BIR Ruling No. 062-15

March 10, 2015 BIR RULING NO. 062-15 Boy Scouts of the Philippines 181 Natividad Almeda-Lopez St., Ermita, Manila Attention: Wendel E. Avisado SVP & Acting Secretary General Gentlemen : This refers to your letter dated 08 January 2015 requesting confirmation of tax exemption privilege of the Boy Scouts of the Philippines (hereinafter referred to as the "BSP" or the "Owner") pertaining to the execution of a Memorandum of Agreement ("MOA"), dated 28 August 2008, between BSP and Empire East Land Holdings, Inc. (hereinafter referred to as the "EELHI" or the "Developer"). The MOA covers the transfer, assignment and conveyance of a significant portion of the BSP's property located at 181 Natividad Almeda-Lopez St., Ermita, Manila. The said property, which is covered by TCT No. 63365, has a total area of 11,721.80 square meters (sqm). At the time of the execution of the MOA, the property is home to the BSP's old office building which the BSP intended to abandon in favor of a new office building to be constructed within the vicinity of the property. Under the MOA, the BSP bound itself to transfer, assign and convey absolutely and perpetually in favor of EELHI all its rights over a portion of the subject property measuring 10,221.80 sqm in consideration of EELHI's obligation to construct the BSP's new office building which shall be located on the remaining 1,500.00 sqm. The MOA, therefore, calls for EELHI to subdivide the property into two (2) lots, to wit: Owner's Lot BSP's Lot 1,500.00 Developer's Lot EELHI's Lot 10,221.80 Total 11,721.80 ======== In addition to the construction of the BSP's new office building, it was further agreed that EELHI shall pay the BSP the total amount of twenty million pesos (P20,000,000.00) as follows: P2,000,000.00 acknowledged to have been received by BSP prior to the execution of the MOA. P18,000,000.00 payable after the execution of the MOA and after the BSP has obtained to the satisfaction of EELHI the written approval of the President of the Philippines (former President Gloria Macapagal-Arroyo) of the MOA and the conveyance of title to the 10,221.80 sqm EELHI's Lot to EELHI. The BSP now requests for confirmation of tax exemption and invokes Section 8 of Republic Act (R.A.) No. 7278, dated March 24, 1992, entitled "An Act Amending Commonwealth Act No. 111, as amended by Presidential Decree No. 460, Entitled An Act to Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define its Powers and Purposes, by Strengthening the Volunteer and Democratic Character of the Boy Scouts of the Philippines and for Other Purposes." Section 8 of R.A. No. 7278, provides, thus: IcDCaT "Section 8. . . . . The corporation shall be entitled to the following tax and duty privileges: (a) Exemption from income tax pursuant to Section 26(e), (g) and (h) of the National Internal Revenue Code as amended ; . . ." (Emphasis supplied) In connection with the foregoing, the BSP avers that the proceeds resulting from the execution of the MOA will be used for the principal purpose of promoting scouting in the Philippines and, accordingly, such proceeds should be exempted from income tax. The BSP also argues that that the said MOA partakes the nature of a joint venture agreement since the transfer of property is in effect a contribution to the joint venture, which transfer is not a taxable event. In reply, please be informed that Section 26 (e), (g) and (h) of the National Internal Revenue Code (NIRC) of 1977, as amended, provide as follows: "Section 26. 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 (b) Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private stockholder or individual; (c) . . . (d) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (e) Club organized and operated exclusively for pleasure, for recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; . . ." The above Section 26 is now covered by Section 30 of the NIRC of 1997, as amended, which retained the tax exemptions for corporations and associations under Section 26 (e) and (g) of the old Tax Code and which are now under Section 30 (e) and (g) of the new code, respectively, to wit: Section 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: (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; (f) . . . (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; EAcTDH In spite of the exemptions granted, Section 26 of the 1977 NIRC, as amended, and Section 30 of the 1997 NIRC, as amended, have identical provisions on the treatment of other income generated by said corporations and associations. The last paragraph of both sections provide: "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) Based on the above, it is mandated that the income of exempt organizations (such as the BSP) from any of their properties, real or personal, or from any activities conducted for profit, shall be subject to the tax imposed by the same Code. Accordingly, the exemption claimed by the BSP is expressly and unequivocally disallowed by the very same provision being invoked in support of its claim. Emphasis should also be made on the phrase " regardless of the disposition of such income " since the BSP also anchored its claim on the ground that any proceeds resulting from the execution of the MOA shall be used for the principal purpose of promoting scouting in the Philippines. In the case of Commissioner of Internal Revenue vs. St. Luke's Center, Inc., G.R. No. 195909, 26 September 2012 , the Supreme Court had the occasion to rule that: "Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Though the proceeds generated by the BSP from the execution of the MOA pertains to income generated from its real properties rather than income from any of its activities conducted for profit, the same conclusion reached by the Supreme Court in the above decision is applicable to the instant case of BSP. As such, even though the BSP is not organized and operated for profit, it is nevertheless allowed to obtain income from its properties, real or personal, ( i.e. , through lease, sale or exchange). The only consequence is that any income generated by the BSP from any such properties shall be taxable, regardless of how such income was used by the BSP. With respect to the BSP's contention that the MOA partakes the nature of a joint venture agreement and should, therefore, be exempt from income tax, the following wordings, phrases and terms of the MOA belies this assertion: "3. EXCHANGE OF DEVELOPER'S LOT FOR OFFICE BUILDING (a) Transfer, Assignment and Conveyance of Developer's Lot . Upon full and faithful compliance with Developer's Obligation under Section 3(b) hereof, Owner shall transfer, assign and convey absolutely and perpetually in favor of Developer all its rights, title and interest in the Developer's Lot. EIDTAa (b) Construction of Office Building . As full payment for the Owner's rights, title and interest in the Developer's Lot , Developer shall plan, design, develop, fund and construct, for and on behalf of Owner, a sixteen (16)-storey (no 13th floor) office building consisting of 15 levels (the "Office Building") on the Owner's Lot with a Total Built Floor Area of 11,935 square meters, more or less. The Office Building shall be built in accordance with the Plans and Specifications attached as Annex "D" hereof. Attached "E" is a cost estimate of the Office Building. 5. EXCHANGE OF DEVELOPER'S LOT FOR OFFICE BUILDING xxx xxx xxx (d) The Parties acknowledge that Developer has paid to Owner the amount of Pesos: Two Million (P2,000,000), receipt of which is acknowledged in full by the Owner. After execution of this Agreement and after Owner has obtained to the satisfaction of the Developer written approval by the President of the Philippines of this Agreement and the conveyance of title to Developer's Lot to Developer, the Developer shall pay the Owner the amount of Pesos: Eighteen Million (P18,000,000) . The aforementioned amounts shall form part of the consideration for the conveyance to the Developer of the Developer's Lot and compensation under this Agreement and the purchase price of the Developer's Lot to be reflected in the Deed of Absolute Sale/Deed of Conveyance over the Developer's Lot . (Emphasis supplied) Upon evaluation of the terms of the MOA, it is clearly apparent that BSP intended to sell its ownership over a portion of the property in exchange for the construction of its new building and for cash consideration amounting to twenty million pesos (P20,000,000.00). For these reasons, we regret to inform you that your request for exemption is hereby denied. 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 Bureau of Internal Revenue