BIR Ruling No. 406-14

October 20, 2014 BIR RULING NO. 406-14 Section 30 of the Tax Code of 1997, as amended; RR 13-98; BIR Ruling No. 357-13 Tanglaw Maralita Foundation (Anti-Poverty Union of the Philippines) Incorporated Manila Astral Tower Taft Ave. corner Padre Faura Manila Attention: Ma. Teresita M. Espino Authorized Representative Gentlemen : This refers to your letter dated 07 March 2012 requesting for the exemption from payment of taxes on donations and income enjoyed by non-stock, non-profit corporations under Section 30 of the Tax Code of 1997, as amended. It is represented that TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED, with Taxpayer Identification Number (TIN) 203-205-127, is a non-stock, non-profit association duly organized under the laws of the Philippines, registered with the Securities and Exchange Commission (SEC) under Company Registration No. A199814218 dated October 7, 1998; and that among the purposes for which the corporation is formed are: 1) "To harness, renew and perpetuate the noble Filipino traditions of "bayanihan" in the war on poverty by using the strategy of providing selected social and medical insurance packages to Filipino families that will eventually become contributors themselves to the universal struggle against poverty and ignorance"; 2) "To carry out programs and projects particularly, though not exclusively, as the means of providing a significant degree of assisted health protection and selective social and education insurance for carefully chosen Filipino families in order to unleash their productive and self-improvement potentials that are being fettered by poverty and poor morale"; 3) "To inspire the emulation of its anti-poverty approach, and stimulate support from the community, the business field, religious groups, as well as generous individuals, within and outside the Philippines, that will be directed and channelled by the Foundation in a manner that will ensure the perpetuation and spread of its work"; 4) "To engage in other social and/or financial activities that are consistent with the promotion of the health and financial security needs of identified Filipino families"; and 5) "To take up advocacy of ideas and concerns in any lawful forum or medium that will redound to gains on the war on poverty and the promotion of the interests of the poor and marginalized elements in the country." IHDCcT It is further represented that TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED has not been in operation since its founding. In reply, please be informed that Section 30 of the Tax Code of 1997, as amended, provides: "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." ACHEaI Applying the foregoing, the purposes of TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED under its Amended Articles of Incorporation "to engage in other social and/or financial activities that are consistent with the promotion of the health and financial security needs of identified Filipino families" show that it does not fall within the contemplation of Section 30 of the Tax Code of 1997. Notwithstanding that the Amended Articles of Incorporation states that TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED is a non-stock, non-profit corporation, it has to prove that it is really a corporation organized and operated as contemplated under Section 30 of the Tax Code of 1997, as amended, by actual exclusive operation for at least three (3) years. TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED has not been operational since its founding in 1998. As represented, the submitted Financial Statements and Income Tax Returns for the taxable years 2009, 2010 and 2011 likewise show that it had no operation for those years. Thus, TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED failed to show that it has been operational as a corporation falling within the contemplated exempt corporations covered by Section 30 of the Tax Code of 1997, as amended. Moreover, 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." 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. TcADCI 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 case 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." 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) In view of the foregoing, your request for the exemption of TANGLAW MARALITA FOUNDATION (ANTI-POVERTY UNION OF THE PHILIPPINES) INCORPORATED 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. 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].