BIR Ruling No. 506-12

July 31, 2012 BIR RULING NO. 506-12 Section 30 (E) of the Tax Code of 1997; BIR Ruling No. 158-2011; BIR Ruling No. 157-2011; BIR Ruling No. 138-2011; BIR Ruling No. 075-2011; BIR Ruling No. 058-2011; BIR Ruling No. 024-2011 St. Camillus Polyclinic Charity Foundation of the Camillian Fathers, Inc. 116 E. Amang Rodriguez Ave. 1600 Pasig City Attention: Rev. Fr. Rolando J. Fernandez, MI Provincial Superior, Ministers of the Infirm Gentlemen : This refers to your letter dated 18 October 2011, requesting for the issuance of a certificate of tax exemption enjoyed by non-stock non-profit corporation or association organized and operated exclusively for charitable purposes under Section 30 (E) of the Tax Code of 1997, as amended. It is represented that ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, INC. with Taxpayer's Identification No. 000-848-799-000, is a non-stock, non-profit charitable institution affiliated to the Order of St. Camillus better known among the Catholic religious denomination as the Camillian Fathers, duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company/Registration No. ANO92-03720 dated September 21, 1992; and that the purposes for which it was incorporated are the following, among others: 1) "To provide medical assistance to the sick among the needy and the underprivileged members of the society"; 2) "To put-up, organize and support health care and feeding centers in depressed areas particularly in, but not limited to, Metro Manila"; 3) "To establish and maintain, appropriate clinics, infirmaries, hospitals, rehabilitation centers, and retirement homes and the like which will offer relatively modern medical, dental and nursing services for the poor, the needy, low income families and workers particularly in depressed areas of Metro Manila and the provinces"; TaCEHA 4) "To organize, create, support and/or give financial assistance to charitable institutions in caring for the disabled, the aged, the homeless and other similarly situated individuals needing assistance"; 5) "To create charitable centers for research and continuing medical education designed to upgrade the professional training and capability of the medical and paramedical personnel"; 6) "To offer scholarships and undertake exchange studies in higher specializations in medical science locally and abroad for deserving medical and paramedical personnel"; 7) "To promote spiritual, moral and social education among health care workers on ethical standards of service"; and 8) "To give financial assistance, support and offer works of mercy to the sick people of the poor and the underprivileged members of the society". In support of your request, ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, INC. has completely submitted on 23 March 2012 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Incorporation; 3) Certified true copy of the Amended Articles of Incorporation which include the following provisions: a) That the corporation is non-stock and non-profit charitable institution; 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 or assets of the foundation shall belong to or inure to the benefit of any member, organizer, officer or any specific person"; HAEDCT d) That "the members of the Board of Trustees shall not receive compensation or remuneration"; e) That "the corporation shall utilize its resources directly for the active conduct of the activities constituting the foregoing purposes or functions for which it is herein organized and shall operate"; f) That "the level of administrative expenses on an annual basis shall not exceed thirty percent (30%) of the total expenses and of the total donations for the taxable year"; and g) That "in the event of dissolution, the assets of the corporation shall be distributed to another accredited non-governmental organization organized for similar purposes, or to the State for public purpose/s, or would be distributed by a competent court of justice to another non-governmental organizations to be used in such a manner as in the judgement of said court shall best accomplish the general purpose for which the corporation is hereby organized". 4) Certified machine copy of the By-Laws; 5) Certified machine copies of the 2009, 2010 and 2011 General Information Sheet; 6) Certified true copy of the BIR Certificate of Registration; 7) Certified true copies of the 2008, 2009 and 2010 Annual Income Tax Returns and attaching Financial Statements; and 8) Copy of BIR RR-7 Ruling No. RR-7-003-2002. In reply, please be informed as follows: Income Tax Section 30 (E) 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: aTSEcA xxx xxx xxx (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; . . ." Under the above-quoted provision, a non-stock 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 is exempt from income taxation. (BIR Ruling No. 158-2011 dated May 19, 2011) ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, INC. is a corporation contemplated under Section 30 (E) of the Tax Code of 1997, as amended. Accordingly, it is exempt from the payment of 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. 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. 157-2011 dated May 19, 2011) 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. TEDAHI It is requested that a copy of this letter of exemption be attached to the aforementioned Annual Information Return. It should be understood that the said exempt corporation/association 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. 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], (BIR Ruling No. 138-2011 dated April 29, 2011) 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. 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. AHDacC 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 ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, 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 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. 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. (BIR Ruling No. 075-2011 dated March 14, 2011) Donor's Tax In as much as ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, INC. is a foundation organized for charitable purposes, donations to it are exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the Tax Code of 1997, as amended, subject to the condition that not more than thirty percent (30%) of said gift shall be used for administration purposes. (BIR Ruling No. 058-2011 dated February 25, 2011) Deductibility of Donation Section 3 of RR 13-98 provides: "SECTION 3. Donations to Accredited Non-stock, Non-profit Corporations/NGOs. Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to the following benefits: IaEACT (1) Limited Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction. (2) Full Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions: (i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner. For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these Regulations. (ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year. (iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose; or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. ADETca (iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. Furthermore, Section 1 (a) of Revenue Regulations No. 13-98 provides that: a) "Non-stock, non-profit corporation or organization" shall refer to a corporation or association/organization referred to under Section 30 (E) and (G) of the Tax Code created or organized under Philippine laws exclusively for one or more of the following purposes: 1. religious; 2. charitable; 3. scientific; 4. athletic; 5. cultural; 6. rehabilitation of veterans; and 7. social welfare. no part of the net income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person. b) "Non-government Organization (NGO)" shall refer to a non-stock, non-profit domestic corporation or organization as defined under Section 34 (H)(2)(c) of the Tax Code organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. HCITDc Foregoing considered, donors can avail of the full deductibility only for donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs. (BIR Ruling No. 024-2011 dated January 28, 2011) Accordingly, for purposes of full deductibility from the taxable business income of its donor, ST. CAMILLUS POLYCLINIC CHARITY FOUNDATION OF THE CAMILLIAN FATHERS, INC. must first be accredited with the Philippine Council for NGO Certification, Inc. (PCNC) which has been duly designated by the Secretary of Finance as the Accrediting Entity pursuant to Memorandum of Agreement dated January 29, 1998 executed by and between the Secretary of Finance and PCNC's Interim Chairman. For further inquiries on the accreditation and certification process, please visit PCNC at 6/F, SCC Building, CFA-MA Compound, 4427 Interior Old Sta. Mesa, 1016 Manila or call their office at 715-9594, 715-2756, 782-1568 and 715-2783 (telefax). You may also visit their website: http://www.pcnc.com.ph or email them at [emailprotected]. 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