BIR Ruling [DA-193-01]

October 17, 2001 BIR RULING [DA-193-01] Sec. 30; 012-95; 001-94; 199-91 Philippine Coconut Authority Office of the Auditor Elliptical Circle, Diliman Quezon City Attention: Atty. Janet D. Nacion State Auditor V Corporate Auditor Gentlemen : This refers to your letter dated March 7, 2000 requesting for clarification of issues relative to the consulting contract entered into by and between your Office and Rural Integrated Cooperative Enterprises Development Foundation, Inc. (RICEDFI for brevity), a non-stock, non-profit domestic corporation organized under the laws of the Philippines and registered with the Securities Exchange Commission. As represented, your Office is the implementor of the Small Coconut Farms Development Project (SCFDP for brevity), which is funded by the World Bank (WB for brevity) through a loan between the Republic of the Philippines and the International Bank for Reconstruction and Development. In compliance with the WB-SCFDP's Action Plan, your Office entered into a consulting contract with RICEDFI for P4,217,400.00 in July 1999 to conduct a nationwide survey on the sustainability of the Rehabilitation component of the SCFDP. Under this Rehabilitation component, fertilizers were given free to the qualified farmer-beneficiaries for application on their coconut trees. The period of the undertaking was for ninety (90) days from its commencement, which was within three (3) calendar days from the execution of the contract. RICEDFI had completed the said services and had received full payment thereon. Your Office, however did not withhold from your payments the corresponding taxes on the said consulting services relying on letter dated August 20, 1999 by then Regional Director Oscar L. Sevilla of Revenue Region No. 7, Quezon City that "RICEDFI falls within the purview of an association as contemplated under Section 30 (E) of the Tax reform Act of 1997. Accordingly, it is exempt from the payment of income tax on income received by it as such organization." However, it is further stated in the same letter that "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." Your Office now petitions to be clarified on whether or not the services undertaken by RICEDFI under the aforementioned contract falls within the purview of the phrase " activities conducted for profit ", which should have been subjected to taxation. In reply, please be informed that Section 30 of the 1997 Tax Code specifically provides that: "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, 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; xxx xxx xxx 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 ." (Emphasis supplied.) The Court of Tax Appeals, in the case of Hospicio De San Jose vs. Commissioner of Internal Revenue , C.T.A. Case No. 4 2 24, February 28, 1991, had the occasion to interpret the historical and true meaning of the phrase "activity for profit". It succinctly pronounced that: "Another significant change in the proviso is the insertion of the phrase " or from any activity conducted for profit ," which restricts further the exemption by excluding therefrom income from any business venture or activity of the exempt organization. xxx xxx xxx Considering the history of the provision in question, it would seem that the statute as now amended has restricted the tax exemption of religious, educational and other organization therein specified only to the extent of withdrawing the exemption with respect to income realized (a) from the productive use of their real and personal properties e.g., rents dividends, or interest and (b) from profitable business pursuits, which properties or businesses are not essential to, or necessarily connected with, their religious, charitable, or educational purposes, etc., as the case may be. (Opinion No. 45, Series of 1959) It is clear from the foregoing interpretation that the legislative intent in amending the proviso in Section 27 by the insertion of the phrase "regardless of the disposition made of such income" is to tax the income from real and personal properties or from any activity conducted for profit of exempt organizations even if used for religious, charitable or other exempt purpose. In other words, the taxable income of such organizations should be treated as separate and distinct from their tax-exempt income for purposes of taxation. In which case, the deficit incurred in the tax-exempt operations cannot be set off against the income from taxable operations. The subsequent deletion of the subject provision from subsection (e) of Section 27 by Presidential Decree No. 1457 which took effect on June 11, 1978 and the transposition of the same as the last paragraph of the same Section to cover all exempt organizations under that Section, lends support to our conclusion. Conformably, the loss suffered by petitioner from its fully exempt operation cannot be allowed as a deduction from its taxable income." (Emphasis supplied.) This Office, in numerous Rulings, has consistently ruled that corporations exempt from taxation under Section 30 of the 1997 Tax Code are 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 purposes. ( BIR Ruling Nos. 012-95 dated January 26, 1995; 001-94 dated January 4, 1994; 199-91 dated October 1, 1991) Considering that RICEDFI, in undertaking to conduct a nationwide survey on the sustainability of the rehabilitation component of the small coconut farms development project, has been compensated or paid in the amount of Four Million Two Hundred Seventeen Thousand and Four Hundred Pesos (P4,217,400.00) this Office opines and so holds that the said undertaking is considered an activity for profit subject to taxation regardless of any disposition made of such income. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group