Children's Garden of the Philippines

February 16, 2009 BIR RULING [NSNP-(S30E-007) 098-09] 30 (E); S-30-080-2007 Children's Garden of the Philippines Provincial Road, Sition Parugan Block I, San Jose, Antipolo City Attention: Rev. Salvador A. Gallo Executive Director Gentlemen : This refers to your letter requesting for exemption from payment of income tax under the Tax Code of 1997. Documentary evidence submitted disclosed that Children's Garden of the Philippines, Inc. is a non-stock non-profit organization operated for the promotion of social welfare and registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. 12386 dated August 28, 1996. The purposes for which it was organized are as follows: "1. To extend material and financial aid to private volunteer groups and other non-government organizations involved in the care and amelioration of the sick, dying, disabled, elderly, street children and other similarly disadvantage persons; 2. To assist, contribute and participate in community development, livelihood and income generating projects for the improvement and upliftment of the quality of life of the community and physically-handicapped persons; 3. To contribute to the upgrading of education, the instilling of moral values and national discipline by assisting and directly financing deserving care for infants, homeless street children, unwed mothers and provide tuition and other matriculation fees for deserving scholars, donating library and technical facilities and equipment to educational institutions and generally to fund and support scholarships in the Philippines; ScAaHE 4. To assist needy and underprivileged children and their families and to provide the opportunity for full development into productive and contributing members of the community; and 5. To develop among the children and their families Christian character, wholesome attitudes and well-rounded personalities so that they may grow "in wisdom and in stature and in the knowledge of God and man." Based on the foregoing, this Office is of the opinion and so holds that Children's Garden of the Philippines, Inc. is a corporation organized for the promotion of social welfare as contemplated under Section 30 (G) of the Tax Code of 1997, as amended. 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. 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, as amended. 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 the organization will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, as amended, 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 they have been granted tax exemptions or tax incentives, and their tax liabilities, if any (RMC No. 89-78 dated October 30, 1973 publishing the amendment effected by P.D. No. 1457 to then Section 324 [now Section 235 in relation to Section 232] of the Tax Code, as amended). It should be understood that Children's Garden of the Philippines, Inc. 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 amended, and as implemented by Revenue Regulations (RR) 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 same Code, also as implemented by RR No. 2-98, as amended (BIR Ruling No. S30-047-01 dated June 5, 2001). aEcADH Moreover, it is subject to the payment of the annual registration fee of P500.00 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 church is registered [ Revenue Memorandum Circular (RMC) No. 76-2003] . Inasmuch as Children's Garden of the Philippines, Inc. is a non-stock non-profit organization devoted for the promotion of social welfare, 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. On the other hand, Section 34 (H) (1) of the Tax Code of 1997, as amended, provides that contributions or gifts paid or made within the taxable year to associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession. However, pure compensation income earners are allowed to deduct from their gross compensation income only their personal and additional exemptions as well as their premium payments on health and/or hospitalization insurance pursuant to Sections 34 and 34 (M) of the Tax Code of 1997, respectively. ( BIR Ruling No. S-30-054-97 dated June 24, 1997) For income tax purposes, contributions and donations in favor of Children's Garden of the Philippines, Inc. by individual donor/contributor earning fixed compensation income, shall not be deductible from their gross income. Furthermore, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997, as amended, covers only income taxes for which it is directly liable. Section 105 of the Tax Code of 1997, as amended, 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. EScAID 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. Accordingly, if Children's Garden of the Philippines, 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 also be liable for VAT ( BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004 ). Likewise, 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. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service