Salvador & Associates

July 1, 2008 BIR RULING [DA-(DT-001) 001-08] Section 101 (A) (3); BIR Ruling No. DA-028-98 Salvador & Associates 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Serafin U. Salvador, Jr. Atty. Rabiev Tobias M. Racho Atty. Marie Cherylle Z. Hular Gentlemen : This refers to your letter dated May 22, 2008 requesting on behalf of your client, The Henry Sy Foundation, Inc. (the "Foundation" for brevity) for confirmation of your opinion that donations made to the Foundation are exempt from donor's tax prescribed under Section 101 (A) (3) and documentary stamp tax (DST) under Section 175, both of the National Internal Revenue Code (NIRC), as amended. DCcHIS As represented, the Foundation, which is in the process of incorporation and registration with the Securities and Exchange Commission (SEC) will be a non-stock and non-profit charitable corporation. The primary purposes for which the Foundation is being organized are as follows: "1. To promote the general well-being of the human individual, developing his potential to the fullest and instilling desirable values; 2. For educational purposes, including, without limiting the generality of the foregoing, to foster an education which would equip the individual for a productive life, by providing assistance, scholarships endowments, or otherwise establishing facilities for the study, education, training, and instruction of the individual through formal, informal, or non-formal education and to build the character of the individual to become useful members of society; 3. Without limiting the generality of the foregoing, to provide assistance education training and resources to teachers and school staff and education specialists within the Philippines; 4. For scientific research and the advancement of scientific knowledge, including without limiting the generality of the foregoing, to provide endowment or scholarship grants and any form of assistance for applied scientific research in any frontier of knowledge which the Board of Trustees, or any committee validly constituted and with sufficient authority, may deem useful, beneficial, and adequate; 5. For medical research and the advancement of medical knowledge, including without limiting the generality of the foregoing, to support studies and research in various fields of medicine, particularly those geared towards improving health in urban and rural communities in the Philippines; 6. To promote health, safety and sanitation programs and fund projects in selected urban and rural communities aimed at controlling, preventing and treating communicable and degenerative diseases and other health disabilities including research into diseases and disease control and health issues; aCSEcA 7. To accept and receive contributions, donations and/or endowments from the government or from the general public, by deeds, grants, devises, bequests, or gifts, and to make use of this in operating enterprises, activities, or businesses as may be necessary to carry out the objectives of the Foundation;" After its registration with the SEC, the Foundation intends to obtain accreditation as a donee-institution pursuant to Executive Order No. 671 dated October 22, 2007. In order to implement its programs, the Foundation shall require funding. Such funding shall necessarily come from gifts, donations and other contributions, given that the Foundation does not intend to engage in activities for profit. In this regard, cash and shares of stock in a domestic corporation will be contributed to the Foundation, initially as part of the initial contribution to the capital of the Foundation. After incorporation, the Foundation will likewise likely receive various donations from prospective donors either in cash or property. You now request for confirmation of your opinion that: 1. Various gifts, donations and other contributions made by residents and/or nonresidents to the Foundation in the form of cash and/or shares of stock or other property, are exempt from donor's tax; and 2. The Deed of Donation or Contribution of Capital wherein shares of stock in a domestic corporation are donated to the Foundation is not subject to DST under Section 175 of the NIRC, as amended. However, the acknowledgment on the deed is subject to DST of P15.00 imposed under Section 188 of the same Code. In reply, please be informed as follows: Donations made to the Foundation are exempt from donor's tax . In BIR Ruling No. DA-058-04 dated February 9, 2008, the prospective donors were willing to donate real properties to the donee-foundations for the purpose of putting up a retreat house and seminary pending the issuance of the Certificate of Tax Exemption and Accreditation with the Philippine Council for NGO Certification (PCNC). This Office ruled that ". . . pursuant to Section 101(A)(3) of the Tax Code of 1997, the proposed donations to Merkaba Foundation, Inc. and Redemptoris Mater Missionary Seminary, Archdiocese of Manila, Inc. are exempt from the payment of donor's tax, subject to the condition that not more than 30% of the said gift shall be used by the donee for administration purposes. TSCIEa However, it is the opinion of this Office that Merkaba Foundation, Inc. and Redemptoris Mater Missionary Seminary, Archdiocese of Manila, Inc. are required to first secure accreditation as donee institutions, from the Philippine Council for NGO Certification (PCNC), 6th Floor SCC Bldg., CFA-MA Compound, 4427 Interior Old Sta. Mesa, Manila, in order that donations made to them by natural and juridical persons may be treated as fully deductible for income tax purposes." In another case, which is on all squares with the present case, this Office opined as follows: "Inasmuch as the donee is a charitable institution, donation from its benefactors is exempt from the payment of donor's tax pursuant to Section 101(A)(3) of the Tax Code of 1997, subject to the condition that not more than thirty percent (30%) of said gift shall be used for administration purposes. Moreover, the Deed of Donation is not subject to documentary stamp tax. However, the acknowledgment on said deed is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997, as amended." (BIR Ruling No. DA-120-08 dated March 4, 2008). AEcTCD Inasmuch as the donee is a charitable institution, donations in cash and/or shares of stock or other properties in a domestic corporation to the Foundation, both as part of the process of incorporation and thereafter, on an ongoing basis, are exempt from payment of donor's tax pursuant to Section 101 (A) (3) and (B) (2) of the NIRC, as amended, subject to the condition that not more than 30% of the gift shall be used by the donee for administration purposes. (BIR Ruling No. DA-467-07 dated August 24, 2007). Moreover, in the case of donations of real properties, Section 185 of Regulations No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations, implementing Title VII of the NIRC, as amended, provides that conveyances of realties not in connection with a sale, to trustees or other persons without consideration are not taxable. Accordingly, the Deed of Donation of real property is not subject to the DST prescribed under Section 196 of the NIRC, as amended, but only to the DST of P15.00 imposed under Section 188 of the same Code. (BIR Ruling No. DA-28-98 dated January 29, 1998 and BIR Ruling No. DA-123-2001 dated July 18, 2001). Donations of shares of stock to the Foundation is not subject to DST under Section 175. The issue on whether or not the donation of shares of stock is subject to DST under Section 175 of the NIRC, as amended, has been answered by this Office in BIR Ruling No. DA-492-07 dated September 14, 2007. In the aforecited ruling, this Office held that the transfer of shares is not subject to DST since the monetary consideration in the conveyance from which the tax shall be based is wanting. On the other hand, this Office opined in BIR Ruling No. DA-311-05 dated July 6, 2005 that in order that the DST may be imposed on the transfer of shares or certificates of stock, there must be a consideration and an actual or constructive transfer of beneficial ownership of the shares from one person to another. Although there may be a transfer of beneficial ownership, if, however, the transfer is without consideration, it is not within the contemplation of Section 175 (then Section 176) of the same Code. Thus, the transfer of shares by virtue of a Deed of Donation is not subject to DST prescribed in Section 175 of the NIRC as amended, viz. : HITEaS ". . . this Office holds that the transfer of the 10,000 shares of stock, in Seaboard Eastern Insurance, from Lily M. Co to Jacqueline Halili M. Co by virtue of a Deed of Donation is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code of 1997, as amended by R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004." However, donations in shares of stock in a domestic corporation, are subject to the DST of P15.00 imposed under Section 188 of the NIRC, as amended. (BIR Ruling No. DA-001-05 dated January 5, 2005). Subsequent transfer by the Foundation of donated property is taxable. If the same property acquired by gift is subsequently conveyed by way of sale or exchange, the sale will be subject to corporate income tax on the gain realized which is determined by deducting from the gross selling price the historical cost or the adjusted basis thereof, as it would be in the hands of the donor, pursuant to Section 27 in relation to Section 101, both of the NIRC, as amended, and consequently to the creditable expanded withholding tax under Revenue Regulations (RR) No. 2.57.2 of RR No. 2-98, as amended. If it is donated to a nonexempt donee, the donor shall be liable for donor's tax pursuant to Section 98 of the same Code. Donations to the Foundation are deductible from donor's taxable business income . Donations to the accredited Foundation shall be deductible in full from the taxable business income of the donor depending on the donee's compliance with the level of administrative expense and utilization requirements. Otherwise, it shall be entitled only to the limited deductions as provided for under Section 34 (H) (1) of the Tax Code (BIR Ruling No. S-30-054-98 dated September 30, 1998). Finally, in case of donations from non-resident citizens, they are required to submit to this Office the notarized Deed of Donation duly authenticated by the Philippine Consul General of the donor's residence. (BIR Ruling No. DA-120-2008 dated March 4, 2008). 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. AaIDCS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service