Tax Implication of Donations

The catchphrase “Corporate Social Responsibility” has been popular in the business community for it stresses the importance of moral, ethical, and philanthropic responsibilities by giving donations to groups with special needs. This has been acknowledged by the government by issuing tax rules which allow responsible donors to enjoy certain privileges for them to continue their CSR programs and encourage others to do so. These privileges and tax rules mainly include the deductibility of the donation from business income and exemption from donor’s tax.

In General, as per National Internal Revenue Code (NIRC) SEC. 34 (H), donation or gift actually paid or made to any registered Non-stock, Non-profit Corporations/Nongovernment Organizations (NGOs) are deductible to the donor’s business income only to the extent of 10% for the individual or 5% for corporation, of donor’s taxable income, without the benefit of deducting the donation or gift.

As an exception to the general rule, the donation or gift shall be deductible in full without limitation, if donation was paid or made to the following:

  1. Government
  2. Certain Foreign Institutions or International Organizations
  3. Accredited Nongovernment Organizations (NGOs) – Non-stock or Non-Profit Domestic Corporation

Hence, many of the taxpayers’ practices are dealing with registered non-stock, non-profit corporation or organization/NGO to exercise their philanthropic responsibilities given the benefit (e.g. tax savings) of such.

Please bear in mind that the term “NGO” as defined in the Sec. 30 (E) and (G), are corporation or association or organization that are created or organized under the Philippine laws exclusively for the following purposes: religious, charitable, scientific, athletic, cultural, rehabilitation of veterans and social welfare, where no part of the net income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

NIRC SEC. 34 (H) (2) and Revenue Regulation (RR) 13-1998 further elaborate the rules and conditions for donations or gifts deductible in full.

  1. For Government – The donation shall be in accordance with National Priority Plan to be determined by National Economic and Development Authority (NEDA) in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions.
  2. 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.
  3. For Accredited Nongovernment Organizations (NGOs)
    1. The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner.
    2. 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.
    3. In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized.
    4. The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property
    5. All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization.

Donations and gifts made in favor of accredited non-stock, non-profit corporations/NGOs shall be exempted from the donor’s tax: Provided, however, that not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the NIRC.

A Certificate of Donation (BIR Form No. 2322) shall be issued on every donation of gift received by accredited institutions and the donors, on the other hand claiming donations should submit evidences or proofs to the BIR by showing the Certificate/s of Donation together with statement of valuation indicating the following:

  1. Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or contribution and the date of receipt thereof.
  2. The amount of the charitable donation or contribution, if in cash; if property, whether real or personal, the net book value of the said property as reflected in the financial statements of the donor. Moreover, the statement must be accompanied by deed of sale/bill of sale, in case of donation of property.

For every donation over One Million pesos (Php 1,000,000), the donor shall give a letter of notice to the Revenue District Officer (RDO) where his place of business is located within thirty (30) days after the receipt of the Certificate of Donation attaching to the said letter the copy of the Certificate of Donation issued to him by the accredited non-stock, non-profit corporation/NGO and statement of valuation, subject to further confirmation by the Bureau as to its correctness and accuracy.

Claims for deductibility of donations and contributions by the donors shall be filed at the time of filing their income tax returns by attaching the said certificate and necessary evidence mentioned above.

However, tax deductibility based on generosity and compassion is not always guaranteed because the donor is constrained by the requirements of tax deductibility as mandated by law. This is to prevent corporations or individuals from claiming non-existent donations to reduce their taxable income, and, on the other hand, to ensure that recipients of donations faithfully use the funds for the intended causes.