BIR Ruling No. 150-13

April 17, 2013 BIR RULING NO. 150-13 Section 30 (E) of the Tax Code of 1997, as amended; RR 3-98; RMC 26-03; BIR Ruling No. 482-11; BIR Ruling No. 075-11 Gov. Arturo Arce Ignacio Sr. Foundation, Inc. M. Adriatico cor. Paras Sts. Ibaba East Calapan City, Oriental Mindoro 5200 Attention: Evangeline S. de la Cruz Administrator Gentlemen : This refers to your letter dated October 6, 2011 requesting for the issuance of a certificate of tax exemption enjoyed by non-stock non-profit corporation or association organized and operated exclusively for charitable purposes under Section 30 (E) of the Tax Code of 1997, as amended. IcEaST It is represented that GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. with Taxpayer's Identification Number (TIN) 006-092-254, 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. CN200500608 dated January 19, 2005; and that the purposes for which it was incorporated are: 1) "Governance and values education in schools, offices and barangays in Calapan City, Oriental Mindoro"; 2) "Medical missions, free consultations and medicines"; 3) "Job skills training to the poor but deserving out of school youth thru scholarship grants by sending them to schools offering training program and thereafter help them find job"; 4) "To extend food programs, soup kitchens to the poor children below six years of age who are enrolled in barangay centers who cannot afford to bring snacks." In support of its request, GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Incorporation; 3) Certified true copy of the Amended Articles of Incorporation which include the following provision: a) That the corporation is "non-stock and non-profit organization"; 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 member, trustee or officer of the Foundation shall have or acquire any right, title or interest in the fund or assets of the Foundation, and that no part of the assets, funds or income which the Foundation may obtain as an incident to its operation shall inure to the personal benefit or be distributed to its members, trustees or officers"; IHCSTE d) "That the Trustees shall not receive any compensation, provided, however, that this shall not prevent the payment to any person of such reasonable compensation for the services actually rendered to or for the Foundation as shall be fixed by the Board of Trustees"; and e) "In the event of dissolution of the Foundation, whether voluntary or involuntary, the remaining assets of the Foundation shall be distributed in the following manner . . . The remaining assets of the Foundation after paying its liabilities and after returning all donations subjected to the above condition, shall be conveyed and transferred to another non-stock, non-profit association dedicated to substantially similar objectives and pursuits of the Foundation as the Board of Trustees may decide, or to the Republic of the Philippines or any of its agencies, instrumentalities, or political subdivisions for a public purpose as a competent court of justice would distribute to accomplish the general purposes for which the Foundation is organized." 4) Certified machine copy of the By-Laws; 5) Certified machine copy of the 2011 General Information Sheet; 6) Certified true copy of the BIR Certificate of Registration; and 7) Certified true copies of the 2008, 2009 and 2010 Annual Income Tax Returns and attaching Financial Statements. In reply, please be informed as follows: Income Tax In the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., (G.R. Nos. 195909 and 195960 dated September 26, 2012) , 1 the Supreme Court discussed the qualifications and taxability of corporations and institutions falling under Section 30 of the Tax Code of 1997, as amended, specifically charitable and social welfare institutions, thus: "Section 30(E) of the NIRC provides that a charitable institution must be: SaIACT (1) A non-stock corporation or association; (2) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) 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. Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes . The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends to its members, trustees, or officers" and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized. " However . . ., any profit by a charitable institution must not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended to achieve." The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person." xxx xxx xxx To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to 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 words "organized and operated exclusively" by providing that: ASTcaE 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) 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. 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." xxx xxx xxx Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the disposition made of such income." Based on the foregoing, this Office is of the opinion that GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. is a charitable organization which is among those corporations contemplated under Section 30 (E) of the Tax Code of 1997, as amended. Accordingly, it is exempt from the payment of tax on income received by it as such organization, provided, that 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. (BIR Ruling No. 482-11 dated December 5, 2011) CTDHSE 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. 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. CaASIc Finally, it is subject to the payment of 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 GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. as a non-stock, non-profit corporation 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 GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. is engaged in the sale of services in the course of a business pursuit, such as providing other services for a fee, including transactions incidental thereto, in general, it shall also be liable for VAT. (BIR Ruling No. 075-11 dated March 14, 2011; BIR Ruling No. 482-11 dated December 5, 2011) 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. ADEHTS 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. Donor's Tax In as much as GOV. ARTURO ARCE IGNACIO SR. FOUNDATION, INC. is an organization devoted for charitable purposes, donations to it are exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the Tax Code of 1997, as amended, subject to the condition that not more than thirty percent (30%) of said gift shall be used for administration purposes. (BIR Ruling No. 075-11 dated March 14, 2011; BIR Ruling No. 482-11 dated December 5, 2011) 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. cCAIDS 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; IEaHSD 3. scientific; 4. athletic; 5. cultural; 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. (BIR Ruling No. 075-11 dated March 14, 2011) Accordingly, for purposes of full deductibility from the taxable business income of its donor, GOV. ARTURO ARCE IGNACIO SR. 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]. SECcAI 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 Footnotes 1. Pertinent portions are circularized by Revenue Memorandum Circular No. 67-2012.