BIR Ruling No. 150-12

February 28, 2012 BIR RULING NO. 150-12 Section 30 (J) of the Tax Code of 1997; BIR Ruling No. 319-11 The Propeller Club of Manila Rm. 301 3rd Floor, Raha Sulayman Building 108 Benavidez Street, Legaspi Village Makati City Attention: Mr. David J. Reynolds President Gentlemen : This refers to your letter dated September 25, 2007 wherein you requested for the issuance of a Tax Exemption Certificate on the exemption enjoyed by a non-stock, non-profit corporation pursuant to Section 30 (J) of the National Internal Revenue Code of 1997 (NIRC). It is represented that THE PROPELLER CLUB OF MANILA is a non-stock, non-profit corporation with Taxpayer Identification No. 229-727-283-000 duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission under SEC Registration No. A1999-20269; and that among the purposes for which the Association is organized are: 1. To promote, further, and support the International Maritime Industry; 2. To promote, further, and support all segments of the International Maritime Industry; 3. To collaborate with other organizations dedicated to the promotion of the best interests of the International Maritime Authority; 4. To promote, further, and support worthy and justifiable river, inland waterway and harbour improvements; 5. To promote improvements and advances in naval architecture, marine engineering and allied sciences for the benefit of the International Maritime Industry; 6. To maintain a continuing program of public relations, education, good will and liaison between the Philippines and the International Maritime Industry. In support of its request, THE PROPELLER CLUB OF MANILA has completely submitted on September 7, 2010, 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 Section 30 of the Tax Code of 1997, as amended; c. That no part of the net income shall inure to the benefit of any 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 copy of the Annual Information Return 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; and 7) BIR Certificate of Registration. In reply, pleased be informed as follows: Income Tax Section 30 (J) 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 (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; xxx xxx xxx" Under the above-quoted provision, a non-stock, non-profit corporation or association organized and operated alike farmers', mutual companies or organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses, and 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 is exempt from income taxation. THE PROPELLER CLUB OF MANILA falls within the purview of a corporation contemplated under the above cited provision. Accordingly, it is exempt from the payment of tax on income received by it as such organization. However, it is subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 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 twenty percent (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 seven and one-half percent (7-1/2%) final withholding income tax pursuant to Sec. 27 (D) (1) in relation to Sec. 57 (A) both of the Tax Code of 1997. (BIR Ruling No. 319-11 dated August 22, 2011) 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. It is requested that a copy of this letter of exemption be attached to the aforementioned Annual Information Return. It should be understood that the said exempt organization shall be constituted as withholding agent for 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 withholding tax provided for in Section 57 of the Tax Code of 1997, also as implemented by Rev. Regs. No. 2-98, as amended. 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]. Value-Added Tax Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 (J) 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 THE PROPELLER CLUB OF MANILA 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. Notwithstanding that it is a non-stock, non-profit corporation, 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. 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. 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 non-stock, non-profit, activities, is exempt from the 12% VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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