BIR Ruling [DA-089-04]

March 1, 2004 BIR RULING [DA-089-04] Section 30 & RR 7-03; BIR Ruling No. 121-91 Acosta Law Office Rm. 313 Catalina Building 9 New York St. cor. E. Rodriguez Sr. Blvd. Cubao, Quezon City Attention: Atty. Federico L. Acosta, Jr. Gentlemen : This refers to your letter dated August 14, 2002 requesting for a ruling that your client, Global Alliance Philippines Ministries, Inc. (GAP) is exempt from the expanded withholding tax since it is a nonprofit entity in line with BIR ruling dated September 18, 1993 re: sale of real property by St. Scholastica's College exempt from income tax and expanded withholding tax. It is represented that your client, GAP, is a non-stock, nonprofit religious corporation; that GAP desires to have realty transferred in its name, which property is registered in the name of Church Assistance Program Inc., another non-stock, nonprofit religious corporation; that Church Assistance Program Inc. has a BIR Certificate of Exemption dated July 28, 1988, exempting it from income tax and from filing of income tax return; that your client shall be assuming the expenses for such transfer; and that GAP has no business whatsoever except to propagate our Lord Jesus Christ to save the lost and strengthen the saved. In reply, please be informed that the tax exemption granted to religious organizations under Section 28(3), Article VI of the 1987 Constitution of the Republic of the Philippines (Constitution for short) is limited to exemption from payment of property taxes only. Also, the last paragraph of Section 30 of the Tax Code of 1997 (then Section 26 of the Tax Code, as amended), clearly subjects to tax the income of whatever kind and character derived by any organization otherwise exempt under the same section, from any of its properties or activities conducted for profit, regardless of the disposition made of such income. Specifically, the Tax Code provides thus: "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: xxx xxx xxx "(E) Nonstock corporation or association organized and operated exclusively for religious, . . . , no part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxx xxx xxx "Notwithstanding, the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any properties, real or personal , or from any of the activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code ." (emphasis supplied) The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 (then Section 26), particularly, does not leave any room for interpretation; the income from any of the organization's properties is subject to tax under the Tax Code, regardless of the disposition made of such income. In relation to this, Section 30 of Revenue Regulations No. 2, as amended, provides, among others, that the income of such tax-exempt corporation which is considered as income from their properties, real or personal, includes profits from the sale of property. The Constitution mandates that "charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious , charitable, or educational purposes shall be exempt from taxation ." [Section 28(3), Article VI, Constitution] (Emphasis supplied) Although the above-quoted constitutional provision seems to grant a sweeping tax exemption, the Supreme Court of the Philippines, in the case of Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965, held that the phrase "exempt from taxation" similarly contained in the 1935 Constitution should not be interpreted to mean exemption from all kinds of taxes. Thus, although in that case the cash received was actually spent by the parish priest for the intended purpose of constructing a new Catholic church, the Court nevertheless ruled against the exemption applied for in view of the interpretation it has given the Constitutional provision. The Highest Tribunal ruled that the exemption provided by the Constitution is only from the payment of taxes assessed on such properties enumerated as property or realty taxes. Finally, it held that there was no clear, positive or express grant of exemption privilege by law in favor of petitioner therein, hence, the denial (BIR Ruling No. 121-91 dated June 25, 1991) . BIR Ruling No. 388-93 dated September 16, 1993 finds no application to your case for the following reasons: (1) St. Scholastica's College Inc.'s exemption is under paragraph 3, Section 4 of Article XIV of the 1987 Constitution; (2) it involved the sale of real properties to entities engaged in the realty business (hence, the application of the expanded withholding tax); and (3) the proceeds of the sale were derived from a single and isolated transaction in furtherance of its educational purposes. Moreover, real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore, considered as capital asset under these Regulations (Section 3(b) of Revenue Regulations No. 7-2003). In view of the foregoing, the contemplated sale, disposition or transfer of property owned by Church Assistance Program Inc. to GAP is subject to the final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, imposed upon the capital gains presumed have been realized pursuant to Section 27(D)(5) of the same Code, as implemented by Revenue Regulations No. 7-2003, the same falling within the contemplation of the last paragraph of Section 30 of the same Tax Code. Moreover, the Deed of Sale and/or Conveyance of said property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. EAIaHD 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group