BIR Ruling [DA-031-05]

January 24, 2005 BIR RULING [DA-031-05] Sec. 30; RR 20-01; RMC 14-01 Community-Based Resource Management Project Department of Finance Roxas Boulevard Manila Attention: Ms . Helena B. Habulan Executive Director Municipal Development Fund Office Gentlemen : This refers to your letter dated May 14, 2004 requesting for a ruling on the following: DaAIHC A. Differing interpretations of applicable laws and requirements among BIR District and Regional personnel, particularly in the eligibility of DOLE-registered People' Organizations (POs) and Community Based Organizations (CBOs) tax exemption: 1. Eligibility of DOLE-Registered POs/CBOs to tax exemption; 2. Eligibility of CDA-Registered POs/CBOs to tax exemption; 3. Eligibility of SEC-Registered POs/CBOs to tax exemption; 4. Exemption from Value-Added Tax; 5. Requirements in the Availment of PO/CBO tax exemption privileges; and B. Slow processing of PO/CBO tax exemption applications. It is represented that the Community-Based Resource Management Project (CBRMO) is a US$38M World Bank assisted project being executed by the Department of Finance through the Municipal Development Fund Office (MDFO);that it covers 83 sub-projects of LGUs in Regions 5, 7, 8 and 13; that the Project seeks to reduce rural poverty and environmental degradation through support for locally generated and implemented natural resource management, small-scale infrastructure and/or livelihood projects, among others; that these sub-project components are implemented in partnership with 750 CBOs or POs through community contracts between the participating LGUs and the POs/CBOs; that these work contracts are either for free plantation and maintenance, nursery establishment, mangrove reforestation and maintenance, fish sanctuary establishment and the like; and that in facilitating establishment and operations of POs/CBOs, particularly in the availment of PO tax exemption privileges, the Project encountered the following issues/concerns that you wish to bring to the attention of this Office for opinion and possible ruling: 1. Differing interpretations of applicable laws and requirements among BIR District and Regional personnel, particularly in the eligibility of DOLE-registered POs/CBOs to tax exemption: a. Eligibility of DOLE-Registered POs/CBOs to tax exemption; b. Eligibility of CDA-Registered POs/CBOs to tax exemption; c. Eligibility of SEC-Registered POs/CBOs to tax exemption; d. Exemption from Value-Added Tax; e. Requirements in the Availment of PO/CBO tax exemption privileges 2. Slow processing of PO/CBO tax exemption applications In reply, please be informed of the following: 1. On the eligibility of DOLE-Registered POs/CBOs to tax exemption : Article 212 (g) and (h) of the Labor Code of the Philippines defined labor organization and legitimate labor organizations as follows: "Art. 212. Definitions xxx xxx xxx (g) "Labor Organization" means any union or association of employees which exists in whole or in part for the purpose of collective bargaining or of dealing with employers concerning terms and conditions of employment. (h) "Legitimate labor organization" means any labor organization duly registered with the Department of Labor and Employment, and includes any branch or local thereof." To be a qualified DOLE-Registered POs/CBOs, the following requirements must be met pursuant to Article 234 of the Labor Code which provides, viz : "Art. 234. Requirements of registration Any applicant labor organization, association or group of union or workers shall acquire legal personality and shall be entitled to the rights and privileges granted by law to legitimate labor organizations upon issuance of the certificate of registration based on the following requirements: IcHEaA (a) Fifty pesos (P50.00) registration fee; (b) The names of its officers, their addresses, the principal address of the labor organization, the minutes of the organizational meetings and the list of the workers who participated in such meeting; (c) The names of all its members comprising at least twenty percent (20%) of all the employees in the bargaining unit where it seeks to operate; (d) If the applicant union has been in existence for one or more years, copies of its annual financial reports; and (e) Four (4) copies of the constitution and by-laws of the applicant union, minutes of its adoption or ratification, and the list of the members who participated in it. As a qualified DOLE-registered PO/CBO, it will be entitled to certain privileges as provided for under the last paragraph of Article 242 of the Labor Code of the Philippines which provides viz: "xxx xxx xxx "Notwithstanding any provision of a general or special law to the contrary, the income and the properties of legitimate labor organizations, including grants, endowments, gifts, donations and contributions they may receive from fraternal and similar organizations, local or foreign, which are actually, directly and exclusively used for their lawful purposes, shall be free from taxes, duties and other assessments. The exemptions provided herein may be withdrawn only by a special law expressly repealing this provision." Thus, pursuant to the above-cited provisions, a DOLE-registered PO/CBO may be granted exemption from the payment of income tax, as a labor organization, pursuant to Section 30(A) of the 1997 Tax Code provided it is principally organized not for profit and has submitted all the requirements enumerated under Revenue Memorandum Circular No. 14-2001 which includes: a. Certificate of Registration b. Articles of Incorporation/Association which must include the following provisions: 1. that the corporation/association is non-stock, non-profit; 2. that the primary purpose for which it was created is one of those enumerated under Sec. 30 of the Tax Code of 1997; 3. that no part of the net income shall inure to the benefit of any of its members; 4. that the trustees do not receive any compensation; and 5. in case of dissolution, assets of the corporation shall be transferred to similar institution or to the government; c. By-laws d. Annual Information Return and Financial Statements for the last 3 years of operation unless the non-stock, non-profit corporation is newly incorporated; and e. Certificate of Non-Forum Shopping 2. On the eligibility of CDA-Registered POs/CBOs to tax exemption : Section 2 of Revenue Regulations No. 20-2001 defined Cooperative as: "Sec. 2. Definitions. a) Cooperative means cooperative duly registered with the Cooperative Development Authority or whose registration has been confirmed by the latter, including primary, secondary or tertiary cooperatives. Thus, the taxability/exemption of duly registered cooperatives dealing/transacting business with both members and non-members as provided for under Revenue Regulations No. 20-2001 are as follows: I. For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. aTAEHc For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997) After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members. The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116 and the P500.00 annual registration fee imposed under Section 236(B), all of the Tax Code of 1997; c. Subject to all other internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic project within the area of operation of the Cooperative. Notwithstanding the foregoing, all income of the Cooperative not related to its main/principal business/es shall be subject to all appropriate taxes under the Tax Code of 1997. This is applicable to all types of Cooperative, whether dealing purely with members or both members and non-members. In any event, all types of Cooperatives are required to register with the Bureau of Internal Revenue. The documentary requirements for the tax exemption of cooperatives under Republic Act No. 6938, as amended by RA 7716 and R.A. No. 8241, and as provided for under Revenue Memorandum Circular No. 14-2001 are the following: a) Articles of Cooperation and By-Laws; b) Certificate of Registration, and certificate of good standing issued by the Cooperative Development Authority (CDA); c) Certificate under oath by the Chairman/President/General Manager of the Cooperative that it is transacting business with members only or Certification that it is transacting business with both members and non-members; c) Certificate of Confirmation of Registration from the CDA (in the case of Cooperatives transacting business with non members already existing and previously registered under P.D. 175, P.D. 775 and EO 898, before the creation of the CDA, the reckoning period for the 10-year period of exemption is from March 10, 1987; d) Certification under oath by, the Chairman/President/General Manager of the Cooperative (if previously registered as above stated),as to the amount of accumulated reserves and undivided net savings, and that at least 25% of the net income is returned to the members in the form of interest and/or patronage refund; HDTcEI e) Latest Financial Statements duly audited by an independent Certified Public Accountant (CPA);and g) In the case of non-agricultural, non-electric and non-credit cooperative, certification that the share capital contribution of each member does not exceed P15,000.00. 3. On the eligibility of SEC-Registered POs/CBOs to tax exemption : Section 30 of the Tax Code of 1997 provides, viz: "Sec. 30. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural, or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock 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 belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers',fruit growers',or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; AEIHCS Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations 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 this Code. thus the said CBOs and POs must fall under the aforesaid classification in order to avail of the tax exemption privilege provided for by the said Section 30 of the 1997 Tax Code. Furthermore, Section 1(a) of Revenue Regulations No. 13-98 provides that a "Non-stock, non-profit corporation or organization" shall refer to a corporation or association/organization referred to under Section 30 (E) and (G) of the Tax Code created or organized under Philippine laws exclusively for one or more of the following purposes: 1. religious; 2. charitable; 3. scientific; 4. athletic; 5. cultural; 6. rehabilitation of veterans; and 7. social welfare 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. To further clarify the matters and pursuant to Section 1 of Revenue Regulations No. 13-98, please be informed further that: (1) "Religious purpose" shall refer to the promotion, propagation and accomplishment of any form of religion, creed or religious belief recognized by the Government of the Republic of the Philippines. (2) "Charitable activity" shall refer to extending relief to the poor, distressed and underprivileged and shall include fighting against juvenile delinquency and community deterioration. (3) "Scientific and research purpose" shall refer to undertaking or assisting in pure or basic, applied and scientific research in the field of agriculture, forestry, fisheries, industry, engineering, energy development, food and nutrition, medicine, environment and biological, physical and natural sciences for the public interest. (a) Basic research shall refer to an experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts without any particular application or use in view. It analyzes properties, structures or relationships with a view to formulating and testing hypothesis, theories or laws. The results of basic research are not generally sold but are usually published in scientific journals or circulars to interested colleagues. SaITHC (b) Applied research shall refer to an original investigation undertaken in order to acquire new knowledge. It is directed primarily towards a specific practical aim or objective. It is undertaken either to determine possible uses for the findings of basic research or to determine new methods or ways of achieving some specific and predetermined objectives. it involves the consideration of the available knowledge and its extension in order to solve particular problems. Applied research develops ideas into operational form. (c) Scientific research will be regarded as carried on for public interest if the results of such research are made available to the public on a non-discriminatory basis; or if such research is performed for the Government of the Philippines or any of its agencies or political subdivisions; or if such research is directed to benefit the public. (4) "Character building and youth and sports development (or athletic) purposes" shall refer to and include conducting basic and applied research on youth development, initiating and establishing youth organizations to promote and develop youth activities, including the establishment of summer camps or centers for leadership training, conducting a program on physical fitness and amateur sports development for the country, developing or maintaining recreational facilities, Playgrounds and sports centers; and conducting training programs for the development of youth and athletes for national and international competitions. (5) "Cultural activity" shall refer to and include undertaking and/or assisting in research activities on all aspects of history, social system, customs and traditions; developing, enriching and preserving Filipino arts and culture; developing and promoting the visual and performing arts; and participating in vigorous implementation of bilingual policy through translation and wider use of technical, scientific and creative publications, development of an adaptive technical dictionary and use of Filipino as the medium of instruction. (6) "Educational activity" shall refer to and include the granting of scholarships to deserving students and professional chairs for the enhancement of professional courses, and instructing or training of individuals either through formal and informal methods, viz: (a) Formal method of instruction refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education; (b) Non-formal method of instruction refers to any deliberately organized, systematic educational activity carried on outside the framework of the formal system to provide selected types of learning to particular subgroups of the population, particularly out-of-school youths and adults, for the purpose of communicating ideas, developing skills, changing attitudes or modifying behavior to improve their character and to provide them with tools necessary for the achievement of a higher standard of living. For the purpose of this section, a certification from the Technical Education and Skills Development Authority (TESDA) is required for the accreditation of the non-formal educational program which is implemented or carried out by a non-stock non-profit corporation, organization or an NGO. ECSHID It also includes upgrading of existing facilities to support the conduct of the above activities. (7) "Rehabilitation of veterans" shall include services extended to Philippine veterans and members of their families because of financial difficulties and attendant problems; and services extended to disabled veterans towards production life. (8) "Social welfare purposes" shall refer to and include: (a) undertaking and/or assisting in the amelioration of the living conditions of distressed citizens particularly those who are handicapped by reasons of poverty, youth, physical and mental disability, illness, old age, and natural disasters, including assistance to cultural minorities; (b) pursuing a program for the protection and development of children and youth such as providing services for drop-outs, pre-school children of low-income working mothers, and physically handicapped children, (c) providing for the rehabilitation of the youth and disabled adults, released prisoners, drug addicts, alcoholics, mentally retarded, hansenites and similar cases; and (d) providing for services to squatter families and to displaced workers (9) "Health purposes" shall refer to include the pursuit of any of the following: (a) control, prevention and treatment of communicable and degenerative diseases, accidents and other health disabilities; (b) family planning program designed to indicate knowledge and understanding of population human growth and development of family life; (c) environment sanitation, such as, public sewerage system and sanitary toilets; and (d) nutrition, which aims to reduce the prevalence of malnutrition and increase the energy and protein intake among households. To avail of the tax exemption privileges, the documentary requirements provided for under Revenue Memorandum Circular No. 14-2001 must be complied with. 4. Exemption from the Value-Added Tax It must be noted that the exemption provided for under Section 30 of the Tax Code of 1997 refers only to the income received by them as such. Hence, they are subject to other internal revenue taxes such as value added tax considering further that VAT when passed on to the said organizations, is no longer a tax but an additional cost which become part of the amount of the contract price to be paid by them. (Phil. Acetylene Co., vs. CIA, G.R. No. 19707, August 17, 1967) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group