GIVEN the tax reform bill pending in Congress and an alleged revenue loss consequently looming upon the Bureau of Internal Revenue (BIR), the massive task of meeting tax revenue targets may become even more challenging for the tax bureau. Even without the tax reforms pushing through, the BIR is already experiencing difficulties in terms of enforcing existing tax laws as it continues to encounter implementation challenges. This is to be expected if the BIR is seen to continue to go beyond its quasi-legislative functions.
Last 22 July 2013, BIR Revenue Memorandum Order (RMO) No. 20-2013 sparked controversy when qualified non-stock, non-profit corporations and associations were required to secure a Tax Exemption Ruling (TER) before they could avail of the exemption benefit under Section 30 of the Tax Code.
Entities enumerated under Section 30 of the Tax Code, consisting of non-stock, non-profit corporations and associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for rehabilitation of veterans; and non-stock and non-profit educational institutions, among others, are generally exempt from income tax.
In an attempt to impede the implementation of RMO No. 20-2013, a non-stock, non-profit educational institution filed a civil action before the Regional Trial Court (RTC) in Makati City to declare the RMO as unconstitutional and to apply for preliminary injunction. In a decision dated 25 July 2014, the RTC ruled in favor of the petitioner and declared RMO No. 20-2013 as unconstitutional for being violative of Article XIV, Section 4 (3) of the Constitution. As a result, all RMOs subsequently issued to implement RMO No. 20-2013 were likewise declared without force and effect. The RTC further went on and made permanent the writ of preliminary injunction earlier issued in February 2014.
Needless to say, the 1987 Philippine Constitution recognized the critical role of education providing under Article II, Section 17, that the state shall give priority to education. As a specific implementation of the said provision, Section 4 (3) of Article XIV thereof mandates that all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose shall be exempt from taxes and duties. Quoting the well respected Constitutionalist Father Joaquin G. Bernas, the RTC held that the “exemption, which is given by the Constitution itself, may not be diminished by legislation or by administrative regulation. The original proposal would have been [sic] made the tax exemption dependent on legislation, i.e. ‘Non-stock, non-profit educational institutions shall be exempt from taxes and duties as may be provided by law.’ ” However, the phrase “as may be provided by law” was deleted to emphasize that the legislature is bereft of the discretion on the subject.”
Notably, the BIR may still request for reconsideration of the RTC decision and may still file an appeal should the RTC affirm its decision. Nonetheless, the BIR recently issued RMO No. 34-2014 dated 18 September 2014 as if to concur with the decision of the RTC. In the newly issued RMO clarifying certain provisions of RMO No. 20-2013, the BIR shed light on the nature of TERs by clearly stating that a TER does not confer tax exemptions which are not provided for by law, nor can it abrogate those exemptions which are granted by the law. In its review of applications for TER, the BIR merely seeks to validate or confirm whether the conditions set forth by law for the grant of tax exemption are present or whether such conditions have been complied with by the applicant.
The RMO went on to expressly confirm that the absence of a valid, current and subsisting TER will not operate to divest qualified entities of the tax exemption provided under the Constitution or Section 30 of the Tax Code. Needless to say, in the event of a tax audit, affected entities which fail to secure a TER must be able to demonstrate compliance with the conditions laid down by the law and applicable rules.
However, the BIR seems to stop short of fully applying the RTC’s decision. Despite the BIR’s recognition that a TER is not necessary, it is curious to note that, in the same breath, the RMO also reiterated the BIR’s requirements under Revenue Memorandum Circular (RMC) No. 8-2014 to present a TER. Under the RMC, the failure of the non-stock, non-profit entity to present its valid TER to the appropriate withholding agents shall subject them to the payment of withholding tax. On the other hand, the withholding agents’ failure to withhold notwithstanding the lack of a TER shall trigger penalties under Section 251 and other pertinent Sections of the Tax Code.
While the RTC decision declaring RMO No. 20-2013 as unconstitutional is a triumphant affirmation for non-stock, non-profit entities, the controversy continues as it would appear that, as far as the BIR is concerned, the requirement to present a TER remains.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Elinor E. de Gracia is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
elinor.e.de.gracia@ph.pwc.com
source: Businessworld
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