BIR Ruling [DA-183-06]

March 27, 2006 BIR RULING [DA-183-06] Sections 30, 101 (A), 105-108 BIR Ruling No. S30-047-01, DA-123-01 & DA-043-04 Floyd P. Lalwet Law Office Rm, 291 The Episcopal Church Center 275 E. Rodriguez Sr. Avenue 1102 Quezon City Attention: Atty. Floyd P. Lalwet Gentlemen : This refers to your letter dated September 14, 2005 requesting, in effect, for a revalidation of the tax exemption issued to The Episcopal Church in the Philippines, Inc. (EPC) under BIR Ruling No. S-30-067-98 dated November 19, 1998. As represented, The Episcopal Church in the Philippines (EPC) is a non-stock, nonprofit domestic corporation duly organized and registered with the Securities and Exchange Commission (SEC) on January 30, 1992 under SEC Registration No. ANO92-000421, with the following purposes: "a] To hold, acquire, dispose, administer and manage the temporalities and properties of The Episcopal Church in the Philippines, Inc. for advancement its religious mission in the Philippines and elsewhere by taking all steps required in the management and operation of churches, institutions, organizations and programs related to the pursuit of the Church's mission. b] To proclaim the good news of the Kingdom of God; c] To baptize, teach and nurture the new Believers; d] To respond to human needs by a loving service; e] To seek to transform unjust structures of society;" No part of the funds and income of the ECP inures to the benefits of any of its members and its Board of Trustees do not receive any compensation. In 1998, the ECP applied for income tax exemption as well as exemption from donor's tax of any donations in its favor. In reply, please be informed that the aforecited ruling exempting EPC from payment of income and donor's taxes pursuant to Section 30(E) and 101(A) of the Tax Code of 1997 subject to the conditions stated therein, remains valid and subsisting. Consequently, this Office holds as follows: HCITDc A. Income Tax & Filing of Return EPC is a corporation organized for religious purposes as contemplated under Section 30(E) 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 should be attached to the annual information return which you will file, in lieu of the income tax return, 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 they have been granted tax exemptions or tax incentives, and their 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 employee receives 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). B. Donor's Tax Since EPC is a corporation organized and operated for religious purposes, donations made to it are exempt from the payment of donor's tax pursuant to Section 101(A)(3) of the Tax Code of 1997, subject to the condition that not more than 30% of said gift shall be used by the donee for administration purposes. Moreover, the deed of donation is not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997 (BIR Ruling No. DA-28-98 dated January 29, 1998). TDCAHE Section 34(H)(2)(C) of the Tax Code of 1997 provides that donations to an accredited non-government organization (NGO), which means a non-profit domestic corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, cultural, rehabilitation of veterans, social welfare or a combination thereof, no part of the net income of which inures to the benefit of any member, organizer, officer or any specific person (Section 1, Rev. Regs. No. 13-98) shall be deductible in full from the taxable business income of the donor depending on the donee's compliance with the level of administrative expense and utilization requirements. Otherwise, it shall be entitled only to the limited deductions as provided for under Section 34(H)(1) of the same Tax Code. Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility on the taxable year it was incurred pursuant to Section 34(H)(2)(C) of the Tax Code of 1997 (BIR Ruling No. DA-124-2004, April 20, 2004 and BIR Ruling No. S30-016-2004 dated May 6, 2004). For purposes of full deductibility from the taxable business income of your donors pursuant to Section 34(H)(2)(C) of the Tax Code of 1997, you must first be accredited with the Philippine Council for NGO Certification (PCNC), Inc. which has been duly designated by the Secretary of Finance as the Accrediting Entity pursuant to Memorandum of Agreement dated January 29, 1998 executed by and between the Secretary of Finance and PCNC's Interim Chairman. For further inquiries on the certification process, you may contact PCNC at 6/F, SCC Building, CFA-MA Compound, 4427 Interior Old Sta. Mesa, 1016 Manila or call their office at telephone nos. 715-9594, 715-2756, 715-2783 and 782-1568. You may also visit their web site: http://www.pcnc.com.ph or e-mail them at [emailprotected]. C. Value-Added Tax 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 Sections 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 EPC 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 to VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Moreover, the tax exemption granted to EPC as a non-stock, nonprofit 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. CSDcTA The shifting of the VAT to EPC does not make it the person directly liable and therefore, EPC 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 (BIR Ruling No. DA-043-2004 dated February 4, 2004). Hence, notwithstanding that EPC is a non-stock, nonprofit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 10% VAT pursuant to Section 107 of the said Code. 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). 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, or that the requirements herein stated are not complied with, 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