BIR Ruling No. 461-14

November 13, 2014 BIR RULING NO. 461-14 Sections 27, 30 (G) of the Tax Code of 1997; RA 8425 Pinoyme Foundation, Inc. Unit 602, Manila Luxury Condominium, 12 Pearl Drive corner Goldloop, Ortigas Center, Pasig City 1600 Attention: Gaudencio S. Salonga, Jr. Finance and Administrative Officer Gentlemen : This refers to your letter dated April 19, 2011, requesting on behalf of PINOYME FOUNDATION, INC. (also stated herein as "the Foundation") for the issuance of a certificate of tax exemption enjoyed by an organization not organized for profit but operated exclusively for the promotion of social welfare pursuant to Section 30 (G) of the Tax Code of 1997, as amended. It is represented that the Foundation with Taxpayer's Identification No. 006-798-975-000, 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. CN200711065; and that the purposes for which it was incorporated are the following: 1) To serve as growth catalyst for microfinance institution by providing them financial and non-financial services; and 2) To conduct microfinance operations pursuant to Republic Act 8425, the Social Reform and Poverty Alleviation Act. Documents submitted disclose that based on its financial statements, the revenues of the Foundation are derived from the following: 1) Interest Income The notes to the Financial Statements provide that as part of its lending activity, the Foundation signed a credit agreement with the Development Bank of the Philippines (DBP) whereby DBP granted a credit facility to the Foundation to borrow funds being an eligible intermediate financial institution for on-lending to small and medium scale enterprises. The Foundation uses the borrowed funds for relending to qualified microfinance institutions, with interest. (Note 10, Audited Financial Statement for 2011 ) EHaDIC As a security for the loans receivable from the microfinance institutions, the borrowers automatically assign, transfer and convey in favor of the Foundation all their rights, titles and interests in and to the credits including mortgages, pledges, guarantees and other collaterals. On the other hand, the Foundation automatically assigns its loan receivables from microfinance institutions to DBP. (Note 5, Audited Financial Statement for 2011 ) The Foundation also has the following other sources of income, to wit: a) deposits and money market placements and b) investment in government and other debt securities. (Notes 4 and 6, Audited Financial Statement for 2011 ) 2) Professional Service Income The Foundation entered into various consultancy agreements with various counterparties such as Japan International Cooperation Agency (JICA). San Roque Multi-purpose Project, Petron Foundation, Inc., Agritera, Grameen Foundation, PEF and others during the year ended June 30, 2011. The Foundation earned around P4,187,416 as professional service income. (Notes 5 and 12, Audited Financial Statement for 2011 ) 3) Donations The Foundation receive various donations from different foundations and institutions during the ordinary course of business. In the year ended June 30, 2011, donations amounted to P2,819,040 while donations in kind amounted to P0.66 Million in 2011. (Note 13, Audited Financial Statement for 2011 ) 4) Foreign Exchange Gains (Losses) In September 2009, the Foundation entered into a five year cross currency swap to manage its foreign exchange and interest rate risks in relation to its dollar denominated SM Investment Corporation (SMIC) Bonds amounting to US$100,000. Cross currency swaps are contractual agreement to exchange interest and foreign exchange differentials based on specific notional amounts. The SMIC bonds have a fixed interest rate of 6% payable semiannually. Based on cross-currency swap agreement, the Foundation is to swap the 6% interest it receives from the SMIC Bond which amounted to US$3,000 per semester while the Foundation receives 7.75% interest amounting to P0.19 million per semester. cAECST In reply, please be informed as follows: Income Tax Under Section 30 (G) of the Tax Code of 1997, as amended provides: "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;" xxx xxx xxx Clearly, the income tax exemption provided under Section 30 (G) of the Tax Code of 1997 does not extend to activities conducted for profit. The last paragraph of Section 30 of the Tax Code of 1997, as amended provides: 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. To be exempt from income taxes, Section 30 (G) of the Tax Code of 1997 requires that the institution be "operated exclusively" for social welfare. (Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. G.R. Nos. 195909 and 195960, 26 September 2012) Based on the foregoing, Revenue Memorandum Circular (RMC) No. 67-12 provides: "Henceforth, non-stock, non-profit corporations or associations which claim to be charitable or social welfare but do not organized and operated "exclusively" for charitable or social welfare purposes as above-defined are not entitled to the income tax-exemption under Section 30 [E] and [G] of the NIRC, as amended, and their taxable income shall be subject to ordinary 30% corporate rate under Section 27 (A) of the NIRC, as amended. They are likewise subject to other applicable taxes, if warranted." caHASI Revenue Regulations (RR) No. 14-07 dated 11 December 2007 was issued to rationalize the tax exemptions of NGOs (Non-Government Organizations) and cooperative engaging in microfinance activities based on existing laws and regulations and the relevant tax treatment of the profits derived in relation to their delivery of microfinance services. Section 5 of RR 14-07 provides: "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. Similarly, non-stock, non-profit NGOs, whether or not engaged in microfinance activities, are still also required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding as specified in Revenue Memorandum Circular No. 76-2003." (Underscoring supplied) Moreover, to be exempt from income tax under Section 30 of the Tax Code of 1997, the purposes under its Articles of Incorporation should be one of those stated under Section 30 of the Tax Code of 1997. (Revenue Memorandum Order No. 20-2013) Therefore, the above stated corporate purposes of PINOYME FOUNDATION, INC. stated in its Articles of Incorporation are not among those enumerated under Section 30 of the Tax Code of 1997. Conducting microfinance lending according to Republic Act No. 8425 or being a catalyst for growth of microfinance is not among the stated purposes under the aforementioned Section of the Tax Code of 1997, consequently, its request for income tax exemption under Section 30 of the Tax Code of 1997 is hereby denied for lack of legal basis. TASCEc The income PINOYME FOUNDATION, INC. from its microfinance activities is subject to income tax under Section 27 of Tax Code of 1997, as amended. This includes the interest income it derives from its lending activities, deposits and money market placements and investment in government and other debt securities; professional service income or consultancy fees; and foreign exchange gains. Value Added Tax 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. As already stated, PINOYME FOUNDATION, INC.'s corporate purposes is to conduct microfinance activities according to Republic Act No. 8425. Such law defines microfinance as: j) "Microfinance" A credit and savings mobilization program exclusively for the poor to improve the asset base of households and expand the access to savings of the poor. It involves the use of viable alternative credit schemes and savings programs including the extension of small loans, simplified loan application procedures, group character loans, collateral-free arrangements, alternative loan repayments, minimum requirements for savings, and small denominated savers' instruments; In connection thereto, PINOYME FOUNDATION, INC. can be classified as a non-bank financial intermediary defined under Section 2.3 of Revenue Regulations No. 09-04, to wit: 2.3 "Non-bank Financial Intermediaries shall refer to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or only occasionally." (Underscoring supplied) This is further supported by DBP's qualification of PINOYME FOUNDATION, INC. as an eligible intermediate financial institution for on-lending to small and medium scale enterprises thus granting it a credit facility. As such, the micro-finance services of PINOYME FOUNDATION, INC. is therefore exempt from VAT pursuant to Section 109 (1) (U) of the Tax Code of 1997, implemented by Section 4.109-1 (B) (1) of RR No. 16-2005, as amended by RR 4-2007. TADaES PINOYME FOUNDATION, INC. is however, subject to the 5% gross receipts tax (GRT) imposed under Section 122 of the same Code, from (a) interest, commissions, discounts and all other items treated as gross income under the Code 5%; (b) on interests, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of the instruments from which such receipts are derived: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% VAT on Purchase of Goods and Services Notwithstanding that it is incorporated 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 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 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. Donor's Tax Donations to PINOYME FOUNDATION, INC. does not qualify for the exemption under Section 101 (A) (3) and (B) (2) of the Tax Code of 1997 since it is not among the enumerated corporations to whom donations are exempt from donor's tax. Accordingly, there is no legal basis for its donors to claim allowable deductions, limited or full, for charitable and other contributions under Section 34 (H) of the same Code. SDEHCc Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. (Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October 14, 1998) Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue