Lamorena & Lamorena Law Office

May 8, 2009 BIR RULING [NSNP-(S30E-054) 311-09] Sections 30 & 101; BIR Ruling No. S30-080-07, DA-408-04 & DA-601-06 Lamorena & Lamorena Law Office Paniqui, Tarlac Attention: Atty. Crispiniano E. Lamorena Gentlemen : This refers to your letter dated October 17, 2008 requesting on behalf of your client, Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. for a certificate of tax exemption from the payment of donor's, capital gains, estate and documentary stamp taxes. Documentary evidence submitted disclosed that Central Luzon Philippines Annual Conference of The United Methodist Church, Inc. is a religious corporation affiliated to The United Methodist Church. It is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 187164 dated July 1, 2002. Its sole purpose is "for the administration of its affairs, properties and temporalities in trust and for the benefit of The United Methodist Church, to be used to implement its Christian Mission Program on healing ministry through charitable institutions enhancing health care service delivery, on education, through established Pre-school, Elementary, High School, College, or to higher level of education; and on preaching the Word (Gospel),through the establishment and maintenance of local churches named as 'The United Methodist Church'." In reply, please be informed that paragraph 3, Section 28, Article VI of the 1987 Constitution provides, viz. : "(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." The phrase "exempt from taxation" as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes. The exemption of the church is only from the payment of taxes assessed on such properties as property taxes (Lladoc vs. CIR, 14 SCRA 293, June 16, 1965). IcAaEH However, Section 30 of the Tax Code of 1997, as amended, provides as follows: "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: 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; 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. " 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. Accordingly, as a non-stock, non-profit religious organization, Central Luzon Philippines Annual Conference of the United Methodist Church, Inc., therefore, is exempt from tax on all revenues derived in pursuance of its purpose as a religious organization and used actually, directly and exclusively for religious purposes. However, it is subject to internal revenue taxes on income from other activity the conduct of which is not related to the exercise or performance of its purposes or functions. Moreover it is subject to the corresponding taxes imposed under the Tax Code of 1997, as amended, on its income derived from any of its properties, real or personal, regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from its currency bank deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements received by the organization, 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 28 (A) (7) (a), in relation to Section 57 (A), both of the Tax Code of 1997, as amended. TAECaD On the other hand, gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization is exempt from the payment of the donor's tax pursuant to Section 101 (A) (3) and (B) (2) of the Tax Code of 1997, as amended, subject to the condition that not more than 30% of said gift shall be used by the donee for administration purposes. Inasmuch as Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. is a religious organization, any donation to it is exempt from the payment of donor's tax pursuant to the above provisions of the Tax Code subject to the condition that not more than thirty percent (30%) of said gift shall be used by the donee for administration purposes. In case of donation of real property, the Register of Deeds shall annotate this condition at the back of the Transfer Certificate of Title because failure to comply with the said condition shall be a ground for the revocation of the donation pursuant to Article 764 of the New Civil Code. Section 185 of Regulations No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations, implementing Title VII of the Tax Code, provides that conveyances of realties not in connection with a sale, to trustees or other persons without consideration are not taxable. Accordingly, the deed of donation is, likewise, not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code (BIR Ruling No. DA-28-98 dated January 29, 1998). If the donor is a value-added tax (VAT) registered person and the donation is an ordinary asset, the donation is subject to VAT pursuant to Section 4.106-7 of Revenue Regulations No. 16-2005, the same being considered a transaction deemed sale, but the input VAT attributed to the VAT portion of the cost of the donation should be deducted from the accumulated input VAT of the donor. If the donor is not a VAT registered person, the donation is exempt from VAT. However, if the same property acquired by gift is subsequently conveyed by way of sale or exchange, the sale will be subject to corporate income tax on the gain realized which is determined by deducting from the gross selling price the historical cost or the adjusted basis thereof, as it would be in the hands of the donor, pursuant to Section 27 in relation to Section 101, both of the Tax Code of 1997, as amended, and consequently to the creditable expanded withholding tax under Revenue Regulations No. 2.57.2 of Revenue Regulations No. 2-98, as amended. If Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. donates the same property donated to it to a nonexempt donee, Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. shall be liable for donor's tax pursuant to Section 98 of the Tax Code of 1997, as amended. IacHAE As a tax-exempt organization, Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. should file an annual information return on or before the 15th day of the 4th month following the end of its taxable 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. In view of the foregoing, Central Luzon Philippines Annual Conference of the United Methodist Church, Inc. is exempt only from donor's tax under Section 101 and DST on the deed of donation under Sections 188 and 196, all of the Tax Code of 1997, as amended, only. Finally, tax exemptions are highly disfavored in law and are construed in strictissimi juris against the taxpayer. He who claims an exemption must be able to justify his claim by the clearest grant of organic law or statute. 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