BIR Ruling No. 365-11

October 5, 2011 BIR RULING NO. 365-11 Section 30 (F) of the Tax Code of 1997; BIR Ruling No. [NSNP-(S30F-005) 677-09]; BIR Ruling No. [NSNP-(S30F-008) 824-09]; BIR Ruling No. S30-27-2003; BIR Ruling No. DA-043-2004; VAT Ruling No. 119-90 Parlade Hildawa Parlade Eco & Panga Attorneys-At-Law 26th Floor, The Orient Square F. Ortigas Jr. Ave., Ortigas Center Pasig City 1605 Attention: Michelle S. C. C. Santos-Domingo Gentlemen : This refers to your letter dated March 14, 2011, requesting on behalf of your client, Sugar Master Plan Foundation, Inc. (SMPFI) for the issuance of a certificate of tax exemption enjoyed by non-stock and non-profit corporation organized as a business league, chamber of commerce, or board of trade, not organized for profit under Section 30 (F) of the Tax Code of 1997, as amended. It is represented that SMPFI with Taxpayer's Identification No. 220-440-764-000, 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 Registration No. CS200251002; and that the purposes for which it was incorporated are as follows: To promote, facilitate, coordinate, and monitor the efforts of all the stakeholders in the sugar industry in the implementation of the sugar master plan with greater focus in the areas of farm production and extension, milling and refining, research and development marketing and distribution, legislation, policy and planning, and social concerns, and with the support of concerned departments and agencies of government as well as private institutions and entities, whenever necessary or desirable, towards increasing productivity and quality, lowering production costs, and enhancing the viability and global competitiveness of the Philippine sugar industry. TIEHSA In support of its request, SMPFI 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 (F) of the Tax Code of 1997, as amended; c. That no part of the net income shall inure to the benefit of any its members; ICHcTD d. That the trustees do not receive any compensation; 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; 5) Certified true copy of the Annual Information Return and 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 (F) 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: AEcIaH xxx xxx xxx (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; . . ." Under the above-quoted provision, a non-stock and non-profit corporation organized as a business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual is exempt from income taxation. (BIR Ruling No. [NSNP-(S30F-005) 677-09] dated October 27, 2009) SMPFI falls within the purview of an association contemplated under the above cited provision. Accordingly, it is exempt from the payment of income 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. [NSNP-(S30F-008) 824-09] dated December 23, 2009) 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. [NSNP-(S30F-008) 824-09] dated December 23, 2009) 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. [NSNP-(S30F-008) 824-09] dated December 23, 2009) aCTHEA It is requested that a copy of this letter of exemption be attached to the aforementioned Annual Information Return. It should be understood that SMPFI 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. (BIR Ruling No. [NSNP-(S30F-008) 824-09] dated December 23, 2009) 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 of the Tax Code of 1997 covers only income taxes for which it is directly liable. aEHAIS Section 105 of the Tax Code of 1997, as amended, 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 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 association (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. 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 the association 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. Accordingly, if SMPFI is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Likewise, 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. However, the above exemption from the 12% VAT does not extend to its purchase of goods or properties or services and importation of goods. Hence, notwithstanding that it is a non-stock, non-profit association, 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 (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). aTEHIC Donor's Tax Pursuant to Section 101 of the 1997 Tax Code, only the following gifts or donations are exempt from donor's tax, viz.: "(A) In the case of Gifts Made by a Resident (1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized, or adopted children to the extent of the first ten thousand pesos (P10,000); (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and (3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution: Provided, however, that not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution, accredited, nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receives no compensation, and devoting all its income, whether student fees or gifts, donations, subsidies or other form of philanthropy, to the accomplishment and promotion of the purposes enumerated in the Articles of Incorporation." SAHIaD Based on the foregoing, SMPFI does not qualify as a donee organization and as such, any gift or donation made thereto by the donor/s is not exempt from the donor's tax. Deductibility of Donations In the light of the above, donations made to SMPFI are not deductible from the gross income of the donor/s as provided for under Section 34 (H) of the 1997 Tax Code. 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 as null and void. ASTIED Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue