Donations and losses during calamities

In recent weeks, the Philippines, mainly Luzon, was ravaged by a series of typhoons that left the Bicol Region in ruins and submerged the Cagayan Valley in floods. Homes and livelihoods were lost because of these calamities.

The sincere outpouring of disaster-relief donations from various sectors of the community has continued even in the midst of the COVID-19 pandemic.

However, kind-hearted donors should be mindful of the tax consequences of such donations and the penalties for failing to course the donation through authorized channels.

DONATIONS

Donations are generally subject to donor’s tax at the rate of 6% on the total gifts made in excess of P250,000 during the calendar year.

For donations to be exempt from donor’s tax, there are authorized channels provided by our Tax Code and Special Laws. Donations, whether from domestic or foreign entities, or a non-resident non-citizen of the Philippines, can be exempt from donor’s tax if made to 1.) national government, or any of its agencies when not conducted for profit or to any political subdivision of the Government, and 2.) any educational, charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization, subject to the condition that not more than 30% of the donation be used for administration purposes.

Further, the Tax Code provides the definition of a “non-profit educational and/or charitable corporation, institution, accredited non-government organization, trust or philanthropic organization and/or research institution or organization” as a school, college or university and/or charitable corporation, accredited non-government organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students’ fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation.

As for other channels such as 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.

Also, donations to non-government organizations (NGOs) are exempt from donor’s tax provided such organizations are accredited with the Philippine Council for NGO Certification (PCNC).

Another case of donation is the assistance given by employers to their employees. Sad to say, this is not exempt from tax as any benefit received by an employee from his employer is generally considered compensation subject to tax. Only the benefits specifically provided under the laws and regulations issued by the Bureau of Internal Revenue (BIR) can be exempt. Assistance provided by employers to employees due to calamities is not exempt from taxation because they are not included in the exemption list. The BIR has been consistent in its rulings that any kind of assistance given by the employer to its employees due to calamities is not considered a tax-exempt benefit. The employer should either withhold tax from the rank-and-file employee or shoulder the fringe benefits tax in case of managerial/supervisory employees.

While many Filipinos are doing everything they can to provide assistance to the typhoon victims, business owners on the other hand are estimating their losses in terms of goods being washed out and factories submerged in flood waters or destroyed by strong winds.

LOSSES

For taxpayers engaged in business, the losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity are allowed as deductions if such property is connected with the trade, business or profession, and if the loss arise from fires, storms, shipwreck, or other such events, or from robbery, theft or embezzlement.

For the losses to be deductible for income tax purposes, the following should be present:

• They must be related to trade, business, or profession;

• They must be actually sustained during the taxable year;

• They must not be compensated for by insurance or other forms of indemnity; and

• They must file their claim of loss within 45 days after the event.

In claiming the deduction for losses, the affected taxpayer must comply with the following requirements imposed under existing regulations, Revenue Regulations No. 12-77 as amended by RR 10-79 and Revenue Memorandum Order No. 31-09:

1. Declaration of loss should be filed within 45 days after the event with the Revenue District Officer (RDO) which has jurisdiction over the taxpayer’s place of business. The sworn declaration of loss must contain, among other things, the following information: Nature of the event that gave rise to the loss and time of its occurrence; Description and location of the damaged properties; Items needed to compute the losses such as: (a) cost or other basis of the properties;  (b) depreciation, if any; (c) value of the properties before and after the event; and (d) cost of repair; and Amount of insurance or other compensation received or receivable.

2. The declaration of loss should be substantiated with evidence which the taxpayer should gather immediately after the occurrence of the casualty or event causing the loss. These include the following documents which should be kept by the taxpayer for BIR verification: photographs of the property taken before and after the monsoon rains showing the extent of the damage sustained; documentary evidence for determining the cost of valuation of the damaged properties such as purchase contracts and deeds, receipt bills for improvements, competent appraisals of the property before and after the casualty, cancelled checks, vouchers, receipts and other evidence of cost; insurance policies; and, if applicable, police reports, in case of robbery/theft during the typhoon and/or as a consequence of looting.

Now more than ever, as we all try to navigate this new reality, taxpayers, whether as donors or entities incurring losses, must be prepared and must take immediate action when calamities occur. Preparation of documentation is necessary to avoid unnecessary consequences or implications.

Once again, our country’s unity is being tested. There a lot of work and rebuilding to do — it will take a while before we can all stand on our feet. Various organizations have launched assistance programs, relief operations, fundraisers and medical missions. Any amount goes a long way, as long as the intent to help is there.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Ed Warren L. Balauag is a manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 24 November 2020