Tax breaks for the compassionate

By Betheena C. Dizon

Business World (12/02/2013 – p.S1/6)

SUPER typhoon Yolanda (Haiyan) wrought unimaginable devastation in the Visayas and sparked a massive international relief operation to bring aid to victims. People and organizations from across the country and from around the world provided assistance. Aid came in the form of cash and goods.

This generous outpouring of support has, however, triggered the question on whether such donations are subject to donor’s tax. Not a few raised the sentiment that it may not seem right to tax the donors, who, in the first place, have extended a helping hand to those who are in dire need.

What does the Tax Code really say about taxation of donations?

As a general rule, the transfer of property through gift by any person, resident or not, is taxed at varying rates. In general, the donor’s tax for each calendar year is computed on the basis of net gifts following a table of graduated rates from 2% to 15%, depending on the amount of the donation. However, if the donee is a stranger, the tax rate that applies is 30%. For this purpose, a “stranger” is a person who is not a brother, sister (by whole or half blood), a spouse, ancestor, or lineal descendant, or a relative by consanguinity within the fourth degree in the collateral line. However, donations not exceeding P100,000 are exempt.

The Tax Code does provide for gifts or donations by residents and non-residents that are exempt from donor’s tax. These are: (a) gifts made to or for the use of the national government or any entity created by any of its agencies not conducted for profit, or to any of its political subdivisions; and (b) gifts in favor of educational and/or charitable, religious, cultural, or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization, subject to the requirement that not more than 30% of the said gifts shall be used by the donee for administration purposes.

Thus, donations made to national government agencies such as the National Disaster Risk Reduction and Management Council (NDRRMC) and the Department of Social Welfare and Development (DSWD) are exempt from donor’s tax. In addition, the importation and donation of food, clothing, medicine, and equipment for relief and recovery shall be considered as that of the NDRRMC where the value-added tax (VAT) due on said importation shall be shouldered by the government.

For donations made to the Philippine Red Cross, the Philippine Red Cross Act of 2009 (Republic Act No. 10072) expressly exempts such donations from donor’s tax, and they are deductible from the donors’ gross income for income tax purposes.

With respect to donations made to non-government organizations (NGOs), the Tax Code requires that these must be accredited with the Philippine Council for NGO Certification (PCNC), so that donations to them may be exempted from the donor’s tax. The rules also require, among others, that not more than 30% of proceeds shall be used by the NGO for administration purposes.

Aside from the donor’s tax issue, the other to consider with regards to gifts or donations is whether the same is deductible for purposes of computing the donor’s net taxable income. Under Section 34(H)(2) of the Tax Code, donations are deductible in full for as long as these are made to the government to be used exclusively 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 Development Authority (NEDA). Also, donations made to accredited NGOs are deductible in full. Should donations given to the government not qualify under the foregoing criteria, or are not made to accredited NGOs, the donations shall only be deductible to the extent of 10% of the donation, in case of individuals or 5%, for corporations.

However, for donations made in kind, especially made by entities engaged in the manufacture and sale of goods, these may be subject to 12% VAT, as they may be considered “transactions deemed” sale, where the goods originally intended for sale are deemed transferred, used, or consumed, even if not in the course of business.

The Tax Code and other related laws seem to provide a clear picture on the taxation of donations. In light of the current relief efforts for those in despair, the information provided can help us be both responsible and compassionate donors at this trying moment.

Betheena C. Dizon is a tax associate Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.