BIR Ruling [DA-157-06]

March 27, 2006 BIR RULING [DA-157-06] Section 30; BIR Ruling No. 022-00 & S30-011-2001 Visually Impaired's Brotherhood for Excellent Services Inc . H-1268 Valley Fairways Subd., Valleygolfroad Cainta, Rizal Attention: Mr. Dante A. Tiosan President Gentlemen : This refers to your letter dated February 28, 2006 indorsed to this Office by Commissioner Jesus E.G. Martinez requesting on behalf of Visually Impaired's Brotherhood for Excellent Services Inc. (VIBES) for a Certificate of Tax Exemption. As represented, VIBES is a non-stock, non-profit organization registered with the Securities and Exchange Commission under SEC Reg. No. ANO92-002227 dated June 23, 1992. It is also registered with the Department of Social Welfare Development (DSWD). It aims primarily to promote the socio-economic conditions of its blind members and dependents. In pursuit of its goal, VIBES established livelihood projects in the form of massage clinics, which provide gainful and decent employment to trained and skilled blind masseurs. For several years of striving hard to become self-reliant individuals and a self help group, VIBES was able to achieve Multi Awards i.e., Apolinario Mabini Best Employer for Disabled, RCBC Sikap Award Disabled Category, Department of Health Hamis Silver Award for Traditional Medicine, and other recognition. To support the Government's ten-point program, more particularly in poverty alleviation, health consciousness and job creation, VIBES is intensifying its sustainable development programs through strengthening, expansion and replication of its livelihood projects. Although current political and economic crisis, tight competition and highly operational costs badly affect its daily sales, VIBES remains hopeful. CaAcSE INCOME TAX Based on the foregoing, this Office is of the opinion and so holds that VIBES is a corporation organized for charitable and social welfare purposes as contemplated under Section 30(E) and (G) of the Tax Code of 1997. Accordingly, it is exempt from the payment of income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. However, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation . Likewise, interest income from currency bank deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7-1/2% final withholding tax pursuant to Section 27(D)(1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in its By-laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. It is requested that a copy of this letter of exemption be attached to the annual information return which VIBES will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organization or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has have been granted tax exemptions or tax incentives, and its tax liabilities, if any. It should be understood that the said exempt non-government organization shall be constituted as withholding agent of the government if it acts as an employer and its employees receive compensation income subject to the withholding tax under Section 79(A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations (Rev. Regs.) No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57(B) of the Tax Code of 1997, also as implemented by Rev. Regs. No. 2-98, as amended (BIR Ruling No. S30-047-01 dated June 5, 2001). HOWEVER, this ruling is subject to the condition that VIBES shall submit its Articles of Incorporation to include the following provisions: a. that the corporation is non-stock, non-profit; b. that the primary purpose for which it was created is one of those enumerated under Sec. 30 of the Tax Code of 1997; c. that no part of the net income shall inure to the benefit of any of its members; d. that the trustees do not receive any compensation; and e. in case of dissolution, assets of the corporation shall be transferred to similar institution or to the government; By-laws, Annual Information Returns and Financial Statements (balance sheet) for the past three (3) years in compliance with Revenue Memorandum Circular (RMC) No. 14-2001. Otherwise, it shall be given a temporary exemption instead. HEDSCc VAT Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added (VAT) imposed in Section 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Accordingly, if VIBES is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Revenue from "contributions, membership dues and donations," not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 10% VAT. However, the above exemption from the 10% of VAT does not extend to its purchase of goods or properties or services and importation of goods. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods (except in the case of foreign donations) shall nevertheless be subject to the 10% VAT pursuant to Section 107(A) of the Tax Code of 1997. Thus, it has been ruled in the case of The Camillian Fathers, Inc. that ". . . if your client imports goods, the said importation shall be subject to VAT. . . ." (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). DONOR'S TAX Republic Act (R.A.) No. 7227, otherwise known as the "Magna Carta for Disabled Persons" is a special law which grants tax incentives to foreign donor/s on donation, bequest, subsidy or financial aid made to government agencies engaged in the rehabilitation of disabled persons and organizations of disabled persons. Sections 41 and 42 of R.A. No. 7227 provides, viz : "SEC. 41. Support From Nongovernment Organizations . Nongovernment organizations or private volunteer organizations dedicated to the purpose of promoting and enhancing the welfare of disabled persons shall, as they, are hereby encouraged, become partners of the Government in the implementation of vocational rehabilitation measures and other related programs and projects. Accordingly, their participation in the implementation of said measures, programs and projects is to be extended all possible support by the Government. SEC. 42. Tax Incentives . a) Any donation, bequest, subsidy or financial aid which may be made to government agencies engaged in the rehabilitation of disabled persons and organizations of disabled persons shall be exempt from the donor's tax subject to the provisions of Section 94 of the National Internal Revenue Code (NIRC), as amended and shall be allowed as deductions from the donor's gross income for purposes of computing the taxable income subject to the provisions of Section 29(h) of the Code (now Section 34(H) of the Tax Code of 1997). aEHASI b) Donations from foreign countries shall be exempt from taxes and duties on importation subject to the provisions of Section 105 of the Tariff and Customs Code of the Philippines, as amended, Section 103 of the NIRC, as amended (now Section 109) of the Tax Code of 1997), and other relevant laws and international agreements. xxx xxx xxx" Based on the foregoing, foreign donations are exempt from donor's tax under Section 101(A)(3). Moreover, pursuant to Section 109(K) of the Tax Code of 1997 as amended by R.A. No. 9337, transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 529, are exempt from the VAT. Accordingly, foreign donations are also exempt from the VAT on importation imposed under Section 107(A) of the same Code. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service