Economic Development Foundation, Inc.

October 24, 2007 BIR RULING [DA-562-07] R.R. 2-98, as amended; BIR Ruling No. DA-193-2001 Economic Development Foundation, Inc. Unit 1405, 14/F Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Mr. Hiram C. Mendoza, Esq. President Gentlemen : This refers to your letter dated August 14, 2007 requesting, in effect, for a reconsideration of the ruling of Regional Director Alfredo V. Misajon of BIR Revenue Region No. 6, denying for lack of legal basis your request for reconsideration of the imposition of the 15% expanded withholding tax on income payments by Philippine Ports Authority (PPA) to Economic Development Foundation, Inc. (EDF). ESHcTD As represented, EDF is a non-stock, non-profit corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 25193 issued on May 22, 1964. Its primary purposes are as follows: "1. To encourage, promote, and develop industrial research guidance in the Philippines and to hold lectures, seminars, meetings, classes, conferences and exhibitions calculated to attain that purpose; to promote and encourage the dissemination of the results of scientific and technological research and the dissemination of the results of scientific and technological research and the general application thereof; to foster and advance studies for technical, managerial and investment advisory service and guidance to individuals and private enterprises, through said technical, managerial and investment guidance, to promote, initiate and develop industries of private ownership and to identify, develop and promote industrial project and/or industrial research. HICSaD 2. To conduct research, investigation and examinations on business and enterprises of every kind and description throughout the world with the aim of securing information and particulars for the investment and employment of capital. 3. To undertake and transact all kinds of business relation to the gathering and distribution of financial and investment information and statistics throughout the world. xxx xxx xxx" BIR Revenue Region No. 8 (Makati) issued BIR Ruling dated September 17, 2002 granting EDF exemption from income tax pursuant to Section 30 of the Tax Code of 1997. HICSaD Sometime in October 2006, Revenue Region No. 6 (Manila), assessed PPA deficiency withholding tax on its 2004 income payments to EDF for services rendered by EDF to PPA relative to project-management of PPA's MIS Computerization Project. In reply, please be informed that the last paragraph of Section 30 of the Tax Code of 1997, 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: aAHDIc 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 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.) SaTAED The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 particularly does not leave any room for interpretation; the income from any of the organization's activities conducted for profit is subject to tax under the Tax Code, regardless of the disposition made of such income. However, the phrase "or from any activity conducted for profit" was interpreted by the Court of Tax Appeals in the case of Hospicio De San Jose vs. Commissioner of Internal Revenue, CTA Case No. 4224, February 28, 1991 "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. TEAcCD 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 organization 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. CDScaT xxx xxx xxx" Consultancy or project management service is not essential to, or necessarily connected with EDF's primary purposes. The payment for such service in the amount PhP12,313,897.30 in 2004 out of the total contract price of PhP49,229,000.00 may be considered as the economic activity or profitable business pursuit contemplated in the above provision of law. Since income was generated from such activity, it follows that expanded withholding tax is payable and collectible. In view of the foregoing, this Office regrets to deny your request for reconsideration and hereby holds that income payments to EDF are subject to expanded withholding tax. caHCSD This is our final stand on the matter. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner