Iloilo Hotels, Restaurants & Resorts Association (IHHRA), Inc.

May 21, 2009 BIR RULING [NSNP-(S30C-012) 339-09] Section 30 (C);NSNP(S30E-001)001-2009 Iloilo Hotels, Restaurants & Resorts Association (IHHRA),Inc. La Fiesta Hotel, Molo, Iloilo City Attention: Mr. Roberto G. Ferrer President Gentlemen : This refers to your letter dated May 8, 2007 requesting exemption from the payment of taxes, being a non-stock, non-profit organization, pursuant to Section 30 (C) of the Tax Code of 1997. Documents submitted disclosed that ILOILO HOTELS, RESTAURANTS & RESORTS ASSOCIATION, INC. (IHHRA, for short),with TIN: 006-125-847, is a non-stock, non-profit association registered with the Securities and Exchange Commission (SEC) on May 28, 1991, bearing SEC Registration No. EN091001768; that it has for its primary purposes, the following, to quote: "1. To promote unity and mutual cooperation among those in the industry in order to protect their interests and welfare; "2. To work for such measures to the upliftment and development of the hospitality industry; "3. To cooperate and coordinate with other instrumentalities engaged in tourism; "4. To act as liaison between members and government institutions or other offices and assist in the enactment and enforcement of national and local ordinances or laws affecting the industry; "5. To uphold the highest standards of professional integrity and efficiency in the conduct of its business; "6. To encourage and maintain a feeling of goodwill and camaraderie among its members; "7. To prevent unethical practices and resist activities inimical to the right conduct of business required of honorable and fair competition; "8. To lead in local and national affairs pertaining to the hospitality industry and to act as spokesman for the members; "9. To take active part in community and civic activities; "10. To promote harmonious relations with allied industries in order that good service and excellent food products may be extended at lowest possible cost; "11. To work with associations engaged in the hospitality industry in Iloilo, in the Philippines, and other countries for closer report, cooperation, and fellowship; "12. To encourage mutual cooperation among all the members, and to protect their interest and welfare in accordance with the Association's By-Laws and Resolutions; "13. To work for any and all measures conducive to the interest and welfare of the hotel, restaurant, and club business; "14. To order, purchase, and otherwise procure goods and other merchandise for distribution and sale to the members in such manner as may be permitted under the law; and "15. Without limitation of any of the foregoing purposes and objectives, to do and perform any and all acts and things reasonably necessary or proper, or which may be deemed incidental or conducive to the attainment and consummation of the foregoing purposes and objectives, and any and all acts and things permitted by the laws of the Republic of the Philippines to be done and performed by the corporations in general, and by corporations of a similar nature in particular. In reply, please be informed as follows: HSacEI Income Tax Based on the foregoing, this Office is of the opinion and so holds that IHHRA is a business league not organized for profit as contemplated under Section 30 (F) of the Tax Code of 1997. Accordingly, it is exempt from the payment of income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. This exemption is subject to the condition that its Articles of Incorporation shall be amended in that no part of its net income inures to the benefit of its incorporators, trustees, members or any individual. However, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code 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 benefits 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. 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. It is requested that a copy of this letter of exemption be attached to the annual information return which IHHRA, will file on or before the 15th day of the fourth month of each year. 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 organization 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. It should be understood that the said exempt non-government organization shall be constituted as withholding agent of 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 (Rev. Regs.) No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Rev. Regs. No. 2-98, as amended (BIR Ruling No. S30-047-01 dated June 5, 2001). cCSTHA VAT 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. Accordingly, if IHHRA is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). 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. 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. However, the above exemption from the 12% VAT does not extend to its purchase of goods or properties or services and importation of goods. Hence, 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 (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). 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. EHACcT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service