided that interest income under the expanded foreign currency deposit system shall be subject to 7% final withholding tax pursuant to Section 27(D)(1) of the Code. Moreover, it will be required to file on or before April 15 of each year a profit and loss statement and balance sheet with the annual information return under oath, stating its gross income and expenses incurred during the year and a certificate showing that there has not been any change in its By-Laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. Finally, it should be understood that the proposed organization/foundation shall be constituted as withholding agent for the government if it acts as an employer and its employees received compensation income subject to the withholding tax under Section 79(A) of the Tax Code of 1997, or if it makes income payments to individuals or corporations subject to the expanded withholding tax pursuant to Section 57(B) of the same Code. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue