BIR Ruling No. 231-11

July 15, 2011 BIR RULING NO. 231-11 Section 30 (E) of the NIRC; BIR Ruling No. 236-82; BIR Ruling No. 015-95; BIR Ruling No. DA-457-99; BIR Ruling No. DA-043-04; BIR Ruling No. 084-2011; BIR Ruling No. [NSNP-(S30E-159) 810-09]; BIR Ruling No. [NSNP-(S30E-042) 242-09] Tomas & Betty De Los Santos Foundation, Inc. No. 7, Golden Mile Ave., Golden Mile Business Park Bo. Maduya, Carmona, Cavite Attention: Mr. Lawrence de los Santos President Gentlemen : This refers to your letter dated October 27, 2010 requesting for the issuance of a certificate of tax exemption enjoyed by non-stock corporation or association organized and operated exclusively for charitable, religious and educational purposes under Section 30 (E) of the National Internal Revenue Code (NIRC), as amended. It is represented that Tomas and Betty de los Santos Foundation, Inc. (T&BDSFI) with Taxpayer's Identification No. 247-903-226-000, 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 Registration No. CN200608617 and that the purposes for which such foundation was incorporated are the following: 1. Accept or receive, hold, administer, maintain, invest and disburse for charitable, religious and educational purposes such funds, gifts, bequests, donations or otherwise as may from time to time be given to it by any persons or corporations; 2. Initiate, promote and develop the advancement of education, religious activities and medical assistance or support, grants, scholarships, sponsorships, donations or other forms of financial aid or assistance out of the disposable funds of the foundation; 3. Raise money or funds from time to time, without limit as to amount, to finance the purposes for which the foundation is organized; 4. Acquire, take and hold property, real or personal, donated, devised or bequeathed to the foundation, including those that may be given in trust for specific purposes and under certain conditions; 5. Make any guaranty respecting securities, indebtedness, dividends, interests, contracts or other obligations so far as the same may be permitted to be done under the laws of the Philippines and only insofar as the same is necessary to carry out its purposes; HIDCTA 6. Enter into, make, perform and carry out cancel or rescind contracts of every kind, including joint ventures, and for any lawful purpose with any person or firm, association, corporation or syndicate, whether domestic or foreign; and 7. In general, carry on any activity, do and perform all acts and things that may be necessary, suitable, proper or useful in accomplishing the purposes herein set forth, or which shall at any time appear to be the best interest and benefit of the foundation in the furtherance of its objectives. In support of its request, T&BDSFI has completely submitted on April 26, 2011, 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 Sec. 30 (E) of the NIRC, as amended; c. That no part of the net income shall inure to the benefit of any its members; d. No member of the Board of Trustees shall 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) BIR Certificate of Registration; 7) Certificate of non-forum shopping; and 8) Other pertinent documents. In reply, please be informed as follows: Income Tax Section 30 (E) of the NIRC, 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 (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; . . ." T&BDSFI falls within the purview of a corporation contemplated under the above-cited provision. Accordingly, it is exempt from the payment of income tax on income received by it as such organization. However, it is subject to the corresponding internal revenue taxes imposed under the NIRC 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. (BIR Ruling No. 015-95 dated February 9, 1995) HAICTD 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 NIRC. (BIR Ruling No. DA-457-99 dated August 11, 1999) 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. (BIR Ruling No. DA-457-99 dated August 11, 1999) 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 corporation/association 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 NIRC, as implemented by Revenue Regulations (RR) 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 NIRC, also as implemented by Revenue Regulations (RR) No. 2-98, as amended. (BIR Ruling No. [NSNP-(S30E-159) 810-09] dated December 22, 2009) Under Section 235 of the NIRC, 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 NIRC, 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] . aTcHIC Value-Added Tax Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the NIRC covers only income taxes for which it is directly liable. Section 105 of the NIRC 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 T&BDSFI 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 (BIR Ruling No. DA-043-04 dated February 4, 2004) . 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 NIRC to avoid the passing on or shifting of the VAT. (BIR Ruling No. DA-043-04 dated February 4, 2004) . 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 T&BDSFI is a charitable organization, donations to it are exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the NIRC, 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. [NSNP-(S30E-042) 242-09] dated March 31, 2009) Deductibility of Donation Section 3 of RR No. 13-98 provides: ETHCDS "SECTION 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. 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 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 accomplish 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 RR 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: (i) religious; (ii) charitable; (iii) scientific; (iv) athletic; (v) cultural; (vi) rehabilitation of veterans; and (vii) 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." IDaCcS 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, T&BDSFI 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]. 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 of Internal Revenue