BIR Ruling No. S30E-0247-2020

May 22, 2020 BIR RULING NO. S30E-0247-2020 Section 30 of the National Internal Revenue Code of 1997, as amended; RMC 64-2016; RMO 20-2013; BIR Ruling No. 150-16; BIR Ruling No. 121-13 Baba's Foundation, Incorporated KM 6, Diversion Rd. Buhangin, Davao City 1000 Attention: Cristita V. Racosalem-Epal Executive Director Madame : This refers to your letter dated November 7, 2013 applying on behalf of BABA'S FOUNDATION, INCORPORATED for tax exemption certificate being enjoyed by non-stock 1 and non-profit corporation under Section 30 of the National Internal Revenue Code (NIRC) of 1997, as amended, which was forwarded to this Office by Revenue Region No. 19, Davao City. It is represented that that Baba's Foundation, Inc., with Taxpayer's Identification No. ___________ is a duly organized non-stock corporation under the laws of the Philippines registered with the Securities and Exchange Commission (SEC) under Registration No. ___________ and that the purposes for which it was incorporated as appearing in its Articles of Incorporation are the following: 1. 2. 3. 4. 5. 6.RA 8425, the Social Reform and Poverty Alleviation Act; 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. In reply, please be informed that the request of Baba's Foundation, Inc., for exemption from income tax as a non-stock, non-profit corporation for charitable and social welfare purposes is denied for lack of legal basis. As stated in subsections (E) and (G) of Section 30 of the NIRC of 1997, as amended: "SEC. 30. xxx xxx xxx (E) xxx xxx xxx (G) xxx xxx xxx 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 the case of COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE'S MEDICAL CENTER, INC. n (G.R. No. 203514 dated February 13, 2017) , the Supreme Court had the occasion to rule on the qualification of St. Luke's Medical Center, Inc. as a non-stock, non-profit operating exclusively for charitable and social welfare purposes, as follows: "Section 30 (E) of the NIRC provides that a charitable institution must be: (1) (2) (3) (4) "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 Supreme Court further discussed the qualification for the availment of tax exemption under Section 30 (E) and (G) of the NIRC of 1997, as amended, to wit : "To be exempt from income taxes, Section 30 (E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare." "The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a purpose to make profit over and above the cost of services." "In rejecting the claim of St. Luke's as a non-stock, non-profit corporation organized and operated exclusively for charitable and social welfare purposes, the Supreme Court held that: "The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B)." In this case, while Baba's Foundation, Inc., was organized as a non-stock corporation, this does not automatically exempt it from paying taxes. The purposes stated in the Articles of Incorporation and in the Oath of Undertaking of Cristita V. Racosalem-Epal are, among others: " 3. That one of the programs being implemented by Baba's Foundation is its Microfinance Program called Developing Resources thru Entrepreneurship and Alternative Microfinance Systems (DREAMS), a livelihood and entrepreneurship initiative which provide credit assistance and other micro financial services to micro and small entrepreneurs, farmers, women, enterprising out of school youth, to help them improve their lives and families; " and " 4. That the DREAMS Microfinance Program of Baba's Foundation, Inc., to sustain its assistance to its beneficiaries, as well as its operation, is extending credit with an effective interest rate of 2.5% per month, as it is also accessing loan from external creditors to be re-lent to its clients and beneficiaries; ". Based therefrom, it can be gleaned that Baba's Foundation, Inc., is not operated exclusively for charitable or social welfare purposes. While Section 3 of RMO 20-2013 requires that the Articles of Incorporation/Amended Articles of Incorporation/By-Laws/Amended By-Laws must clearly state that: (a) it is a non-stock, non-profit corporation or association; (b) the purpose/s for which it was created is/are one of those enumerated under Section 30 of the NIRC of 1997, as amended; (c) no part of the corporation or association's net income or assets shall inure to the benefit of any private individual; (d) the trustees of the non-profit corporation or association do not receive any compensation or remuneration; and (e) in the event of dissolution, the assets of the corporation shall be transferred to similar institution or to the government. A perusal of the submitted Amended Articles of Incorporation and Amended By-Laws, shows that (a), (c), and (e) are not explicitly stated in the said document/s. Also, the Financial Statements are incompletely submitted. Wherefore, this Office is of the opinion that Baba's Foundation, Inc., does not qualify for income tax exemption under Section 30 (E) and (G) of the NIRC of 1997, as amended, as it failed to meet the requirements set forth under the said law. It is a governing principle in taxation that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. The basic principle in the construction of laws granting tax exemptions has been very stable. He who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. 2 In view of the foregoing, this Office is of the opinion that BABA'S FOUNDATION, INC. does not qualify as a charitable or social welfare corporation within the contemplation of Section 30 of the NIRC and that your request for the exemption of BABA'S FOUNDATION, INC. as a non-stock, non-profit corporation under Section 30 (E) and (G) 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As stated in the Amended Articles of Incorporation. 2. City of Iloilo, et al. vs. Smart Communications, Inc. , G.R. No. 167260 dated February 27, 2009. n Note from the Publisher: Written as "ST. LUKE'S MEDICAL CENTER, INC. vs. COMMISSIONER OF INTERNAL REVENUE" in the official document.