Fair and relaxed tax exemption rulings for NSNP entities

THE BUREAU of Internal Revenue (BIR) is in a surprisingly merry mood these days. The reason could be one of three things:

1) the nearing yuletide season;

2) the P9.45 billion increase in revenue collection as of August 2014 compared to August 2013;

3) the P62 billion worth of tax evasion cases filed in the courts as of July 2014.

Whatever the reason is, taxpayers surely felt the good vibes with the issuance of Revenue Memorandum Order No. (RMO) 34-2014 on September 18, 2014, which helpfully eased the burden of nonstock, nonprofit (NSNP) corporations and associations, falling under Section 30 of the Tax Code, namely:

a. Labor, agricultural or horticultural organizations not organized for profit

b. Mutual savings banks and cooperative banks without capital stock and organized not for profit

c. Beneficiary societies or associations operating for the exclusive benefit of the members

d. Cemetery companies owned and operated for the exclusive benefit of the members

e. NSNP corporations or associations operated exclusively for religious, charitable, scientific, athletic or cultural purposes, no part of net income or asset inures to the benefit of any member or officer

f. Business leagues, chambers of commerce or boards of trade not organized for profit

g. Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare

h. NSNP educational institutions

i. Government educational institutions

j. Farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of covering expenses

k. Farmers’, fruit growers’ and like associations organized and operated as sales agents in marketing products of the members and returning the proceeds to the members

As explained in RMO 34-2014, the tax exemption rulings granted to NSNP entities will serve as confirmation, rather than approval, on whether the conditions for tax exemption set forth by law are appropriately complied.

This means that during the preparation of income tax returns, NSNP entities are not precluded from treating income derived from registered activities as exempt from income tax in the absence of a valid, current, and subsisting BIR ruling or tax exemption certificate. Likewise, NSNP entities are still required to subject income derived from unregistered activities to 30% regular corporate income tax.

This is a welcome relief from the BIR’s previous directive in RMO 20-2013 -- as amended by RMO 28-2013 -- which strictly requires the procurement of a BIR ruling or tax exemption certificate before NSNP entities can avail of the tax exemption.

The issuance also allowed umbrella organizations duly recognized by the BIR to apply for tax exemption rulings on behalf of any of their members that are NSNP entities. This is reasonably practical and fair to NSNP entities given that most, if not all of these entities, do not have adequate budget for a relatively costly BIR ruling.

However, RMO 34-2014 does not negate the purpose of the issuance of tax exemption rulings -- i.e., to minimize tax leakages caused by inaccurate interpretation of existing tax laws and administrative issuances. Therefore, in case of a BIR tax investigation in any given period, the NSNP entities are required to present a valid, current and subsisting BIR ruling or tax exemption certificate as proof of compliance of the conditions for tax exemption. Failure to do so will expose NSNP entities to deficiency in income tax due.

NSNP entities are also required to present the same to the withholding agents in order to be exempt from applicable final and creditable withholding taxes due on their transactions. Failure to do so will likewise expose NSNP entities to deficiency in withholding taxes due. In the same manner, failure on the part of the withholding agents will lead to payment equivalent of the total amount of tax not withheld plus penalties up to P25,000.

To fully take advantage of the tax benefits given to them, qualified NSNP entities should, therefore, carefully examine the nature of their revenue-generating activities, timely check the relevance of their duly issued tax exemption rulings with the newest tax issuances and properly comply with documentary requirements.

All in all, the fair and well-thought-out interpretation of the BIR on tax exemption rulings for NSNP entities has earned the nods of the public.

RMO 34-2014 has provided an efficient way for complying with BIR requirements, which, in effect, has given NSNP entities more time, funds and energy in realizing the purposes for which the NSNP entities were established.

Could the entities under special laws be next? Will the BIR fairly see the certificates of exemption issued by the Philippine Economic Zone Authority and the Board of Investments as practical and sufficient documentation for availing tax exemption under the BIR?

We can only hope that the BIR, as one of the influential pillars of the government in running the economy, continues to set regulations and guidelines that will not only boost the revenue collections of the government, but also boost the growth and sustainability of both for profit and not-for-profit entities.

After all, it wouldn’t be “more fun in the Philippines” if there is imbalance in any of the key economic players.

Sheena Marie D. Daño is a senior at the Cebu branch of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.