BIR Ruling No. 319-11

August 22, 2011 BIR RULING NO. 319-11 Sec. 30 (J) of the NIRC of 1997; BIR Ruling No. 015-95; BIR Ruling No. DA-457-99; BIR Ruling No. DA-043-04; BIR Ruling No. NSNP-(S30J-003) 744-09 Barangay San Isidro Water System Association Tagum City, Inc. San Isidro, Tagum City, Davao del Norte Attention: Mr. Roberto C. Abarquez President Gentlemen : This refers to your letter dated August 26, 2010 requesting tax exemption of BARANGAY SAN ISIDRO WATER SYSTEM ASSOCIATION TAGUM CITY, INC. (BASIWASA) under Section 30 of the Tax Code of 1997, as amended. Documents submitted disclosed that BASIWASA, with Taxpayer Identification No. 006-188-316-000, is a non-stock, non-profit corporation registered with the Securities and Exchange Commission (SEC) with SEC Registration No. D200200424 dated April 15, 2002; that the primary purposes for which it was incorporated are the following: "1. To provide adequate and potable water to the community. 2. To develop capabilities and skills of members in organizational management. 3. To further develop unity and understanding between and among its members and the community in general." and that its main source of funding are derived from water bill collections which is used for the payment of repairs and maintenance works, utilities, and employees' honorarium. In support of its request, BASIWASA has completely submitted on July 6, 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 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 net income shall inure to the benefit of any of its members; and IEaCDH d. 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 copies of the recent three (3) years Annual Income Tax Returns; 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; 7) Affidavit of Non-Forum Shopping; and 8) BIR Certificate of Registration. In reply, please be informed as follows: Income tax Section 30 (J) of the 1997 Tax Code, as amended, provides viz. : "Sec. 30. Exemptions from Tax on Corporations. The following organization shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses." Under the above-quoted provision, a non-stock non-profit corporation or association organized and operated alike farmers', mutual companies or organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses, and 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. BASIWASA falls within the purview of a corporation 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. 015-95 dated February 9, 1995) 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. 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. CHDAaS 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. 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] . Value-Added Tax Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 (J) 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 BASIWASA 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. DA-043-04 dated February 4, 2004) . 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 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. ICcDaA 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue