Written by Ian B. Lapinid, 4 May 2007
Quite a number of top 10,000 corporations discharge their corporate social responsibilities either by giving donations directly or setting up foundations, indirectly. Donations also serve as a tax planning tool provided both parties to the transaction, namely: the party donating (donor) and the party receiving the donation (donee), are aware of the Tax Code requirements on income tax deductions and donor’s tax exemption. Not all donations reap tax benefits. However, if the donee is a qualified donee institution, i.e., an accredited NGO-Foundation, then the donor enjoys the benefits of full income tax deductibility and donor’s tax exemption.
A foundation is defined as a “non-stock, non-profit corporation established for the purpose of extending grants or endowments to support its goals or raising funds to accomplish charitable, religious, educational, athletic, cultural, literary, scientific, social welfare or other similar activities.” Legally, the word “Foundation” is appended to the corporate name with a required minimum start-up fund of P1 Million. To be “accredited”, means to pass the accreditation process for tax exemption entitlement conducted by the Philippine Council for NGO Certification, Inc. (PCNC), the association authorised by the Department of Finance.
Generally, donations are not deductible from gross income for income tax purposes, as these are not ordinary and necessary expenses of the business; hence, there is no tax benefit. Additionally, donations are also subject to donor’s tax at the rates ranging from 0% to 15% of the gross value of donations, and to 30% if the donee is a stranger. A stranger is a person who is not a brother, sister, spouse, descendant or relative of the donor.
For donations to be deductible from gross income, the donee must be any one of the following: (1) the Government of the Philippines/agencies/political subdivisions and government-owned and controlled corporations (GOP/GOCC) not engaged in priority activities; (2) GOP/GOCCs engaged in priority activities; (3) foreign institutions or international organisations (FI/IO), pursuant to international agreements/treaties or special laws; (4) accredited non-profit corporations or associations (NPC/A); (5) non-accredited non-government organisations (NGO); and (6) accredited NGOs.
Priority activities aforementioned refer to activities in education, health, youth and sports development, human settlements, science and culture and economic development as defined by the National Priority Plan drawn up by NEDA. A foundation can either be an NPC/A or NGO. Take note that donations given to donees (1), (4) and (5) are entitled to partial income tax deductibility (i.e.,10% for individuals or 5% for corporations), while donations to donees (2), (3) and (6) can be deducted in full.
Donations to the government, accredited NGOs and NPC/As satisfying the administrative expense requirement (not more than 30% of total expenses are exempted from the donor’s tax.
Both an NPC/A and NGO refer to an entity engaged exclusively in certain priority activities like charitable, scientific, educational, etc. in which no part of their net income inures to the benefit of any private individual. For an NGO, however, (i) the donations received shall be utilised for its registered activities by the 15th day of the 3rd month of the following taxable year, (ii) its administrative expenses do not exceed 30% of total expenses, and (iii) its assets upon dissolution are distributed to similar entities, to the state, or to accomplish its purposes pursuant to a court order.
Thus, a foundation can either be an NGO or merely an NPC/A, depending on whether or not it satisfies the utilisation, administrative expenses and asset distribution requirements for NGOs.
For income tax deductibility, donations to a PCNC-accredited NPC/A-Foundation are entitled to full deductibility; otherwise, only partial income tax deductibility applies. As for donor’s tax purposes, a foundation, whether an NPC/A or NGO, does not have to be accredited for the donations to be exempt, but must additionally satisfy the administrative expenses requirement.
The best channel therefore for one’s donation is an accredited, qualified donee institution (e.g. NGO-Foundation) since it entitles the donor to full income tax deductibility and full exemption from donor’s tax. Donees, henceforth must also be aware of the BIR requirements to be able to entice prospective donors.
Giving donations, therefore, to a qualified donee would entail virtually no tax cost and result in substantial tax benefits for the donor—32% for individuals, or 35% for corporations representing the reduction in income tax payables resulting from the full deduction. In case of corporations in a net loss position at the time of donation, the income tax reduction will be in later taxable years through a carry over of net operating losses.
The other benefit is an exemption from the donor’s tax of 30% (or up to 15% for relatives up to the fourth degree of consanguinity) of the donation, or the fair market value of a property to be donated.exemption. Plan your donations now and maximise tax benefits in the process.
