BIR Ruling No. 049-14

February 7, 2014 BIR RULING NO. 049-14 Section 30 (G) of the Tax Code of 1997; BIR Ruling No. 140-11; BIR Ruling No. 108-11; BIR Ruling No. 080-11; BIR Ruling No. 060-11; BIR Ruling No. 052-11 Familia Lorenzo Foundation, Inc. Ground Floor, Lapanday Centre 2263 Pasong Tamo Extension, Makati City Attention: Alicia P. Lorenzo President Gentlemen : This refers to your letter dated March 2, 2012 requesting for the issuance of a certificate of tax exemption enjoyed by a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare pursuant to Section 30 (G) of the Tax Code of 1997, as amended. It is represented that Familia Lorenzo Foundation, Inc. with Taxpayer's Identification No. 004-660-025-000, is a non-stock, non-profit corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. ANO94-00004946; and that the purposes for which it was incorporated are the following: Undertaking and/or assisting in the amelioration of the living condition of distressed youths particularly those who are handicapped by reasons of poverty physical and mental disability, illness and natural disasters including assistance to cultural minorities such as by: (1) Pursuing a program for the protection and development of children and youth such as providing service for the dropouts, pre-school children of low-income working mothers and physically handicapped children; (2) Providing for the rehabilitation of the youth among the drug addicts or other services; (3) Instruction or training of youths either through formal, informal and non-formal methods: HICSTa (i) Formal method of instruction refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education; (ii) Informal method of instruction refers to learning which is not deliberately planned or organized but growing out of experience, parental guidance; peer learning, observations; (iii) Non-formal method of instruction refers to any deliberately organized systematic educational activity carried on outside the framework of the formal system to provide selected types of learning to particular subgroups of the population, particularly out-of-school youths, for the purpose of communicating ideas, developing skills, changing attitudes or modifying behavior related to the realization of development goals and the achievement of higher standard of living and welfare of the people. (4) Granting scholarship to deserving students and professional chairs for the enhancement of professional courses; (5) Upgrading of existing facilities to support the conduct of the above activities; (6) Undertaking and/or assisting in research activities on all aspects of history, social system, customs, and traditions of Filipino youth; (7) Inculcating among the youth the value of: (i) Developing, enriching and preserving Filipino arts and culture; (ii) Developing and promoting the visual performing arts; and (iii) Participating in the vigorous implementation of bilingual policy through translation and wide use of technical, scientific and creative publications, development of an adaptive technical dictionary and the use of Filipino as the medium of instruction; (iv) The proper management, protection, conservation and regeneration of natural resources including life supporting elements in land, water and air. SDIaHE (8) The provision and design of all kinds of shelters and structures for homeless youth within various community patterns, including transportation, communication and related infrastructure requirements; (9) Promoting training programs to harness youth potentials in the invention, innovation and harnessing of products and Processes that fit the needs of Philippine industry and other users of technology; (10) Helping the youth to improve their livelihood potential by involving them in undertaking or assisting in pure or basic and applied scientific research in the field of agriculture, forestry, fisheries, engineering, energy development, food and nutrition, medicine, environment, and biological, physical and natural sciences for the public interest, "basic research" and "applied research" being defined as follows: (a) Basic research means an experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts without any particular application or use in view. It analyzes properties, structure or relationships with a view to formulating and testifying hypothesis, theories or laws. The results of basic research are not generally sold but are usually published in scientific journals or circulars to interested colleges. (b) Applied research means an original investigation undertaken in order to acquire new knowledge. It is directed primarily towards a specific practical aim or objective. It is undertaken either to determine possible uses for the findings of basic research or to determine new methods or ways of achieving some specific and predetermined objectives. It involves the consideration of the available knowledge and its extension in order to solve particular problems. Applied research will be regarded as carried on for public interest: (i) If the results of such research are made available to the public on a non-discriminatory basis; or (ii) If such research is performed for the Government of the Philippines or any its agencies or political subdivisions; or (iii) If such research is directed to benefit the public. (11) Improving the health standards of the youth through health programs including but not limited to: (a) Control, prevention and treatment of communicable and degenerative diseases, accidents and other health disabilities; (b) Family planning program design to inculcate knowledge and understanding of population, human growth and development, family life and responsible parenthood methods; HSIaAT (c) Environmental sanitation such as public sewerage system and sanitary toilets; and (d) Nutrition, which aims to reduce the prevalence of malnutrition and increase the energy and protein intake among household. and such other scientific, education, social, cultural, healthful or charitable purpose. In support of its request, Familia Lorenzo Foundation, Inc. has completely submitted on October 29, 2013 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) Certified true copy of the Articles of Incorporation which includes 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, as amended; 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. 4) Certified true copy of the By-Laws; 5) Certified true copies of the Annual Income Tax Returns and Financial Statements for the last three (3) years of operation; 6) Certification under oath that there has not been any change in the By-Laws, Articles of Incorporation, manner of activities as well as sources and disposition of income; AEIDTc 7) BIR Certificate of Registration; and 8) Other pertinent documents. In reply, please be informed as follows: Income Tax Section 30 (G) of the Tax Code of 1997, as amended provides, viz. : "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 (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; . . . ." The Supreme Court, in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. [G.R. No. 195909 & G.R. No. 195960, 26 September 2012] , declared: ". . . [T]o be exempt from income taxes, Section 30 (G) of the NIRC requires that the institution be "operated exclusively" for social welfare. However, the last paragraph of Section 30 of the NIRC qualifies the word "organized and operated exclusively" by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations 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. In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated exclusively for . . . . charitable . . . . purposes." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of social welfare." aScITE In interpreting the term "exclusive" as used in the provision, the Supreme Court, citing the case of Lung Center of the Philippines v. Quezon City (G.R. No. 144104, 29 June 2004), held: "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." . . . The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively." Since Familia Lorenzo Foundation, Inc. is civic organization not organized for profit but operated exclusively for the promotion of social welfare, it falls within the purview of an association contemplated under the above cited provision. Accordingly, it is exempt from the payment of income tax on income received by it as such organization. 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. (BIR Ruling No. 140-11 dated April 29, 2011) 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. (BIR Ruling No. 060-11 dated March 4, 2011 and BIR Ruling No. 052-11 dated February 25, 2011) It should be understood that the said exempt 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. 108-11 dated April 7, 2011 and BIR Ruling No. 080-11 dated March 15, 2011) SECcIH Value-Added Tax Moreover, the tax exemption granted to it as a civic league/organization not organized for profit but operated exclusively for the promotion of social welfare under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. 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 tax (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 Familia Lorenzo Foundation, Inc. is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall be liable for VAT. (BIR Ruling No. 108-11 dated April 7, 2011 and BIR Ruling No. 080-11 dated March 15, 2011) Notwithstanding that it is not organized for profit but operated exclusively for the promotion of social welfare, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code. (BIR Ruling No. 108-11 dated April 7, 2011 and BIR Ruling No. 080-11 dated March 15, 2011) 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. SDIaHE Revenue from contributions 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 operation for the promotion of social welfare, is exempt from the 12% VAT. Donor's Tax In as much as Familia Lorenzo Foundation, Inc. is a social welfare institution, donations 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 thirty percent (30%) of said gift shall be used for administration purposes. Deductibility of Donation Section 3 of RR 13-98 provides: SEC. 3. Donations to Accredited Non-stock, Non-profit Corporations/NGOs. Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to the following benefits: (1) Limited Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction. (2) Full Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions: (i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner. CIaHDc For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these Regulations. (ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year; (iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized. (iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. Furthermore, Section 1 (a) of Revenue Regulations No. 13-98 provides that: a) "Non-stock, non-profit corporation or organization" shall refer to a corporation or association/organization referred to under Section 30 (E) and (G) of the Tax Code created or organized under Philippine laws exclusively for one or more of the following purposes: 1. religious; 2. charitable; 3. scientific; 4. athletic; 5. cultural; HEDSIc 6. rehabilitation of veterans; and 7. social welfare no part of the net income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person. b) "Non-government Organization (NGO)" shall refer to a non-stock, non-profit domestic corporation or organization as defined under Section 34 (H)(2)(c) of the Tax Code organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. Foregoing considered, donors can avail of the full deductibility only for donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs. Accordingly, for purposes of full deductibility from the taxable business income of its donor, Familia Lorenzo Foundation, Inc. must first be accredited with the Philippine Council for NGO Certification, Inc. (PCNC) 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 accreditation and certification process, please visit PCNC at 6/F, SCC Building, CFA-MA Compound, 4427 Interior Old Sta. Mesa, 1016 Manila or call their office at 715-9594, 715-2756, 782-1568 and 715-2783 (telefax). You may also visit their website: http://www.pcnc.com.ph or email them at [emailprotected]. Moreover, Familia Lorenzo Foundation, Inc. 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. (BIR Ruling No. 108-11 dated April 7, 2011 and BIR Ruling No. 080-11 dated March 15, 2011) DICcTa 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 organizations 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 been granted tax exemptions or tax incentives, and its tax liabilities, if any. Finally, it is subject to the payment of the annual registration fee of PhP500.00 as prescribed in Section 236 (B) of the Tax Code of 1997, as amended. It is also required under Section 6 (C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which the Association is registered [Revenue Memorandum Circular (RMC) No. 76-2003]. It is requested that a copy of this letter of exemption be attached to the aforementioned Annual Information Return. Please note that this tax exemption ruling shall be valid for a period of three (3) years from the date of issue, unless sooner revoked or cancelled. The tax exemption ruling may be renewed upon filing of a subsequent application for Tax Exemption/Revalidation provided under the same requirements and procedures provided under Revenue Memorandum Order (RMO) No. 20-2013. Failure to renew the Tax Exemption Ruling shall be deemed revoked thereof upon the expiration of the three (3)-year period. The new Tax Exemption ruling shall be valid for another period of three (3) years unless sooner revoked or cancelled. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue