Divina & Uy

August 24, 2007 BIR RULING [DA-467-07] DA 196-06 Divina & Uy Law Offices 8th Floor, Pacific Star Building Sen. Gil Puyat Avenue Corner Makati Avenue Makati City Attention: Atty. Nilo T. Divina and Atty. Marian Joanne K. Co Gentlemen : This refers to your letter dated July 26, 2007 stating that your client, Go Kim Pah Foundation, Inc. (Foundation), is a non-stock, non-profit charitable corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CN200619060 dated December 12, 2006; that it is formed for the following purpose(s): a) To take part in significant and continuing human enterprise by engaging in non-profit social welfare, cultural and charitable activities for the purpose of advancing the social and economic well-being of fellow citizens; b) To establish, maintain, operate administer and manage a non-stock, non-profit charitable institution; c) To engage in philanthropic, humanitarian, and charitable purposes, all for public welfare; and d) To provide scholarship grant to poor but deserving students; that no part of the income which the organization may obtain as an incident to its operation is distributed as dividends to its members, trustees or officers, subject to the provisions of the Corporation Code on dissolution; and that any profit obtained by the association as a result of its operation, whenever necessary or proper shall be used for the furtherance of the purposes enumerated in Article II of its Articles of Incorporation, subject to the provision of Title XI of the Corporation Code of the Philippines. Based on the foregoing representations, you now request confirmation of your opinion that 1. The income derived by Go Kim Pah Foundation is exempt from income tax provided in Section 30 (E) of the Tax Code of 1997, and as such, need not file an income tax return concerning said income; EDcIAC 2. The income payment made to a tax-exempt corporation under Section 30 (E) of the Tax Code of 1997, as amended, is not subject to creditable withholding tax, as provided for in Section 2.57.5 (B) (3) of Revenue Regulations No. 2-98, as amended; 3. The fees or dues which it held in trust and used solely for administration expenses of the association shall likewise be exempt from income tax and consequently from withholding tax; 4. The income derived from the sale of real property owned by a foundation having been derived from a single and isolated transaction in furtherance of the purposes for which the foundation was established, cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax and consequently, to the creditable withholding tax; 5. Any sale of property made by the Foundation is not subject to value-added tax provided for in Section 105 in relation to Sections 106, 107 and 108 of the Tax Code of 1997, since such sale is a single and isolated transaction made in connection with its non-stock, non-profit activities and not made in the course of its trade or business; 6. Any donation made in favor of the Foundation is exempt from the payment of donor's tax pursuant to Section 101 (A) (3) and Section 101 (B) (2) of the Tax Code of 1997, as amended, subject to the condition that not more than 30% of said gift shall be used by the donee for administration purposes, and that the Deed of Donation is likewise not subject to documentary stamp tax; and 7. Finally, pursuant to Section 34 (H) of the Tax Code of 1997 and Section 3 of Revenue Regulations No. 13-98, donations, contributions or gifts made to the Foundation shall be fully deductible from the taxable income of the donor. In reply thereto, please be informed that your opinion is hereby confirmed as follows: INCOME TAX AND WITHHOLDING TAX Go Kim Pah Foundation, Inc. being a charitable institution is within the ambit of Section 30 (E) of the Tax Code of 1997 and therefore exempt from income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. aIHSEc 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. FEES AND DUES HELD IN TRUST In BIR Ruling No. DA196-06 dated March 28, 2006 , this Office ruled that "the fees or dues which it held in trust and used solely for administration expenses of the association shall likewise be exempt from income tax and consequently from withholding tax." Accordingly, any fees or dues which it held in trust and used solely for administration expenses of the aforesaid Foundation shall be exempt from income tax and consequently, from withholding tax. SINGLE AND ISOLATED TRANSACTION The proviso in Section 27 (e) [now Section 30 of the Tax Code of 1997], provides: "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 the said Code." The Secretary of Justice in his Opinion No. 45 dated March 10, 1959 said in part, as follows: TDCaSE "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 organizations 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 (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. Thus, I am more inclined to subscribe to the view that the projected sale at a profit of the present site and church building of the Union Church of Manila, for the sole purpose of acquiring a new site and constructing a new church in a place where most of its members now reside, does not come within the reach of the proviso of Section 27(e) quoted above, and is therefore not subject to income tax. I attach a great weight to the fact that the Union Church, which is organized and operated exclusively for religious purposes, owns and holds said property for religious purposes, i.e., the transfer of the church to a new site. The profit or income resulting from the transaction would be merely incidental to said religious purposes. And as the present church site was not acquired for speculation or as an investment to be eventually sold primarily for monetary gain, I think there is reason enough to say that income to be derived from the sale of said property is not within the contemplation of the proviso of said Section 27(e)." ( cited in BIR Ruling No. 387-93 dated September 16, 1993 ) The foregoing portion of the opinion of the Secretary of Justice was quoted and applied by the Court of Tax Appeals in its decision in Manila Polo Club ( CTA Case No. 293, August 31, 1959 ) which involves similar facts, i.e., proceeds of the sale of real property was used exclusively to acquire and develop another property for purposes for which the club was organized. In the case of Xavier School, Inc. ( CTA Case No. 1682, October 8, 1969 ), the Tax Court exempted the gain derived from income tax by stating that the taxpayer's isolated sale of real property and using the proceeds thereof to purchase lots for a new site and constructing improvements thereon in furtherance of its educational purposes cannot be considered as an activity conducted solely for profit because a single transaction of incidental character does not constitute engaging in business. SUCH BEING THE CASE, this Office holds that the proceeds from the sale of the above-mentioned property cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax, the same having been derived from a single and isolated transaction in furtherance of the purposes for which the Go Kim Pah Foundation, Inc. is organized. However, the said transaction is subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 543-93 dated December 28, 1993) DONOR'S TAX Inasmuch as the donee is a charitable institution, donation from its benefactors is 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 thirty percent (30%) of said gift shall be used for administration purposes. Moreover, the Deed of Donation is not subject to documentary stamp tax. However, the acknowledgement on said deed is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997, as amended. aAHDIc VALUE-ADDED TAX The BIR has ruled that for as long as the revenues are derived by the non-stock, non-profit organization from its "non-stock, non-profit activities" the same are exempt from the 12% VAT. Thus, in BIR Ruling No. DA263-2003 dated August 11, 2003 which is a reiteration of BIR Ruling No. 023-03 dated March 3, 2003, this Office ruled that "In the instant case, the sale of real property is not the business of Metroclub, since the real property subject of the proposed sale is being held neither for sale to customers, nor primarily for lease in the ordinary course of trade or business, the same shall be exempt from VAT pursuant to Section 109(w) of the Tax Code of 1997, as implemented by Section 4.103-B(w)(1) of Revenue Regulations No. 7-95, as amended." Accordingly, any sale of property made by the Foundation in connection with its non-stock, non-profit activities and not made in the course of trade or business is not subject to VAT. It is requested that a copy of this letter of exemption be attached to the annual information return which Go Kim Pah Foundation, Inc. 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 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. Moreover, income payments made to Go Kim Pah Foundation, Inc., as a tax-exempt corporation, is not subject to creditable withholding tax pursuant to Section 2.57.5 (B) (3) of Revenue Regulations No. 2-98, as amended. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service