BIR Ruling No. 378-15

October 29, 2015 BIR RULING NO. 378-15 Section 30 of the Tax Code of 1997, as amended; BIR Ruling No. 577-12; BIR Ruling No. 536-12 Brgy. Nalinan Farmers Association of Maguindanao, Inc. Brgy. Nalinan, Sultan Kudarat, Maguindanao 9605 Attention: Mr. Tato G. Patiang President Sir : This refers to your letter dated July 10, 2012 duly indorsed by Revenue District Office No. 107-Cotabato City through 1st Indorsement dated October 24, 2012, requesting for the issuance of a certificate of tax exemption. It is represented that BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. with Taxpayer's Identification No. 424-400-538-000, is organized as a non-stock, non-profit corporation registered with the Securities and Exchange Commission (SEC) under Registration No. CN201230997 dated June 27, 2012; that the purposes for which it was incorporated are the following: 1) To provide continuous assistance of farm inputs, other needed materials used by the farmers in their daily needs; 2) To give opportunity to the farmer members to gain more income by planting permanent high valued crops to be more productive and can sustain the family needs; 3) To implement development programs and projects of the government for farming purposes; and 4) Serve also as programs information and dissemination in the community especially among farmers. and that in support of your request, the following documents were submitted: 1) Photocopy of the BIR Certificate of Registration; 2) Affidavit dated July 12, 2012 executed by the Corporate President; 3) Photocopy of the Corporation's Certificate of Incorporation and Amended Articles of Incorporation; and 4) Photocopy of the Corporation's By-Laws. In reply, please be informed that tax exemptions are never presumed and thus, as ruled by the Supreme Court in the case of Quezon City and The City Treasurer of Quezon City vs. ABS-CBN Broadcasting Corporation (G.R. No. 166408 dated October 6, 2008) : "He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that "exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt".In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms." In this case, the submitted documents are insufficient to prove the qualification of BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. as a corporation contemplated under Section 30 of the Tax Code of 1997, as amended. Mere registration of BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. with the SEC as a non-stock and non-profit corporation does not automatically exempt it from income tax. This only refers to its corporate organization, BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. has to prove by actual operation for at least three (3) years that it is really an organization contemplated under Section 30 of the Tax Code of 1997, as amended, to be exempt from income tax imposed on income received by it as a Section 30 corporation. ICHDca BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. has only submitted its corporate papers but there are no document showing proof of its actual operations for the immediately preceding years. Moreover, a notice for the submission of additional documents was sent to your registered address last November 29, 2013, however, there was no submission made until now. In view of the foregoing, this Office regrets to deny your application for tax exemption for lack of factual basis. Hence, BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. shall be treated as an ordinary corporation subject to regular corporate income tax and the applicable internal revenue taxes imposed by the Tax Code of 1997, as amended. BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. shall file the necessary annual information return instead of an income tax return on or before the 15th day of the fourth month following the end of its taxable year as required under Section 24 of Revenue Regulations No. 2-40 dated February 10, 1940 (Collector vs. Sinco, G.R. L-9276 dated October 23, 1956) .Based on such information return, we shall conduct the necessary investigation on the activities undertaken during the period. The letter of exemption shall thereafter be issued depending upon the result of our investigation. 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 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. 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. It should be understood that BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. shall be constituted as withholding agent of the government if it acts as an employer and its employee receives 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 expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 577-2012 September 9, 2012 and BIR Ruling No. 536-2012 dated August 8, 2012) 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. BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. is likewise subject to the payment of the annual registration fee of P500.00 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] . Moreover, 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. TCAScE 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 BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, 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 registered with the SEC as 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 Tax 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. Finally, for purposes of securing a certificate of tax exemption after the three (3)-year period, BRGY. NALINAN FARMERS ASSOCIATION OF MAGUINDANAO, INC. shall file its application for tax exemption with the Revenue District Office (RDO) where it is registered and is required to submit the following documents to Revenue Memorandum Order (RMO) No. 20-2013: a) An application letter for issuance of Tax Exemption Ruling. The letter shall cite the particular paragraph of Section 30 of the Tax Code of 1997, as amended, under which the application for exemption is being based. b) SEC Certified true copies of the latest Articles of Incorporation and By-Laws or its Amended versions, which must clearly state that: 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; 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. c) Original Certification under Oath by an executive officer of the corporation or association as to: (i) all previous amendments/changes in the Articles of Incorporation and By-Laws, (ii) manner of activities, and cTDaEH (iii) the sources and disposition of income, if any, of the subject corporation or association. If there are no amendments/changes, the Certification shall state this fact. d) Certified true copy of the Certificate of Registration with the BIR; e) Original copy of the Certification under Oath by the Treasurer of the corporation or association as to the amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers. f) Original copy of the Certification issued by the RDO where the corporation or association is registered that the corporation or association 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; or if thereby be any, the Original copy of the Certification issued by the RDO on the status thereof; g) BIR-certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation for the last three (3) years; and h) Original copy of a statement under Oath by an executive officer of the corporation or association as to its modus operandi which shall include: i. A full description of the past, present, and proposed activities of the corporation or association; ii. A narrative description of anticipated receipts and contemplated expenditures; and iii. A detailed description of all revenues which it seeks to be exempted from income tax. All other revenues which are not included in the statement/application shall be subject to income tax. 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