BIR Ruling No. 390-14

October 15, 2014 BIR RULING NO. 390-14 Section 30 of the Tax Code of 1997, as amended; BIR Ruling No. 357-13 Bla-An Self-Help Society, Inc. (BSHS) Sitio Lubon, Barangay Assumption Koronadal City, South Cotabato 9506 Attention: Johnny T. Liwao, Sr. Chairman Gentlemen : This refers to your letter dated 07 May 2012 requesting for the issuance of a certificate of tax exemption as a non-stock, non-profit organization working with less privileged families. It is represented that BLA-AN SELF-HELP SOCIETY, INC. (BSHS), with Taxpayer Identification Number (TIN) 005-926-605, 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 Company Registration No. DS-0003214 dated October 17, 1989; and the purposes for which BSHS is formed are the following: 1) "To pool the resources of the members by encouraging savings and promoting thrift to stimulate capital formation for development activities"; 2) "To increase the income and purchasing power of the member"; 3) "To develop Bla-an ancestral land and preserve their cultural values"; 4) "To provide the member of the community with needed service or services"; 5) "To advance the BSHS as a technique for improving the economic and social status of the people"; 6) "To cooperate with the Government of the Philippines and its instrumentalities in the execution of government policies, which will redound to the benefit of the Bla-an People"; 7) "To undertake continuous education for its member, directors, committee men, officers and employees as well as the Bla-an People in principle and techniques of association, both economic and democratic"; 8) "To conduct publicity and or research work for the promotion of the association and for this purpose to issue from time to time suitable publication of literature"; and 9) "To undertake any lawful, related activities for the member's self-government growth and economic independence under a truly just and democratic society". In reply, please be informed that Section 30 of the Tax Code of 1997, as amended, provides: DAHEaT "Section 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: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, 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; (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; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (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; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent, for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; 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." 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: "Section 30 (E) of the NIRC provides that a charitable institution must be: 1) A non-stock corporation or association; 2) Organized exclusively for charitable purposes; 3) Operated exclusively for charitable purposes; and 4) 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. Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30 (E) of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends to its members, trustees, or officers" and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized." However, under Lung Center, any profit by a charitable institution must not only be plowed back "whenever necessary or proper", but must be "devoted or used altogether to the charitable object which it is intended to achieve." HSIADc The operations of the charitable institution generally refer to its regular activities. Section 30 (E) of the NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person." xxx xxx xxx "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. . . ." In the above-cited case, the Supreme Court interpreted the term "exclusive" citing the 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." Based on the foregoing, this Office is of the opinion that BSHS does not fall within the contemplation of Section 30 (E) of the Tax Code of 1997, as amended, and implemented by Revenue Regulations (RR) No. 13-98, as the first purpose of BSHS relates to the engagement of microfinance activities. Moreover, upon evaluation of the 2009, 2010 and 2011 audited financial statements submitted by BSHS, the bulk of the revenues are sourced from "catering services". Hence, such activities cannot qualify BSHS as a corporation organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, contemplated under Section 30 (E) of the Tax Code of 1997, as amended, and implemented by Revenue Regulations (RR) No. 13-98. Notwithstanding that the Articles of Incorporation classifies BSHS as a non-stock, non-profit corporation, it has to prove that it is really a corporation organized and operated as contemplated under Section 30 (E) of the Tax Code of 1997, as amended, by actual exclusive operation of religious, charitable, scientific, athletic or cultural activities for at least three (3) years for BSHS be exempt from income tax. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. 1 Thus, statutes granting tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. 2 (BIR Ruling No. 357-2013 dated September 26, 2013) Furthermore, as to the purpose of BSHS "to pool the resources of the members by encouraging savings and promoting thrift to stimulate capital formation for development activities" in its Articles of Incorporation, Section 5 of RR No. 14-07 which clarifies the tax treatment of profits on microfinance activities derived by NGOs and cooperatives engaging in microfinance activities provides: ESTaHC "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 of such income, shall be subject to tax under the Tax Code of 1997, as amended." (emphasis supplied) Since BSHS does not fall within the contemplation of Section 30 of the Tax Code of 1997, as amended, its income from microfinance activities are nevertheless subject to income tax. In view of the foregoing, your request for the exemption of BSHS as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997, as amended, is hereby denied for lack of factual and legal basis. Hence, BSHS will be taxable as a regular corporation and is required to file income tax and VAT returns as well as pay the corresponding income tax and VAT thereto pursuant Sections 27, 52, 105 and 108 of the Tax Code of 1997, as amended. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. [G.R. No. 195909 & G.R. No. 195960, 26 September 2012]. 2. Quezon City and The City Treasurer of Quezon City vs. ABS-CBN Broadcasting Corporation [G.R. No. 166408, 6 October 2008].