Tax Savings on Foundations
By: Garry S. Pagaspas
Foundation as an entity is not new to each of us. During calamities, donations and grants from and to foundations and charitable institutions are common. Big companies are now becoming more active in corporate social responsibilities and most of these are coursed through foundations and charitable institutions. In line with this, let us determine the tax side of this entity( or simply – How to tax foundations?) to have some clue on how this became popular now.
As Section 1 of SEC Memorandum Circular No. 1, Series of 2006 puts it, and hereunder quoted:
“A Foundations is a non-stock, non-profit corporation established for the purpose of extending grants endowments to support its goals or raining funds to accomplish charitable, religious, educational, athletic, cultural, literary, scientific, social welfare or other similar objectives.”
Further Section 87 of the Corporation Code defines non-stock as follows, and hereunder we quote:
“Non-stock corporation is one where no part of its income is distributable as dividend to its members, trustees, or officers, subject to the provisions of this Code on dissolution. Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.”
From the above, Foundation is a specie of a non-stock, non-profit corporation. For Securities and Exchange Commission (SEC) corporate registration purposes, the main characteristic of a Foundation lies on two (2) things – (1) Use of “foundation” in its corporate name, and (2) Paid-up capitalization of p1,000,000.00. Under SEC rules, corporate name for an ordinary non-stock and non-profit has no distinguishing characteristic and it is only when you look into its Articles of Incorporation and By-laws where you will know them as such, and any amount of paid-up capitalization from member’s contribution will do, as compared to the P1,000,000.00 paid up capitalization for foundations.
Use of foundation could provide the following tax benefits:
a. 30% Income tax exemption. Under Section 30 of the Tax Code, as amended, foundations are exempt from income tax under certain conditions with respect to the funds it generates from donations, grants, and operations geared towards the fulfillment of its purpose as a foundation. Quoted is Section 30(E) of the Tax Code for easy reference:
“Section 30(E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall inure to the benefit of any member, organizer, officer or any person.“
The above exemptions is anchored on the fact that the noble objectives of the non-stock and non-profit corporations are very much beneficial to the government with the public as recipient thereof. They are the functions that the government delivers so its the same thing if these entities are required to pay taxes, and the funds therefrom are used to fund and deliver the services there entities are doing. For such exemptions, the Bureau of Internal Revenue (BIR) normally issues a confirmation (BIR Ruling) after evaluation of the qualifications of such entities. For the purpose, the following factors are material:
- Utilization of contributions not later than the 15th day of the 3rd month after the end of the calendar year,
- Level of administrative expenses which should not exceed 30%, and,
- Disposition of assets in the event of liquidation which should be distributed to a similar non-stock and non-profit organization.
However, the income of whatever kind and character of the non-stock and non-profit from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under the Tax Code. Notably, corporate tax rate is a bit high at 30%.
b. Value-added tax (VAT) exemption. VAT is a business tax imposed upon those who in the ordinary course of trade or business sells, barters, exchanges, leases goods or properties, renders service, and those who imports goods. Contributions and donations to foundations and non-stock, non-profit organizations are not treated as one received in such course of trade or business, so not subject to 12% VAT.
However, if in order to raise funds the non-stock and non-profit engages in trade or business (e.g. sales goods or renders service that is VATable should the same be rendered by other entities), then, such 12% VAT shall be imposed. Usage of net proceeds for noble intentions is one thing that is being exempted from income tax, while, engaging in a trade or business is another thing that is subject to 12% VAT. The reason for such taxability is to level the playing field between those engaged in the same line of trade or business. After all, its business and the consequences of the same should be fair to all.
c. 100% deductible expenses. On the part of the DONOR or GIVER of charitable contributions to a Foundation duly accredited by the Bureau of Internal Revenue as a donee-institution is deductible in full. In general, business entities are expected to spend only those expenses related to the conduct of its trade or business, and donations to Foundations may not always be in such relation. Despite the fact that their might have no business relation of the donations to Foundation, still, the same is allowed as deduction for income tax purposes based on prescribed substantiations (e.g. Certificate of Donation). Presently, the concept of Corporate Social Responsibility is optimizing this aspect of giving back the favor to the general public whom they deal with, while, enjoying the tax perks.
For donations to non accredited donee-institutions, the tax rules provides a limit of not more than 5% for corporations or 10% for individual taxpayers based on the taxable net income before such donation deduction. As such, the catch is to make donations to accredited donee institutions to enjoy the 100% tax deduction. Notably, direct donations of private companies are at risk for documentation issues and thus, prone for tax exposures.
d. 30% Donor’s tax exemption. Donor’s tax is imposed upon the act of liberality of the donor or giver in order to equalize the wealth among the members of the society. However, donations or gifts to Foundations are exempt from donor’s tax provided that the not more than 30% of such donations or gits for the taxable year are used for administrative purposes. The reason of the requirement is probably to prevent the circumvention of such donations to private benefits within the organization like paying administrative salaries at exorbitant amounts.
Based on the above major benefits, Foundation is a better structure to use for the implementation of corporate social responsibility (CSR) programs. Under this, private company will be able to see to it that the donations are properly documented with official receipts issued by the Foundation, a Certificate of Donation issued, and other technical requirements be complied with for tax deduction and exemptions purposes. Thus, it could enjoy 100% tax benefits.
To become an accredited donee institution, it must be registered as a non-stock and non-profit or as Foundation with the Securities and Exchange Commission (SEC) and BIR based on the technical requirements such as paid-up capitalization of P1,000,000.00; non distribution of dividends; BIR Ruling on tax exemptions; and other related accreditation requirements. With proper documentation, the above tax benefits seems to be more fun.
References for more readings:
(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at firstname.lastname@example.org.)
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.
Corporate Registrations. We could assist you in the complete registration of your legal business entity – ordinary corporation, license to do business for foreign corporations, foundations, non-stock and non-profit corporations. We already have established and registered a number of corporations – local and foreign with the Securities and Exchange Commission and other government agencies.
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