BIR Ruling [DA-502-06]

August 16, 2006 BIR RULING [DA-502-06] Sections 30 & 34 (H) Hon. Angelina Sandoval-Gutierrez Supreme Court of the Philippines Society for Judicial Excellence Padre Faura St. Ermita, Manila M a d a m : This refers to your letter dated August 9, 2006 requesting on behalf of the Society for Judicial Excellence a ruling that it is exempt from the payment of income and donor's taxes, and that the donations it receives from private individuals or corporate entities are fully deductible from their gross income. As represented, the Society for Judicial Excellence is a non-stock, non-profit organization aimed primarily for the improvement of the judicial system and the professional advancement of its members. Its purposes are as follows: (1) the just, efficient, speedy, inexpensive administration and dispensation of justice; (2) the continued development and active pursuit of personal and professional excellence among its members; (3) the service by its members as leaders and models of ethical conduct and professional competence; and (4) the commitment to promote the professional growth and advancement of its members. It is an association of Judicial Excellence awardees organized pursuant to the mandate of the Supreme Court. It is affiliated with the Court, functioning as a Committee, in charge of the selection of awardees among the judges of the Regional Trial Courts, the Municipal Trial Courts, and the clerks of the said Courts. In 1993 up to January, 2006, it was the Committee on Judicial Excellence which was in charge of selecting and awarding outstanding judges and clerks of court. The Committee was then chaired by Associate Justice Artemio V. Panganiban, now Chief Justice, and co-chaired by Associate Justice Antonio T. Carpio. However, on January 26, 2006, the Supreme Court abolished the Committee and devolved its task to the newly organized Society for Judicial Excellence. EIDTAa As the Society for Judicial Excellence is an organization devoted towards the improvement of the administration of justice, it was initially given funds by the Supreme Court. Likewise, the Court detailed some of its employees to the Society to form its administrative staff. For additional financial support, the Society's Constitution and By-Laws allows it to collect membership fees and annual dues from its members and accept donations from benevolent individuals or corporate entities that share its visions and goals. Among the Society's benevolent donors are the Madrigal Abad Santos family and Avancea family who are sponsoring the Chief Justice Jose Abad Santos and Chief Justice Ramon Q. Avancea Awards . On or about July 18, 2006, the Society received donations in the total amount of Php1,200,000.00 from Don Emilio T. Yap, the Manila Bulletin Corporation, and the Euro-Med Corporation. All such donations are intended to cover the expenses incident to the awards for Judicial Excellence, such as the cash prizes, plaques, costs of seminars, testimonials, and researches on the improvement of the administration of justice. No portion of the donations shall be used for administrative expenses which shall be borne by the Supreme Court. The Society (a) utilizes directly and exclusively all donations for the active conduct of activities constituting its purpose or function; (b) does not allocate any portion of its net income or asset to the benefit of any member, organizer, officer, or any specific person; (c) is governed by a Board of Trustees, whose officers and members do not receive compensation of whatever nature; and (d) shall devolve all its assets and remaining funds to the coffers of the Supreme Court upon dissolution INCOME TAX Pursuant to Section 30 of Revenue Regulations (Rev. Regs.) No. 2, otherwise known as the Income Tax Regulations, charitable corporations include an association for aiding the general body of litigants by improving the efficient administration of justice. Accordingly, this Office is of the opinion and so holds that the Society for Judicial Excellence is a corporation organized for charitable purposes as contemplated under Section 30(E) of the Tax Code of 1997. Such being the case, 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/Constitution, manner of operation and activities as well as sources and disposition of income. EaTCSA It is requested that a copy of this letter of exemption be attached to the annual information return which the Society for Judicial Excellence 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 it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. It should be understood that the said exempt non-government 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 Rev. Regs. No. 2-98, as amended, 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 Rev. Regs. No. 2-98, as amended (BIR Ruling No. S30-047-01 dated June 5, 2001). HOWEVER, this ruling is subject to the condition that the Society for Judicial Excellence shall submit photocopies of its Annual Information Returns and Financial Statements (balance sheet) for the past three (3) years in compliance with Revenue Memorandum Circular No. 14-2001. Otherwise, it shall be given a temporary exemption instead. VAT Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Accordingly, if the Society for Judicial Excellence is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Revenue from "contributions, membership dues and donations," not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 10% VAT. However, the above exemption from the 10% VAT does not extend to its purchase of goods or properties or services and importation of goods. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to they 10% VAT pursuant to Section 107 of the said Code (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). HTCAED DONOR'S TAX Pursuant to Section 101(A)(3) of the Tax Code of 1997, gifts in favor of charitable institutions are exempt from payment of donor's tax subject to the condition that not more than thirty percent (30%) of the gift shall be used for administration purposes (BIR Ruling No. DA-622-99 dated November 3, 1999). On the other hand, Section 101(A)(2) and (B)(1) of the Tax Code of 1997 provides that 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 are exempt from payment of donor's tax (DA-036-03 dated February 6, 2003). Inasmuch as the Society for Judicial Excellence is both a charitable institution and an entity of the government, donations to it are exempt from donor's tax DEDUCTIBILITY OF DONATION In general, the Government and fully-owned government corporations are eligible donee institutions pursuant to Section 4(E) of BIR-NEDA Regulations No. 1-81 implementing Section 30 (h) of the old Tax Code (now Section 34(H) of the Tax Code of 1997) as amended by Batas Pambansa (B.P.) Blg. 45, as amended. Section 5 of BIR-NEDA Regulations No. 1-81 further provides that in order to avail of the benefit set forth under B.P. Blg. 45, all donee institutions except the Government, must register with the Government and Tax Exempt Corporations Division of the BIR within ninety (90) days from issuance of their corporate charter by the Securities and Exchange Commission. Under Section 34(H)(2) of the Tax Code of 1997 as implemented by Rev. Regs. No. 13-98, donations to the Government, its agencies or political subdivisions are deductible in full from the gross income of the donor. However, donations not in accordance with the National Priority Plan are subject to limited deductibility or deductions to an amount not exceeding 10% in the case of an individual and 5% in the case of a corporation of the taxpayer's taxable net income as computed without the benefit of this deduction, viz: "(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, to 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), in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, that any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection" However, for purposes of entitlement to the full deductibility of the contribution/donation from gross income of the donor under Section 34(H)(2) of the Tax Code of 1997, a certification must be secured from the NEDA that the above contribution/donation to the Government through the Supreme Court is in accordance with priority programs, projects and activities included in the current National Priority Plan (BIR Ruling No. 005-03 dated July 2, 2003). 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. cSTHaE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service