BIR Ruling No. 278-15

August 24, 2015 BIR RULING NO. 278-15 Section 30 (E) of the Tax Code of 1997, as amended; BIR Ruling No. 373-13; BIR Ruling No. 150-13; BIR Ruling No. 314-12; BIR Ruling No. 028-12 Family Cooperation Health Services Foundation, Inc . Unit 530 Richville Corporate Tower, 1107 Alabang-Zapote Road, Madrigal Business Park, Ayala Alabang, Muntinlupa City 1770 Attention: Ms. Roseanne I. Gonzalez President Madam : This refers to your letter dated December 3, 2013, applying on behalf of FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. for a tax exemption certificate enjoyed by non-stock, non-profit corporations or associations organized and operated exclusively for charitable purposes under Section 30 (E) of the Tax Code of 1997, as amended. It is represented that FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. with Taxpayer's Identification No. (TIN).001-628-334-000, is a corporation duly organized under the laws of the Philippines, registered with the Securities and Exchange Commission (SEC) under Registration No. ANO91-197977 dated November 14, 1991; and that the purposes for which it was incorporated are the following, to wit: 1. To provide the poor and underprivileged, particularly those living in economically depressed areas or communities with quality medical, dental and health care, particularly maternal and child care, including, without being limited to, preventive, diagnostic and curative health services, in a humane and dignified environment and for this purpose, to establish, own, operate, maintain, administer, and manage clinics and hospitals, including facilities, equipment, pharmacies, laboratories or other departments incidental for the operation thereof; HEITAD 2. To conduct sponsor, supervise, or direct lectures, seminars, conferences, researches, projects or other similar activities to teach, inform and train the poor and underprivileged on maternal and child care, health, nutrition, hygiene, and sanitation; and to form and develop hygiene, and sanitation and to form and develop values and attitudes relating to human dignity, self-worth, and material and spiritual well-being; 3. To develop, undertake, supervise, direct, and administer programs, means and opportunities for students of medicine, nursing, midwifery, paramedics, dentistry and other allied medical fields from various schools and for medical, dental and allied health practitioners to practice or exercise their respective professions or fields of specialization or training under the principles of bioethics and with the objective of providing quality medical and health care to the poor and underprivileged in a genuine spirit of service, self-giving, social responsibility, generosity and commitment; 4. To engage the services of doctors, nurses, midwives and other medical and health practitioners and employees necessary for the conduct of the purposes of the Foundation; 5. To purchase, acquire, import, lease and dispose of any of all equipment and supplies necessary for the clinics, hospitals and other facilities which the foundation may operate; 6. To research on, promote, undertake, administer, direct, and provide means and opportunities for developing and increasing social awareness among the privileged in society, particularly medical and health practitioners who are best qualified and able to respond to the demands and needs of the underprivileged for a basic healthy and dignified life and for this purpose to undertake, direct and supervise programs, projects and similar activities for the involvement of said persons in the activities of the Foundation; and 7. To establish, operate and administer facilities and undertakings which can stand as models for replication by the Foundation or other groups undertaking similar activities in other depressed and rural communities lacking or in need of medical and health services. In support of its request, FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. submitted the following required documents: 1. Original copy of application letter for issuance of Tax Exemption Ruling; 2. Certified true copy of the Certificate of Registration/Incorporation with the Securities and Exchange Commission (SEC); 3. Certified true copy of the Articles of Incorporation issued by the SEC which include the following: 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 of the Tax Code of 1997, as amended; c. That no portion of the funds, earnings, income or profits of the Foundation shall be declared as dividend nor inure to the benefit of private individuals or judicial entities, whether domestic or foreign; d. Upon the dissolution of the Foundation, all its assets shall go to a corporation, association or entity organized and operated to accomplish the general purpose for which the Foundation was organized. 4. Certified true copy of the By-Laws which include the following: a. Members of the Board of Trustees shall not receive any compensation. 5. Certification under Oath by its Corporate Secretary 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 of the subject corporation or association; 6. Certified true copy of the Certificate of Registration with the BIR; 7. Certification under Oath by the Treasurer certifying that the Board of Trustees of FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. do not receive any compensation as provided in Article VI, Section 9 of the By-Laws; 8. Certification issued by the Asst. Revenue District Officer, RDO No. 53B, Muntinlupa City, certifying that the corporation has no pending investigation, on-going audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; 9. 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; 10. Original copy of a statement under Oath by the Corporate Secretary of the corporation as to its modus operandi . In reply, please be informed as follows: Income Tax Section 30 (E) of the 1997 Tax Code, as amended, provides, viz. : ATICcS "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; ..." 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. The Supreme Court, in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. [G.R. No. 195909 and G.R. No. 195960, September 26, 2012],held: "Section 30 (E) of the NIRC provides that a charitable institution must be: (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, under Lung Center, 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 However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that: 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. 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 "non-stock corporation or association must be organized and operated exclusively for ...charitable ...purposes ..." In the above-cited case, the Supreme Court interpreted the term "exclusive" citing the case of Lung Center of the Philippines vs. Quezon City (G.R. No. 144104, June 29, 2004),which held that: "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation, or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively."...The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the constitution and the law. Solely is synonymous with exclusively." Wherefore, FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. is a charitable 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 or inure to the benefit of any member, organizer, officer or any specific person. (BIR Ruling No. 373-13 dated October 10, 2013) 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. TIADCc 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 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. 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 FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. 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 Sections 106 to 108 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. 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. (BIR Ruling No. 150-13 dated April 17, 2013) Donor's Tax In as much as FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. is a corporation organized 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. 314-12 dated May 3, 2012) Deductibility of Donation Section 3 of RR 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 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. AIDSTE (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 afore-mentioned 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; 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, FAMILY COOPERATION HEALTH SERVICES 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] . Moreover, FAMILY COOPERATION HEALTH SERVICES FOUNDATION, INC. 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. 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]. (BIR Ruling No. 028-12 dated January 16, 2012) 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 with the same requirements and procedures provided under Revenue Memorandum Order (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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue