BIR Ruling No. 260-12

April 20, 2012 BIR RULING NO. 260-12 Section 30 (E) of the Tax Code of 1997; BIR Ruling No. 75-2011; BIR Ruling No. 157-2011 St. Scholastica Research and Development Foundation, Inc. St. Scholastica's College 2560 Leon Guinto Sr. St.,Malate, Manila Attention: Sr. M. Soledad Hilado, OSB Executive Director Gentlemen : This refers to your letter dated October 12, 2010, requesting exemption of St. Scholastica Research and Development Foundation, Inc. from the following: 1) Payment of internal revenue taxes, including income taxes; 2) Withholding tax remittances; 3) Annual Information Return of Income Tax Withheld on Compensation; and 4) Expanded and Final Withholding Taxes. Documents submitted disclose that St. Scholastica Research and Development Foundation, Inc. ("SSRDFI") with Taxpayer Identification No. 000-821-185-000, 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 SEC Reg. No. 64791 dated December 2, 1975 with principal address at 2560 Leon Guinto Sr. Street, Malate, Manila; and that the purposes for which it was incorporated are: CcTIAH 1. To promote, encourage, sponsor and/or initiate scientific research and development projects in Social Sciences and Humanities, Nutrition and Physical Sciences; to conduct, grant, sponsor, establish, set-up and maintain scholarship in order to foster, promote and encourage the study and improvement of fundamental or pure research, applied research, developmental work and/or economic evaluation in the fields of Social Sciences and Humanities, and Health Sciences, develop industrial, technological management, business, economic, vocational studies, arts and letter and all other fields of academic and athletic activities; 2. To conduct, sponsor, and publish the results of its scientific and/or technical research and development projects or studies in order to benefit the public on a non-discriminatory basis; 3. To build, improve, enlarge, or equip or to cause the building, improvement, enlarging or equipping of buildings, libraries, laboratories, workshops and or other educational accessories required for scientific research, to establish, maintain or endow institutions doing research of all kinds in the fields of physical sciences, nutrition and/or social sciences and humanities; 4. To acquire properties, real or personal, receive contributions, gifts, endowments, bequests, legacies and donations of all kinds from donors here and abroad; to invest its funds, monies and properties in such undertakings and to pursue such activities as the Foundation may deem appropriate from time to time to carry out any or all of the foregoing purposes; and to enter into, make, perform and carry out or cancel and rescind contracts of every kind and for any lawful purpose with any person, firm, association, corporation or syndicate, domestic or otherwise. aACEID xxx xxx xxx In support of its request, SSRDFI has completely submitted on February 2, 2011 the following documents: 1) Letter of application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) Certified true copy of the Amended 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 Tax Code of 1997, as amended; c. That no part of the net income shall inure to the benefit of any of its members; d. That the members of the Board of Trustees do not receive compensation or remuneration; 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; SIEHcA 5) Certified true copies of the 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 the sources and disposition of income; and 7) BIR Certificate of Registration. 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: xxx xxx xxx (E) Non-stock 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; ..." Under the above-quoted provision, a non-stock 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 is exempt from income taxation. (BIR Ruling No. 075-2011 dated March 14, 2011) SSRDFI falls within the purview of a corporation organized for scientific research purposes as 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. (BIR Ruling No. 157-2011 dated May 19, 2011) 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. 157-2011 dated May 19, 2011) aICcHA 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. 157-2011 dated May 19, 2011) 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. (BIR Ruling No. 157-2011 dated May 19, 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 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 SSRDFI 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. HCEcAa 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 SSRDFI is engaged in the sale of services in the course of a business pursuit, such as providing research services for a fee, including transactions incidental thereto, in general, it shall also be liable for VAT. (BIR Ruling No. 157-2011 dated May 19, 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. (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 Inasmuch as SSRDFI is a scientific research organization, 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. (BIR Ruling No. 157-2011 dated May 19, 2011) STcHDC Deductibility of Donation Section 3 of Revenue Regulations (RR) No. 13-98 provides: 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 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 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) and (b) of RR 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: aETASc 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, SSRDFI 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 offices at 715-9594, 715-2756, 782-1568 and 715-7-2783 (telefax).You may also visit their website: http://www.pcnc.com.ph or email them at [emailprotected] . IN SUM, this Office is of the opinion and hereby holds that: 1. SSRDFI is exempt from the payment of tax on the income received by it as such organization. However, as discussed above, it is not exempt from the payment of other internal revenue taxes; 2. SSRDFI is not exempt from being the withholding agent for the government obligated to withhold tax on compensation and remit the same to the BIR, if it acts as an employer and its employee/s receive compensation income subject to the withholding tax or if it makes income payments to individuals or corporations subject to the withholding taxes under Revenue Regulations No. 2-98, as amended. 3. Additionally, since SSRDFI is constituted as the withholding agent, is directed to comply with Sec. 2.83.2 of Revenue Regulations No. 2-98, as amended, which requires every employer or other person required to deduct and withhold the tax to file with the Large Taxpayers Assistance Division (LTAD)/Large Taxpayers District Office (LTDO)/RDO where the payor/employer is registered as Withholding Agent on or before January 31 of the succeeding year to file an Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF), to be submitted with an alphabetical list of employees/payees. 4. As to exemption from Expanded and Final Withholding Taxes, since SSRDFI is exempt from the payment of tax on income received by it as such organization, it is likewise exempt from expanded withholding tax. However, as discussed above, SSRDFI is not exempt from final withholding taxes. 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. TCaEAD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue