BIR Ruling No. 208-14

June 19, 2014 BIR RULING NO. 208-14 Section 30 (E) of the Tax Code of 1997; BIR Ruling No. 157-2011; BIR Ruling No. 138-2011; BIR Ruling No. 075-2011; BIR Ruling No. 158-2011 Pioneer Foundation, Inc. Pioneer House Makati, 108 Paseo de Roxas Legaspi Village, Makati City Attention: Ms. Ma. Cristina C. de Guzman Treasurer Gentlemen : This refers to your letter dated November 5, 2013, as indorsed by the Regional Director of Revenue Region No. 8, Makati City requesting for revalidation of the tax exemption privilege of Pioneer Foundation, Inc. (PFI) under Section 30 (E) of the Tax Code of 1997, as amended. aICHEc It is represented that PFI with Taxpayer's Identification No. (TIN) 003-929-248-000, 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 Company Reg. No. ANO94-002319; and that the purposes for which it was incorporated are the following: 1. To promote the social, cultural, educational and the general well-being and economic development of the Filipino people, especially the less fortunate members of the Philippine society by undertaking charitable or philanthropic work or activities; 2. To undertake, directly finance, assist, provide scholarship grants to deserving students and professional chairs for the enhancement of professional courses, or otherwise establish facilities and/or upgrade existing facilities for the study, education, training, instruction of deserving students; 3. To undertake and/or assist in the amelioration of the living conditions of distressed citizens particularly those who are handicapped by reason of poverty, youth, physical and mental disability, illness, old age and natural disasters, pursuing a program for the protection and development of children and youth and to sponsor, support promote, encourage and finance educational activities and projects, including, but not limited to educational and/or travel grants, seminars, lectures, conferences, meetings and exhibitions calculated to attain and/or support the conduct of the above activities; 4. To receive gifts, bequests, and donations of money and/or property of any kind and nature to be used to administer or otherwise manage the same for the purposes of the Foundation. In support of its request, PFI has completely submitted on November 5, 2013, the following documents: a. Original copy of application letter for issuance of tax exemption ruling; b. Certified true copy of the latest Articles of Incorporation and By-Laws issued by the Securities and Exchange Commission; HIACEa c. Original copy of Certification under oath by an executive officer of the corporation or association as to: (i) all previous amendments/changes in the Articles of Incorporation and By-Laws, (ii) manner of activities, and (iii) the sources and disposition of income, if any, of the subject corporation or association. d. Certified true copy of the Certificate of Registration with the BIR; e. Original copy of the Certification under oath by the Treasurer of the corporation or association as to the amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers; f. Original copy of the Certification issued by the Revenue District Officer of Revenue District No. 47, East Makati, that the foundation has no outstanding liabilities and is not subject of any pending investigation or on-going audit as of September 12, 2013 with the said office; g. Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation or association for the last three (3) years; and h. Original copy of a statement under oath by an executive officer of the corporation or association as to its modus operandi which shall include: i. A full description of the past, present, and proposed activities of the corporation or association; ii. A narrative description of anticipated receipts and contemplated expenditures; and iii. A detailed description of all revenues which it seeks to be exempted from income tax. In reply, please be informed as follows: Income Tax Section 30 (E) of the 1997 Tax Code, 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: HCacTI xxx xxx xxx (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; . . ." Corporations or associations which apply for tax exemption ruling under Section 30 (E) of the Tax Code of 1997, as amended, must meet all the following requirements in accordance with Revenue Memorandum Order (RMO) No. 20-2013 dated July 22, 2013, to wit: a. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans. b. It should meet the following tests: i. Organizational Test requires that the corporation or association's constitutive documents exclusively limit its purposes to one or more of those described in paragraph (E) of Section 30 of the Tax Code of 1997, as amended. ii. Operational Test mandates that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in paragraph (E) of Section 30 of the Tax Code of 1997, as amended. A corporation or association fails to meet this if a substantial part of its operations may be considered "activities conducted for profit". c. All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person. Any profit must be plowed back and must be devoted or used altogether for the furtherance of the purpose for which the corporation or association was organized. d. It must not be a branch of a foreign non-stock, non-profit corporation. cAaTED Wherefore, PFI is a corporation 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. 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 benefit 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. 157-2011 dated May 19, 2011) It should be understood that the PFI 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 No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the withholding tax pursuant to Section 57 of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 075-2011 dated March 14, 2011) Value-Added Tax Moreover, the tax exemption granted to it 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 PFI 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. 158-2011 dated May 19, 2011) DHcTaE 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. (BIR Ruling No. 157-2011 dated May 19, 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. 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 PFI is an institution exclusively 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, 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. DHEaTS (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. 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: aCTHEA 1. religious; 2. charitable; 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. Accordingly, for purposes of full deductibility from the taxable business income of its donor, PFI 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]. cTDaEH Moreover, PFI 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. 138-2011 dated April 29, 2011) 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 under the same requirements and procedures provided under RMO No. 20-2013. Failure to renew the Tax Exemption Ruling shall be deemed a revocation 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. EHTIDA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue