BIR Ruling No. 307-15

September 15, 2015 BIR RULING NO. 307-15 Sec. 30 (G) of the Tax Code of 1997; Rev. Regs. 14-07 San Roque Power Foundation, Inc. Barangay San Roque, San Manuel, Pangasinan Attention: Tommy T. Valdez Executive Director Gentlemen : This refers to your letter dated 19 December 2013 received by this office via second indorsement dated 12 February 2014, requesting for the issuance of a certificate of tax exemption enjoyed by a civic league organization not organized for profit but operated exclusively for social welfare under Section 30 (G) of the Tax Code of 1997, as amended. It is represented that SAN ROQUE POWER FOUNDATION, INC.,with Taxpayer Identification No. 007-907-542-000, is a non-stock, non-profit corporation duly organized under the laws of the Republic of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CN201017349 dated 21 October 2010; and that as stated in its Amended Articles of Incorporation, the primary purposes for which it was incorporated are as follows: 1) To promote, support, and/or undertake local and national community and social development programs and projects designed to help improve quality of life and contribute to enhance economic development in the country and in this connection, to undertake and assist in the identification, planning and implementation of comprehensive and sustainable livelihood and rehabilitions (sic) projects by encouraging participation, providing access to resources and capability building, and to conduct microfinance operations pursuant to Republic Act No. 8425, otherwise known as the Social Reform and Poverty Alleviation Act .(as amended on October 20, 2011) 2) To create establish, organize and/or maintain centers, institutions, and programs which will provide or allow access to health services and educational opportunities. 3) To foster partnership with communities, non-government organizations, government agencies, local government units and international organizations to work towards advancing social development in the country, and to actively participate in and support government and non-government organization programs promoting quality education, health care services, and the implementation of needs-based community infrastructure projects, e.g. ,farm to market roads, rural electrification. 4) To receive and/or give grants, gifts, legacies, donations, contributions, endowments, and financial aids or loans, to or from any sources whatsoever, and to make use of the foregoing in undertaking, operating and/or supporting enterprises, activities and businesses as may be necessary to carry out the objectives of the Corporation, including but not limited to conducting, undertaking providing and/or supporting relief operations (including extending relief to the poor, distressed and the underprivileged),educational assistance, leadership/capability building activities, environmental protection projects, research studies to address current social issues and other similar activities. cDHAES 5) Generally, to do all things, transact such business, exercise such powers and authority as may be directly or indirectly necessary, suitable, or proper for the accomplishment of any of the purposes or the attainment of any one of the or more of the objectives herein enumerated or which shall appear at any time conducive or expedient for the protection or benefit of the corporation; it being understood that the property and income of the Corporation shall be used, in accordance with the applicable rules and regulations, exclusively for the furtherance of the purposes enumerated herein or related thereto, and that no part of the property or income of the corporation shall inure to the benefit of any private individual or person, it being understood that the Corporation shall not engaged in charitable activities under the jurisdiction of the Department of Social Welfare and Development without the latter's consent whenever such consent is required. In support of its request, SAN ROQUE POWER FOUNDATION, INC. has completely submitted 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 of the Tax Code of 1997, as amended; c. That no part of the community's assets or net income shall inure to the benefit of any of the members thereof; d. That members of the board are also not to receive any remuneration as members of the board; and e. To donate all assets of the foundation to the government or to another non-stock, non-profit corporation with similar purposes in case of dissolution. 4) Certified true copy of the By-Laws; 5) Certification under oath by the Executive Director of SRPFI 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 SRPFI; 6) Certified true copy of SRPFI's Certificate of Registration with the BIR; 7) Certification under oath by SRPFI's Treasurer that no amount of income, compensation, salaries or emoluments has been paid by SRPFI to its trustees, officers and other executive officers; 8) Certification issued by the Revenue District Office No. 6 in Urdaneta City, Pangasinan that SRPFI is not the subject of any 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/Financial Statements for the last three fiscal years; 10) Statement under oath by the Executive Director of SRPFI as to the modus operandi of SRPFI; and 11) SRPFI's Certificate of Registration as an Auxiliary Social Welfare and Development Agency issued by the DSWD; and 12) SRPFI's Certificate of Registration as a Donee Institution with PCNC. In reply, please be informed as follows: ASEcHI Income Tax Section 30 (G) of the Tax Code of 1997, as amended, provides: 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 (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; ... The Supreme Court, in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. [G.R. No. 195909 & G.R. No. 195960, September 26, 2012] ,declared: ". . . [T]o be exempt from income taxes, Section 30 (G) of the NIRC requires that the institution be "operated exclusively" for social welfare. 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 "[n]on-stock corporation or association [must be] organized and operated exclusively for ...charitable ...purposes. ..." It likewise qualifies the requirement in Section 30 (G) that the civic organization must be "operated exclusively" for the promotion of social welfare ." In the above-cited case, the Supreme Court interpreted the term "exclusive" citing the case of Lung Center of the Philippines v. 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." Thus, the income tax exemption provided under Section 30 (G) does not extend to activities conducted for profit. In relation to this, Revenue Regulations (RR) No. 14-07 dated December 11, 2007 was issued to rationalize the tax exemptions of NGOs and the cooperatives engaging in microfinance activities based on existing laws and regulations and the relevant tax treatment of the profits derived in relation to their delivery of microfinance services. Section 5 of RR No. 14-07 provides: SECTION 5. Tax Treatment of Microfinance Services Rendered by Non-governmental Organizations. All NGOs falling under the enumeration of Section 30 of the Tax Code of 1997, as amended, are exempt from income taxes, in respect of income received by them as such. However, income of such NGOs from microfinance activities, and which are not in respect of their registered activities covered by Section 30 of the Tax Code of 1997, as amended, regardless of the disposition made such income, shall be subject to tax under the tax Code of 1997, as amended. Similarly, non-stock, non-profit NGOs, whether or not engaged in microfinance activities, are still also required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding as specified in Revenue Memorandum Circular No. 76-2003. Based on the foregoing, SAN ROQUE POWER FOUNDATION, INC. is a corporation contemplated under Section 30 (G) 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. ITAaHc 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. 140-11 dated April 29, 2011) . Moreover, the income derived by SAN ROQUE POWER FOUNDATION, INC. from its microfinance activities pursuant to R.A. 8425 (Social Reform and Poverty Alleviation Act) is subject to the 30% corporate income tax under the Tax Code of 1997, as amended . (RR No. 14-07) 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. 140-11 dated April 29, 2011) It should be understood that the said exempt organization shall be constituted as withholding agent of 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 RR No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Rev. Regs. No. 2-98, as amended. Value-Added Tax 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. cSaATC 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. Accordingly, if SAN ROQUE POWER 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 not organized for profit but operated exclusively for the promotion of social welfare, 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. 451-13 dated 27 November 2013) 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. Donor's Tax Inasmuch as SAN ROQUE POWER FOUNDATION, INC. is a corporation organized for social welfare, 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. CHTAIc 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 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) 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: 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, SAN ROQUE POWER 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 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] . EATCcI 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. 108-11 dated April 7, 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 provided under the same requirements and procedures provided under Revenue Memorandum Order (RMO) No. 20-2013. Failure to renew the Tax Exemption Ruling shall be deemed 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