BIR Ruling [DA-466-04]

September 1, 2004 BIR RULING [DA-466-04] Sections 30, 99 & 107 (A) BIR Ruling No. S30-11-2001 & 022-2000 Balane Tamase Alampay Law Office 12/F, PDCP Bank Centre corner Rufino and Leviste Sts. Salcedo Village, Makati City Attention: Atty. Ma. Filipina R. Mendioro Gentlemen : This refers to your letters dated March 22, 2002, April 23, 2004, and July 15, 2004 indorsed to this Office by Chief of Legal Division Cesar A. Pangilinan of Revenue Region No. 8 on May 25, 2004 requesting on behalf of your client, Handicap International , for exemption from the payment of income tax and value-added tax on your importation of tools and equipment to produce artificial limbs and braces, wheelchairs, crutches, etc. for disabled persons. It is represented that Handicap International is a non-stock, non-profit institution registered with the Securities and Exchange Commission (SEC) under SEC Registration No. AF093-000007 dated February 2, 1993, Bureau of Internal Revenue under Certificate of Registration No. OCN-9RC0000055600 dated November 9, 2001 and Department of Social Welfare and Development under Certificate of Registration No. SB-R0107-03 dated July 11, 2003; that it is working in fifty three (53) countries around the world with head office in Lyon, France; that the primary purpose for which it was organized is "to provide aid in the rehabilitation of the physically handicapped, wherever this need may be felt in the world, by refugees or populations victim of armed conflict or epidemic. Rehabilitation will be carried out especially in the prosthetic domain, more particularly that of the lower limbs, but assistance may be extended, when needed, to the handicapped in any form, including local socio-professional reinsertion, or even, with the agreement of the Authorities concerned, integration into the French population"; that your main concern in the Philippines is to support disabled persons and work towards their integration into society and on the other hand, to work on developmental issues; that the organization was founded on July 19, 1982; that it is a foreign corporation created and existing under the laws of France; that its main source of income/resources comes from but not limited to donors' contributions, members' subscriptions, subsidies from the state, and the like; that the projects of the organization are being funded by the World Bank, United States Agency for International Development (USAID), Japanese International Cooperation Agency (JICA) and Canadian International Development Agency (CIDA); that no part of its net income inures to the benefit of any member; that it was co-winner of the Nobel Peace Prize for 1997; that it aims to develop the following projects in the Philippines from 2003 to 2005: 1) Rehabilitation program to support people with disability; 2) Direct support to orthopedic workshops; 3) Transport accessibility for disabled persons and elders; 4) Mobile rehabilitation services, orthopedic boat; 5) Inclusion of disabled persons in their community; 6) Rural education and research institute; 7) Disaster preparedness; and 8) Local and community development that in the past, the organization had been involved in four (4) fields of activity: 1) Rehabilitation Program has trained the orthopedic and prosthetic technicians and has supported the set up of 15 workshops all around the country from 1985 to 1994 2) Ethnic Minority Support-Self Help Education Program Appropriated for Cultural Communities (SHEPACC) development of ethnic minority Manobos, Bukidnon Province, Mindanao, through an educational program since 1997 3) Emergency-Reconstruction support to the victims of typhoon Nanang in Negros Occidental I in November 2001; has set up first relief operation which focused on food and medical help and simple shelters 4) Community Approach of Human Development (CAHD) an approach to help disabled persons to be integrated to their community; and that through these extensive efforts, the organization's thrust is focused mainly at giving full support to the handicapped by alleviating the degree of disability in the Philippine society, thus, producing confident and independent handicapped people to hold a job leading to full productive lives. ECTAHc In reply, please be informed as follows: 1) This Office is of the opinion and so holds that Handicap International is a corporation organized for social welfare purposes as contemplated under Section 30(G) of the Tax Code of 1997. Accordingly, it is 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 is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue 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 benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7 1/2% final withholding tax pursuant to Section 27(D)(1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period 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. It is requested that a copy of this letter of exemption should be attached to the annual information return which your client, Handicap International will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organization or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any. It should be understood that the said exempt nongovernment organization shall be constituted as withholding agent of the government if it acts as an employer and its employee receives compensation income subject to the withholding tax under Section 79(A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98 (BIR Ruling No. S30-11-2001 dated March 9, 2001). 2) Pursuant to Section 109(q) of the Tax Code of 1997, transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590, are exempt from the value-added tax (VAT). Republic Act (RA) No. 7277, otherwise known as the "Magna Carta for Disabled Persons" is a special law which grants tax incentives to foreign donor/s on donation, bequest, subsidy or financial aid made to government agencies engaged in the rehabilitation of disable persons and organizations of disabled persons. Pertinent provisions of the RA 7277 provides, as follows: "SEC. 3. Coverage . This Act shall cover all disabled persons and, to the extent herein provided, departments, offices and agencies of the National Government or nongovernment organizations involved in the attainment of the objectives of this Act. xxx xxx xxx SEC. 41. Support From Nongovernment Organizations . Non government organizations or private volunteer organizations dedicated to the purpose of promoting and enhancing the welfare of disabled persons shall, as they, are hereby encouraged, become partners of the Government in the implementation of vocational rehabilitation measures and other related programs and projects. Accordingly, their participation in the implementation of said measures, programs and projects is to be extended all possible support by the Government. SEC. 42. Tax Incentives . a) Any donation, bequest, subsidy or financial aid which may be made to government agencies engaged in the rehabilitation of disabled persons and organizations of disabled persons shall be exempt from the donor's tax subject to the provisions of Section 94 of the National Internal Revenue Code (NIRC), as amended and shall be allowed as deductions from the donor's gross income for purposes of computing the taxable income subject to the provisions of Section 29(h) of the Code (now Section 34(H) of the Tax Code of 1997). b) Donations from foreign countries shall be exempt from taxes and duties on importation subject to the provisions of Section 105 of the Tariff and Customs Code of the Philippines, as amended, Section 103 of the NIRC, as amended (now Section 109) of the Tax Code of 1997), and other relevant laws and international agreements. xxx xxx xxx" On the basis of the above representation, this Office holds that your importation of tools and equipment to produce artificial limbs and braces, wheelchairs, crutches, etc. for disabled persons is exempt from the 10% VAT under Section 107(A) of the Tax Code of 1997. IASEca 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service