Timothy Habilitation Center, Inc.

February 25, 2009 BIR RULING [NSNP-(S30E-016) 143-09] 30 (E);S-30-041-2005 Timothy Habilitation Center, Inc. #5 Francisco Court, Gilmore New Manila, Quezon City Attention: Mary Jane Tan President Gentlemen : This refers to your letter dated September 29, 2008 requesting for exemption from the payment of income tax and the filing of the corresponding income tax return under Section 30 of the Tax Code of 1997, as amended. It is represented that Timothy Habilitation Center, Inc. (TIN 007-087-779) is a non-stock, non-profit corporation duly registered with the Securities and Exchange Commission (SEC) on July 28, 2008 under SEC Registration No. CN200811753 and some of the purposes/objectives for which the said corporation was organized are the following: TESDcA 1. To help provide multidisciplinary care such as but not limited to physical therapy, occupational therapy, speech pathology services, counseling as well as special education for the habilitation and rehabilitation of visually, physically, and mentally impaired and multi-handicapped pediatric patients. Not to operate as a clinic or hospital. 2. To continuously update the center's knowledge, techniques, and technology and resources for the advancement and improvements of habilitation and rehabilitation services rendered by the center. In reply, pleased be informed as follows: Income Tax Based on the foregoing, this Office is of the opinion and so holds that Timothy Habilitation Center, Inc. is a corporation organized for charitable purposes as contemplated under Section 30 (E) 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. 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. CTEaDc It is requested that a copy of this letter of exemption be attached to the annual information return which Timothy Habilitation Center, Inc. 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). 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 Timothy Habilitation Center, 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). 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). AcIaST Donor's Tax Inasmuch as Timothy Habilitation Center, Inc. is a charitable organization, donations to it are exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the Tax Code of 1997, subject to the condition that not more than thirty percent (30%) of said gift shall be used for administration purposes. Deductibility of Donation Section 34 (H) (2) (C) of the Tax Code of 1997 provides that donations to an accredited non-government organization (NGO),which means a non-profit domestic corporation or association 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 shall be deductible in full from the taxable business income of the donor depending on the donee's compliance with the level of administrative expense and utilization requirements. In case of failure on the part of the accredited NGO to comply with the level of administrative expense and utilization requirements, its donors shall be entitled only to the limited deductions (in an amount not in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the donor's taxable income derived from trade, business or profession as computed without the benefit of Section 34 (H) of the Tax Code of 1997, as provided for under Section 34 (H) (1) of the same Tax Code. Donations, contributions or gifts actually paid or made within the taxable year to an accredited NGO shall be allowed full deductibility on the taxable year it was incurred pursuant to Section 34 (H) (2) (C) of the Tax Code of 1997 (BIR Ruling No. DA-124-2004, dated April 20, 2004 and BIR Ruling No. S30-016-2004 dated May 6, 2004). Accordingly, for purposes of full deductibility from the taxable business income of its donor, Timothy Habilitation Center, 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 contact 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] . However, this ruling is subject to the condition that Timothy Habilitation Center, Inc. shall amend its Articles of Incorporation to include provisions that its trustees do not receive compensation and that in case of dissolution, the assets of the organization be donated to another non-profit domestic corporation organized for similar purpose/s or to the estate for public purpose. TCHcAE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service