Category: Taxation

Charitable donations as tax deduction

If you are considering donating cash or property, or combination of both, you should know that your donations may be deducted from your income tax.

A. Donations to Philippine Red Cross

All donations, legacies and gifts made to the Philippine Red Cross to support its purposes and objectives shall be exempt from the donor’s tax and shall be deductible from the gross income of the donor for income tax purposes or from the computation of the donor-decedent’s net estate as a transfer for public use for estate tax purposes. (Sec. 5, Republic Act. 10072)

 

B. Other donations as per Sec. 34 of the Philippine tax code

If you are thinking of donating not to Philippine Red Cross but to another done and wondering whether your donation can be deducted from your income, the relevant provision of the Philippine Tax Code reads:

“SEC. 34. Deductions from Gross Income. – Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

x x x

(H) Charitable and Other Contributions. –  

(1) In General. – 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, or to accredited domestic corporation 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 non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer’s taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs.

(2) Contributions Deductible in Full. – Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full;

(a) Donations to the Government. – Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used 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 and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations. – donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;

(c) Donations to Accredited Nongovernment Organizations. – the term ‘nongovernment organization’ means a non profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and

(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term ‘utilization’ means:

(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.

(3) Valuation. – The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property.

(4) Proof of Deductions. – Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.”

What this provision means:

 1.      “Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section”

If you are a taxpayer employee (earning compensation income arising from personal services rendered under an employer-employee relationship), any donation you make pursuant to Sec. 34 of the tax code cannot be deducted in your income tax computation.

 2.      “in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1)”

If the person donating is any one of the following;

a. Individual Citizen, or Individual Resident Alien of the Philippines (Sec. 24[a]).

b. Nonresident alien individual engaged in trade or business in the Philippines (Sec. 25[a]).

c. A partner in a general professional partnership (Sec. 26).

d. Domestic Corporation (Sec. 27[a])

e. Proprietary educational institutions and hospitals (Sec. 27[b])

f. Government-owned or Controlled-Corporations, Agencies or Instrumentalities (Sec. 27[c])

g. Resident Foreign Corporations (Sec. 28[a][1])

any donation is a deduction (except if you are a taxpayer employee as above).

 3.      “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, or to accredited domestic corporation 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 non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual”

To be considered a deductible donation, the donation (ie., contributions or gifts) must one that is actually paid or made within the taxable year to, or for the use of any of the following donees;

a.  Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes; or to

b. Accredited domestic corporation 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 non-government organizations.

No part of the net income of the said NGO or accredited corporation or associations should go for the benefit of any private stockholder or individual. As well, Revenue Regulations No. (RR) 13-1998 require that the donee NGO be accredited with the Philippine Council for NGO Certification or PCNC (www.pcnc.com.ph). Otherwise, your donation to these NGOs cannot be claimed as deduction for tax purposes.

Also, if an individual (donor-taxpayer) donated one million pesos to another individual, this donor-taxpayer cannot claim the donation as deduction, under this section, because the donee must be one of those named juridical persons.

 

 4.      Partial deduction rule or the general rule on the rate of deduction that you can make:

 a.  “Not in excess of ten percent (10%) in the case of an individual . . . of the taxpayer’s taxable income” – If you are an individual taxpayer, 10% of your taxable income.

So an individual taxpayer who donated one million pesos (P1,000,000), the donation as deduction will be 10% of his computed taxable income.  Assuming, his taxable income is 500,000, the 10% thereof is 50,000 – – this is the amount to be deducted from his income, not the entire amount donated of one million pesos.

 

b. “Not in excess of . . . five percent (%) in the case of a corporation, of the taxpayer’s taxable income” – If you are a corporation, 5% of your taxable income.

 A corporation donated P500,000. If its taxable income is one million pesos (P1,000,000), the 5% of this is P50,000, this is the amount allowed as deduction, not the P500,000 it donated.

 5.      Full deduction rule of Sec. 34[h][2] which provides “donations to the following institutions or entities shall be deductible in full” – – the total amount of your donations to the following donees shall be fully deductible;

a. Donations to the Government for use pursuant to an annual priority plan – Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used 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 and Development Authority (NEDA), in consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions.

Any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations in Sec. 34[h][1] or the “partial deduction rule” at either  the10% or 5% rates.

 b.  Donations to Certain Foreign Institutions or International Organizations – donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws.

 c.  Donations to Accredited NGOs – the term NGOs or ‘nongovernment organization’ means a non profit domestic corporation organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. The NGOs must comply with the requirement for utilization of the donated money or property and the 30% cap on administrative expenses. The NGOs’ assets, in the event of dissolution, must be distributable to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

Revenue Regulations No. (RR) 13-1998 require that these NGOs-donees must be accredited with the Philippine Council for NGO Certification or PCNC (www.pcnc.com.ph).

The website of PCNC http://www.pcnc.com.ph/ngo-list.php provides a listing of its certified NGOs. If the NGO is not certified, your donation can be a partial deduction; if certified, you can claim the full value of your donation as full deduction.

 6.      Non-cash donations – If your donation is not cash, the amount of your donation shall be based on the acquisition cost of the property you donated. (Sec. 34[h][3])

C. Other donations regulated by other special laws

There may be other kinds of donations that maybe considered deductions from your income.

For example, donations to Polytechnic University of the Philippines (PUP), a government educational institution governed by Republic Act No. 8292 is considered as deductible items from the income tax of the donor (Republic Act No. 8292).

Gifts and donations of real and personal properties of all kinds to People’s Television Network is considered as an allowable deduction from the gross income of the donor (Republic Act No. 10390).

Another, your donation to People’s Survival Fund to address the problem of Climate Change is considered as allowable deductions from the gross income of the donor (Republic Act No. 10174).

D. Donor taxpayer employee

As discussed above, if you are a taxpayer employee (earning compensation income arising from personal services rendered under an employer-employee relationship), any donation you make pursuant to Sec. 34 of the tax code cannot be deducted in your income tax computation.

If you think this is unfair, you maybe correct and you are not alone. The National Tax Research Center of the Department of Finance prepared a discussion report on this which is worthy of reading (see http://www.ntrc.gov.ph/files/Feasibility-of-Allowing-the-Tax-Deductibility_3txfiq1d.pdf last accessed November 13, 2013).

Conclusion

So if you want to claim the value of your donation as tax deduction you could consider the above, or the relevant special law applicable to the fund or entity you want to donate your money or property.

However, humanitarianism and charity should be the foremost reason for donation and should be above considerations of tax deductibility of donations made; so donate and help – – regardless of whether or not you can claim partial, full, or zero value of your donation.

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