BIR Ruling No. 352-14

September 3, 2014 BIR RULING NO. 352-14 Section 30 (G) of the Tax Code of 1997, as amended; BIR Ruling No. 140-2013; BIR Ruling No. 108-2011; BIR Ruling No. 080-2011; BIR Ruling No. 060-2011; BIR Ruling No. 052-2011 UP Business Research Foundation, Inc. U.P. College of Business Administration Building, Guerrero Street, U.P. Campus, Diliman, Quezon City Attention: Cesar E.A. Virata President Gentlemen : This refers to your letter dated August 16, 2013, as indorsed by the Regional Director of Revenue Region No. 7, Quezon City relative to your request for a Certificate of Tax Exemption on behalf of U.P. BUSINESS RESEARCH FOUNDATION, INC. pursuant to Section 30 (G) of the National Internal Revenue Code (NIRC) of 1997, as amended. It is represented that U.P. BUSINESS RESEARCH FOUNDATION, INC.,with BIR Certificate of Registration No. OCN3RC0000227700 and Taxpayer's Identification No. (TIN) 000-393-672-000, is a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare duly organized and existing under the laws of the Philippines, registered with the Securities and Exchange Commission (SEC) under Company Registration No. 45769 dated October 29, 1971; and that the primary purpose for which the Foundation was incorporated is: 1) To establish and provide a private institutional medium with the assistance of which the College of Business Administration of the University of the Philippines can effectively undertake, promote, develop or enhance research in the business and management operations of industry, agriculture, commercial, governmental, and other sectors, through any or all of the following activities: EHSTDA a) To finance projects and programs dedicated to the pursuit of new learning, investigation and/or experiment in the management sciences leading to a better understanding of industry, agriculture, commerce, and other sectors of the Philippine economy; b) To encourage and underwrite researchers and studies on the teaching of the managerial and business aspects of industry, agriculture, commerce and other sectors of the economy, including financial management, marketing management, production and operations management, agri-business, and business economics; c) To establish scholarship and professorial chairs in the management sciences, business administration and related fields; d) To provide the machinery through which a systematic exchange of information and views can be made among individuals, associations, corporations and entities, be the governmental or private, who or which are concerned in the promotion and propagation of the managerial aspects of industry, agriculture and commerce; ESaITA e) To establish and distribute or cause to be published or distributed without profit, books, information, case studies, statistics or data on business and management and related subjects as a result of studies, researches, and projects made thereon; f) To cooperate with private, government or public institutions in undertaking, conducting and/or sponsoring projects and/or programs, seminars, training sessions and conferences dedicated to the promotion, propagation and enhancement of the business and management sciences; g) To enter into, contract with and execute with any person, corporations, partnerships or associations, governmental or otherwise, any management contract, trust agreement of any lawful arrangement of the management and investment of funds of the Corporation, and to secure the consent and approval thereto of the National Science Development Board, in accordance with its rules and regulations; h) To give or administer grants and donations of cash, property or service to programs and activities that will redound to the benefit and enhancement of business and management sciences; and HEDCAS i) To assist in strengthening the library, laboratory and other facilities, teaching and research capabilities of public or private institutions and foundations of like or similar objectives, alone or in conjunction with others. In support of its request, U.P. BUSINESS RESEARCH FOUNDATION, INC. submitted the following documentary requirements: 1) Letter-application for tax exemption; 2) Certified true copy of the Certificate of Incorporation 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 no part of the net income shall be inure to the benefit of any of its members; c. That the trustees do not receive any compensation; and d. In case of dissolution, assets of the corporation shall be transferred to similar institution or to the government. CScTED 4) Certified true copy of the Amended By-Laws; 5) A copy of the Delinquency Verification Slip issued by the Collection Division of Revenue Region No. 7, Quezon City, stating therein that U.P. BUSINESS RESEARCH FOUNDATION, INC.,has no record of delinquent accounts in the Collection Division as of March 26, 2014; 6) Original copy of the Certification under Oath executed by the Executive Vice-President of the Foundation as to: (I) all the previous amendments or changes in the Articles of Incorporation and By-laws, (II) manner of activities, and (III) sources and disposition of income; 7) Original copy of the Certification under Oath executed by the Treasurer of the Foundation certifying therein that the members of the Board of Trustees and the officers of the Foundation do not receive any income, compensation, salary or any emolument; 8) BIR certified true copies of the Annual Income Tax Returns and Financial Statements for the years 2010-2012; 9) Original copy of the Statement under Oath executed by the Executive Vice-President of the Foundation as to its Modus Operandi ; 10) BIR certified true copy of its Certificate of Registration; and aTSEcA 11) Verification and Affidavit of Non-Forum shopping. In reply, please be informed as follows: Income Tax Section 30 (G) of the Tax Code of 1997, 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 (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. AIDTHC However, the last paragraph of Section 30 of the NIRC of 1997, as amended, 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 interpreting the term "exclusive" as used in the provision, the Supreme Court, in citing the case of Lung Center of the Philippines vs. Quezon City (G.R. No. 144104, June 29, 2004) ,held: EcHIDT "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusive" 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, U.P. BUSINESS RESEARCH FOUNDATION, INC. falls within the purview of an organization/association contemplated under the above cited provision of law. Accordingly, it is exempt from the payment of income tax received by it as such organization. However, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code 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, 2012) 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, as amended. (BIR Ruling No. 140-11 dated April 29, 2011) EcSaHA It should be understood that the said exempt corporation/association shall be constituted as a 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 (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 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 civic league/organization not organized for profit but operated exclusively for the promotion of social welfare under Section 30 (G) of the Tax Code of 1997, as amended, 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. TECcHA Accordingly, if U.P. BUSINESS RESEARCH 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. (BIR Ruling No. 080-11 dated March 15, 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 Sections 106 to 108 of the said Code. (BIR Ruling No. 060-11 dated March 4, 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. aTICAc Donor's Tax In as much as U.P. BUSINESS RESEARCH FOUNDATION, INC. is a social welfare 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, 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. 052-11 dated February 25, 2011) Deductibility of Donation Section 3 of Revenue Regulations 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: aTDcAH (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. ESTcIA (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 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. THIECD b) "Non-government Organization" 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, U.P. BUSINESS RESEARCH 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] . HcaDIA Moreover, U.P. BUSINESS RESEARCH 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. (BIR Ruling No. 108-11 dated April 7, 2011) Under Section 235 of the Tax Code of 1997, as amended, 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 Foundation 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. TCaEAD The tax exemption ruling may be renewed upon filing of a subsequent application for Tax Exemption/Revalidation provided under Revenue Memorandum Order (RMO) No. 20-2013, dated July 22, 2013, otherwise, the exemption shall be deemed revoked upon the expiration of its validity period. 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