On taxing the compassionate and levying on altruism

The institution of giving has been among the championed hallmarks of humanity. Without a doubt, extending a helping hand without any equivalent return is accepted as morally-good on a wide and comprehensive level. This institution proves all the more relevant (and necessary) considering the onslaught of economic and natural turmoil that we recently experienced and the need to bridge the alarmingly widening gap between those who have beyond what they need and those who can only make do with what they have.

To this end, the Tax Code accordingly recognizes to a considerable degree, the value of generosity by providing that certain donations may be exempted from the imposition of donor’s tax or be allowed as deductions for the purpose of determining the taxable income of the donor.

As a rule, donor’s tax should not be imposed upon donations 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 government.

Further, donor’s tax should not be imposed upon gifts in favor of non-governmental organizations (NGOs), provided, however, that not more than 30 percent of said gifts should be used by such donee for administration purposes.

It may be noted that under Revenue Regulations (RR) No. 13-1998 dated Dec. 8, 1998, these organizations should be duly accredited by the Philippine Council for NGO Certification Inc. (PCNC), in order that donations to them may be exempted from donor’s tax.

On the issue of deductibility, Section 34 (H) (1) of the Tax Code provides that the following donations may be claimed as deductions in an amount not to exceed 10 percent in the case of an individual, and five percent in the case of a corporation, for the purpose of determining their taxable income:

1. Contributions or gifts actually paid or made within the taxable year to, or for the use of the government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes.

2. Donations to accredited non-stock, and non-profit  corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to NGOs, in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, no part of the net income of which inures to the benefit of any private stockholder or individual.

Full deductibility of the donation on the other hand, may be claimed provided that:

1. Donations to the government should be used exclusively to finance priority activities pursuant to a national priority plan determined by the National Economic and Development Authority (NEDA).

2. Donations to accredited NGOs should comply with the conditions set forth in Section 34 (H)(2)(c) as implemented by Section 3 (2) of RR No. 13-1998, such as the utilization requirements, the 30-percent cap on administration expenses, the rule on distribution of assets to another accredited NGO organized for similar purposes or to the state, in the event of the donee-NGO’s dissolution, the use of acquisition cost for the valuation of donated property other than money for donor’s tax purposes, and the prohibition against the paying of compensation to the members of the Board of Trustees of the accredited NGO.

Considering however, that there is a need to protect the integrity of the state’s income flow, reasonable controls are expected to be in place lest the institution of giving be devised as a ruse to evade the payment of due taxes. One such mechanism for control, among others, is provided under Section 8 of RR No. 13-1998 which requires that a donor claiming donations to accredited NGOs as deductions from their taxable business income should submit evidences or proofs to the Bureau of Internal Revenue (BIR) in the form of a Certificate of Donation which indicates the following pieces of information:

1. Actual receipt by the accredited NGO of the donation or contribution and the date of receipt thereof.

2. The amount of charitable donation or contribution, if in cash; if property, whether real or personal, the acquisition cost of the said property.

Under Revenue Memorandum Circular (RMC) No. 86-2014 dated Dec. 5, 2014, the above Certificate of Donation should now come in the form of the prescribed BIR Form No. 2322. The BIR Form No. 2322 comes in two parts: a donee certification and a donor’s statement of values.

The donee certification should contain the certification by the donee that it has received on the date indicated the subject matter of the donation as well as the description of the property/ies donated. Furthermore, this donee certification should be signed by an authorized representative of the donee organization.

On the other hand, the donor’s statement of values should contain a statement of the donor of the descriptions, acquisition costs, and the net book values of the properties donated by him, as reflected in his financial statements. Furthermore, the donor’s statement should be accompanied by the deed of sale/bill of sale or a certification under oath by the donor of the net book value and acquisition cost of the property/ies that he donated. Likewise, the donor’s statement must be signed by the donor or his authorized representative.  The values declared by the donor in his donor’s statement, however, is not conclusive upon the BIR as the same should still be subject to the verification of the Bureau as to its correctness and accuracy.

The BIR Form No. 2322 should be accomplished in triplicate and distributed accordingly to the donor, donee and the BIR within 30 days from the receipt of the donation.

Moreover, RMC 86-2014 reminded tax-exempt organizations or entities enjoying tax incentives such as accredited NGOs that their tax status is subject to the regular monitoring and examination by the BIR.

It is worth pointing out though, that the BIR Form No. 2322 only provides the baseline substantiation for claiming donations as deductible per se. Whether or not full or limited deductibility may be claimed is another matter. In this regard, we may recall that under RR No. 02-2003 dated Dec. 16, 2002, it is required, for the purpose of claiming full deductibility, that a Notice of Donation should be submitted by the donor on every donation to accredited NGOs worth at least P50,000. This Notice must include a certification that the conditions for full deductibility as provided in Section 34(H)(2)(c) of the Tax Code have been complied with. It may be observed however, that the submission of this notice has yet to come into prominence in so far as being a standard practice is concerned.

Nevertheless, from a compliance standpoint and considering that RMC 86-2014 now requires the participation of the donor in the accomplishment of the Certificate of Donation, it may be a best practice for the donor to concurrently prepare the Notice of Donation along with the donor’s statement of values. This is in order to streamline the donor’s efforts to comply with the documentary requirements for claiming deductions.

Note that the Notice of Donation along with the Certificate of Donation should be submitted to the Revenue District Officer where the donor’s business is located. Moreover, the full deductibility of the donation is also contingent on the donee-NGO’s continued possession of an accredited status by the PCNC as evidenced by a valid and current Certificate of Accreditation.

The stringent requirements for claiming a tax relief for donations given may dampen a donor’s impassioned generosity. Of course, it may be argued that the virtue of giving should not be motivated by any potential tax breaks that a donor may enjoy.  Yet considering that tax rules are also a means of regulation, our present rules on substantiating donations may call into question if donation is encouraged at all. Is this really a message that we want to send out? Perhaps if our administrative agencies would revisit the substantiation requirements of donations from a place that recognizes the importance of promoting compassion rather than from a viewpoint jaded by the possibility of evasion, then we would have a tax environment that encourages more to help out. That notwithstanding, any lingering resistance toward compliance may be lessened by being reminded that the payment of due taxes is, in its idealized (and achievable) form, still an act of altruism.

Michael Angelo D. Adrid is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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