No Income Will be Imputed or Recognized to Any of the Parties, Whether Child and Family Service Philippines, Inc., the San Carlos City Government, or the Alger Foundation, When CFSPI and the San Carlos City Government Allow the Alger Foundation to Use Free of Rent, their Respective Properties; Therefore, No Value-Added Tax Shall be Due or Payable on the Said Transactions

October 30, 1997 BIR RULING NO. 114-97 24-102-000-00-114-97 Baniqued & Baniqued Law Offices Suite 803, 8/F Jollibee Centre San Miguel Avenue, Ortigas Center, Pasig City Attention: Atty . Carlos G . Baniqued Partner Gentlemen : This refers to your letter dated May 13, 1997 stating that the Consuelo Zobel Alger Foundation (Alger Foundation) is a non-stock, non-profit corporation organized in July 1988 under the laws of the State of Hawaii; that its principal office is in the City and County of Honolulu, State of Hawaii; that Alger Foundation was founded and endowed by Consuelo Zobel Alger who died on November 29, 1990; that it was established primarily to assist poor, abused or sexually exploited children and their families in Hawaii and the Philippines in obtaining needed food, shelter, vocational training, education, health care and/or self care skills; that in furtherance of the purpose/s for which it is organized, the Alger Foundation had undertaken and implemented since 1988, numerous community development projects and programs aimed at providing food, decent shelter, education, vocational training, medical, dental and social services, self-help and income-generating skills to poor, abused or sexually exploited children in the Philippines and Hawaii; that it formally applied in 1993 for a license to operate in the Philippines through a Philippine branch which the Securities and Exchange Commission approved the same in the same year; that through the years, the Alger Foundation had undertaken several community development projects in the Philippines through the years; that in 1996, the Alger Foundation made a grant to the Child and Family Service Philippines, Inc. (CFSPI) another non-stock, non-profit corporation organized under the laws of the Philippines, for the acquisition of a property in Pasay City and another property in Dumaguete City to be used by CFSPI in furtherance of the purpose/s for which it is organized; that in the meantime that the said properties are not used by CFSPI, the latter has offered the same to the Alger Foundation for use by the Alger Foundation in the pursuit of its various community development projects and programs in the said localities; that CFSPI will not charge the Alger Foundation any rent because the Alger Foundation will anyway use the said properties for the very same purposes for which CFSPI and Alger Foundation are organized and the acquisition of the properties was made possible, after all, through a grant from the Alger Foundation; that the property in Pasay City is presently the site of a center (Serra Center) operated by the Alger Foundation for the care and rehabilitation of young prostitutes while that in Dumaguete City is presently the site of an orphanage (Rainbow Orphanage) for abandoned children; that the Alger Foundation will also make another community development grant to a local government unit, namely, San Carlos City in Negros Occidental; that the San Carlos City government will use the grant to purchase materials for the construction of a community center at the site of a socialized housing project of the San Carlos City government; that the city government will use the community center for its social action projects and training seminars; that at the same time, the San Carlos City government has offered the Alger Foundation a rent-free use of the community center for fifteen (15) years; that Alger Foundation intends to use the center for its community development activities, social action projects, and other programs for squatters, fire and other calamity victims, and other persons and families in need; that there is no consideration involved in the transactions other than Alger Foundation's undertaking to use the said properties or premises solely for the purpose for which the Alger Foundation was organized; that another community development program of the Alger Foundation is also in partnership with a local government unit, the City of Dumaguete in Negros Oriental; that Alger Foundation will grant an interest-free loan to the city government of Dumaguete which the latter will use to finance the construction of houses in a resettlement area for city squatters; and that the grant of an interest free loan to the city of Dumaguete is precisely in furtherance of one of Alger Foundation's objectives, namely, to provide decent shelter to children, youth and their families. dctai In connection therewith, you are requesting confirmation of your opinion that no income will be imputed or recognized to any of the parties, whether CFSPI, the San Carlos City government, or the Alger Foundation, when CFSPI and the San Carlos City government allow the Alger Foundation to use free of rent, their respective properties in Pasay City and Dumaguete City and San Carlos City, respectively; that inasmuch as no rent will be charged by CFSPI or the San Carlos City government to the Alger Foundation for the use by the latter of the above-mentioned properties of CFSPI and the San Carlos government, no value-added tax shall be due or payable on the said transactions; and that no income will be imputed or recognized to any of the parties, whether the Alger Foundation or the City of Dumaguete, when the Alger Foundation grants an interest-free loan to the city government of Dumaguete for use by the latter to fund its resettlement/housing project for city squatters; and that no value-added tax shall be due or payable on the said transaction. In reply thereto, please be informed that income, in the broad sense, means all wealth which flows into the taxpayer other than a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. (Section 36, Revenue Regulations No. 2) Considering that CFSPI, the city government of San Carlos City, Negros Occidental as well as the Alger Foundation will not realize income when CFSPI and the San Carlos City government allow the Alger Foundation to use, free of rent, their respective properties in Pasay City, Dumaguete City and San Carlos City respectively, because there is no consideration involved in the transactions other than Alger Foundation's undertaking to use the said properties or premises solely for the purposes for which the Alger Foundation was organized. Accordingly, CFSPI, the city government of San Carlos City, Negros Occidental as well as Alger Foundation shall not be subject to income tax on the aforementioned transactions. Moreover, since CFSPI and the San Carlos City government are not engaged in the leasing of property, the transactions are not subject to value-added tax under Section 102 of the Tax Code, as amended by Republic Act No. 8241. Furthermore, since no income will be realized by Alger Foundation or the City of Dumaguete when the Alger Foundation grants an interest-free loan to the city government of Dumaguete for use by the latter to fund its resettlement/housing project for city squatters, the transaction is not subject to income tax. The transaction is likewise not subject to value-added tax since Alger Foundation is not a lending investor and does not derive any economic benefit from any of its programs/projects. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue