BIR Ruling No. 017-10

July 1, 2010 BIR RULING NO. 017-10 101 (B) (2) KPMG Manabat Sanagustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City Attention: Ms. Ma. Georgina J. Soberano Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated February 3, 2010 stating that your client, Homenet South Asia (HNSA), is formed as a charitable trust registered under the laws of Mauritius on October 29, 2006, with principal address at Kross Border Trust Services Ltd., St. Louis Business Centre, Cnr Destoches & St. Louis Streets, Port Louis, Mauritius; that HNSA operates a Liaison Office in India, and the principal address of HNSA's Liaison Office is 21/22 Goyal Tower, Nr. Panjarapole, Ahmedabad-380015, India; that HNSA was established for the following purposes: a. To improve the working and living conditions of homebased workers in countries in the South Asia region and such other countries as may be decided by the Trustees from time to time; b. To strengthen the network and international policies on homebased workers at the national, regional, and international level; c. To advocate for national and international policies on homebased workers in each country; d. To promote access to local, national, and international markets and popularize the products of homebased workers; e. To promote the products of homebased workers through financial packages and policies; f. To promote and develop the organizations of homebased workers; g. To promote and advocate the formulation and implementation of international policies for homebased workers; h. To promote social welfare like education, insurance, health, housing, and the welfare of children of homebased workers; cIADaC i. To participate in any programs designed to relieve the poverty of homebased workers; and j. To participate in any programs designed to advance the human rights and fundamental freedoms of homebased workers; that Section 4.2 of HNSA's Trust Deed states that in the event the Trust funds cannot be used for such purposes, the Trustees will be required to use the Trust funds "for such exclusively charitable purpose as may be approved by the Enforcer" of the Trust; that in addition, Section 18 provides that the Deed of Trust may be altered or amended by the Trustees with the written consent of the Enforcer, provided that such alternations or amendments do not result in the Trust funds becoming "subject to any trusts other than trusts for charitable purposes"; that HNSA has received a donation from the Bill & Melinda Gates Foundation (BMGF) to conduct charitable activities in South Asia and Southeast Asia; that BMGF is a US private grant-making foundation described in section 501 (c) (3) of the United States Internal Revenue Code of 1969, as amended, and its primary objectives are as follows: a. Global Development: to increase opportunities for people in developing countries to overcome hunger and poverty; b. Global Health: to help ensure that advances in health are created and shared with those who need them most; and c. U.S. Programs: to help ensure greater opportunity for all Americans through the attainment of secondary and postsecondary education with genuine economic value. that HNSA intends to use a portion of the donation received from BMGF to provide a donation to Homenet Southeast Asia (HNSEA); that HNSEA is a non-stock, non-profit association of homebased workers in Southeast Asia, established under Philippines laws, with its principal office address at No. 38 Maginhawa Street, UP Village, Diliman, Quezon City, Philippines; that HNSEA was granted a Certificate of Incorporation by the Philippine Securities and Exchange Commission (SEC) on March 22, 2006 under SEC Registration No. CN20063424; that the purposes for which HNSEA is incorporated, as indicated in its Articles of Incorporation, are as follows: Mission To enable organized homeworkers to democratically run and manage institutionalized and self-sustaining organizations and networks at the sub-regional and national levels that will allow them to enjoy better working conditions and standards of living, attain higher income, steadier employment, and access to social protection; and to ensure that their issues and concerns are better addressed in the policies and programs of governments, international agencies, and civil society organizations, and that their representatives gain greater visibility and participation in various levels of governance, than when they were unorganized. Objectives a. To further strengthen the organizations and the networks of homeworkers in Southeast Asia, as well as their collective action at the sub-regional and national levels; b. To help build the economic sustainability of the homeworkers' livelihood and social protection schemes towards the attainment of their economic rights and security; c. To facilitate homeworkers' exercise of their rights through participation in governance, leading to strengthened advocacy, public policy formulation, and program implementation on key issues affecting them both as workers and as women; d. To build an information based on the situation of homeworkers in different parts of Southeast Asia, disaggregated by gender; e. To take forward the ratification of ILO Convention 177; and f. To facilitate resource generation for homeworkers' organizations and to receive grants and donations to pursue the above objectives. Chapter Eight of HNSEA's Articles of Incorporation also provides that "no part of the income which the association may obtain as an incident to its operation shall be distributed as dividends to its members, council or officers subject to the provision of the Corporation Code on dissolution. Any proceeds obtained by the association as a result of its operation, whenever necessary or proper shall be used for the furtherance of the purposes enumerated in Article II, subject to the provision of Title XI of the Corporation Code of the Philippines." that as an association of homebased workers, HNSEA shall require funding which shall necessarily come from gifts, donations and other contributions, given that HNSEA is not engaged in activities for profit; that some of these donations, like the one HNSEA intends to receive from HNSA, will be made by non-Philippine residents who are not citizens of the Philippines; that HNSEA intends to use the donation it will receive from HNSA for its project, "Strengthening the Organizations of Urban Poor Homebased Workers for Greater Visibility and Participation in the City Governance"; that the project will be carried out over a five-year period involving five major activities: (1) Establishment of local and national member-based organizations (MBOs) of urban poor home-based workers (HBWs) in the HNSEA member countries; (2) Conduct general assemblies at the local, national, sub-regional, and regional levels; (3) Conduct sub-regional workshops; (4) Advocate and raise awareness around urban zoning infrastructure services and planning for the home-based workers; (5) Documentation, replication and sharing of innovative approaches among the HNSEA member countries; that HNSEA will not use more than 30% of the donation it will receive from HNSA for administrative purposes; and that HNSEA is not accredited by the Philippine Council for NGO Certification (PCNC). SHADEC Based on the foregoing representations, you now request confirmation of your opinion that 1. A donation made by HNSA, which is a non-resident of the Philippines and is not a citizen of the Philippines, to HNSEA is not subject to donor's tax; and 2. HNSEA is not required to secure an accreditation from the PCNC in order for the donation from HNSA to HNSEA to be exempt from donor's tax. In reply thereto, please be informed as follows: 1. Section 101 (B) (2) of the Tax Code of 1997 provides that "SEC. 101. Exemption of Certain Gifts . The following gifts or donations shall be exempt from the tax provided for in this Chapter: (A) . . . (B) In the Case of Gifts Made by a Non-resident not a Citizen of the Philippines. (1) 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. (2) Gifts in favour of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes." In stressing the rationale of the above-cited provisions, this Office has repeatedly stressed in BIR Ruling No. DA379-06 dated June 20, 2006, which was later cited in BIR Ruling No. DA120-08 dated March 4, 2008, as follows: ". . ., donation in cash coming from a non-resident shall not be subject to any Philippine tax since non-residents are beyond the taxing jurisdiction of the Philippine Government (cited in BIR Ruling No. 115-99 dated August 6, 1999). In this connection, it may be stated that should such donation materialize, a non-resident donor is required to submit to this Office a copy of the Deed of Donation covering the aforesaid gifts with the signature of the authorized representative of the non-resident donor, notarial commission and signature of the Notary Public acknowledging the instrument of donation duly authenticated by the Philippine Consulate General of the donor's residence. (BIR Ruling No. DA048-06 dated February 15, 2006) " SHECcT Applying the afore-quoted provisions and the authorities cited above to the case under consideration, HNSEA is organized as a non-stock, non-profit corporation for social welfare purposes, and it intends to receive a donation in cash from HNSA, which is a non-resident corporation, the aforesaid donation is contemplated in Section 101 (B) (2) of the Tax Code of 1997, as amended, and consequently EXEMPT from donor's tax. 2. Section 34 (H) of the Tax Code of 1997, as implemented by Revenue Regulations No. 13-98, provides that "non-stock, non-profit corporations and NGOs must first secure accreditation from the Philippine Council for NGO Certification (PCNC) before they are entitled to the following benefits: (1) Limited Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction. (2) Full Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions: (i) The accredited NGO shall make utilization directly for the active conduct of the activities constitution the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner. For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these Regulations. (ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year; (iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized; cHCaIE (iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property; (v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. (3) Exemption from Donor's Tax Donations and gifts made in favour of accredited non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided, however, that not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101(A)(3) and (B)(2) of the Tax Code." On the issue as to whether HNSEA is not required to secure an accreditation from the PCNC in order for the donation from HNSA to be exempt from donor's tax. It may be useful to make a distinction between Section 101 (A) (3) and Section 101 (B) (2), supra, for the purpose of this disposition. The former states that donations made by residents to accredited NGOs are exempt from donor's tax. While the latter does not require that the donee institutions be accredited. Accordingly, if the donee institution is classified as one of those entities listed under Section 101 (B) (2) of the said Code, then by force of logic and invoking the previously cited provisions, it is entitled to the tax exemption benefit. Corollarily, Section 34 (H) of the Tax Code of 1997, as implemented by Revenue Regulations No. 13-98, refers to the deductibility of charitable contributions made to certain entities for purposes of computing the taxable income of individuals or corporations. However, the aforesaid deductions as contemplated in Section 34 (H), supra and Revenue Regulations No. 13-98 are not applicable to non-resident foreign corporations or foreign corporations not engaged in trade or business in the Philippines. Such being the case, this Office holds that donations made by HNSA to HNSEA shall nevertheless be EXEMPT from donor's tax notwithstanding the fact that HNSEA is not accredited as a qualified donee-institution by the PCNC. cDAISC 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, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue