Request for Exemption from Payment of Income Tax and Filing of Income Tax Return

October 2, 1986 BIR RULING NO. 206-86 27-f 183-81 206-86 Gentlemen : This refers to your request in behalf of Nippon Kaiji Kyokai (Manila Branch) for exemption from the payment of income tax and the filing of the corresponding income tax return under Section 27(f) of the Tax Code. cdta Investigation conducted by this Office disclosed that Nippon Kaiji Kyokai (NK) is a non-profit organization founded in 1899 as a Ship Classification Society in Japan; that it is dedicated to promote the improvement and development of various businesses relating to ships so as to safeguard the safety of life and property at sea; that in order to attain such objective, NK conducts the following: (1) classification and survey of ships and assignment of load lines, (2) testing and inspection of ship-building materials, ship's equipment and their materials, and (3) other operations essential for the attainment of such purpose; that NK is a member of the International Association of Classification Societies, that as such it works toward the improvement of standards of safety at sea, provides for consultation and information with relevance to maritime organizations and cooperates closely with maritime industries in the world; that the Philippines, conscious of the need for undertaking safety measures for the protection of life and property at sea, has accepted NK to establish a branch office here, that it works closely with the Philippine Coast Guard as one of the recognized classification societies; that in connection with the issuance of the certifications or performance of its activities, NK collects fees from customers in order to fund its operations and in case said fees are not sufficient to cover its operation, its head office would have to remit the necessary funding; and that no part of its net income inures the benefit of any private individual. In view of the foregoing, this Office is of the opinion and so holds that the Nippon Kaiji Kyokai (Manila Branch) is considered as a business league as contemplated under Section 27(f) of the Tax Code because it is an association of persons having some common business interest which limits its activities to work for such common interest, and does not engage in regular business of a kind ordinarily carried on for profit (Section 31, Revenue Regulations No. 2). Moreover, the rendering of services by NK does not affect its tax-free status since the same is incidental to its primary exempt purpose. (American Plywood Association v. United States, 267 F, Supp. 830; Revenue Ruling No. 70-187, 1970-1 C.B. 151). Accordingly, it is exempt from the payment of income tax in respect of income received by it as such organization and therefore need not file an income tax return concerning such income. 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, pursuant to Section 27 of the Tax Code, as amended by Presidential Decree No. 1457 . Moreover, it is required to file on or before April 15 of each year a profit and loss statement and balance sheet with the annual information return under oath stating its gross income and expenses incurred during the year and a certificate showing that there has not been any change in its By-Laws, Articles of Incorporation, manner of operations and activities, as well as sources and disposition of income. In this connection, since NK is exempt from income tax as a business league because it was not organized for profit, the income covered by said tax exemption is also exempt from business taxes. (B.I.R. Ruling No. 188-00-000-29-80). cdtech It is requested that a copy of this letter of exemption be attached to the annual information return which you will file on or before April 15, of each year. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue By: ROMULO M. VILLA Deputy Commissioner