Tax exemptions are often met with
reservations and must withstand the strict scrutiny of revenue
collectors. After all, taxes are the driving fuel that propels all
programs and activities of the state. Absolving persons from their tax
liabilities means reducing public funds and restraining the government
from actualizing its goals.
Nevertheless, the legislative groundwork
covering the tax exemption of religious and charitable institutions has
long been established, even as early as the Commonwealth period. The
rationale for the exemption springs from the benevolent neutrality
approach premised on the ground that religious and charitable
institutions are not engaged in profit-seeking undertakings; whatever
gains derived by the organization redounds to charity. Hence, Section
30(E) of the National Internal Revenue Code (or simply, the Tax Code) is
specifically couched to incorporate the rationale in these words: a
non-stock corporation or association organized and operated exclusively
for religious, charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, wherein 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 shall be exempt from income
tax.
In a recent decision (CTA Case No. 8912 dated July 25, 2017), the Court
of Tax Appeals (CTA) emphasized that while our Tax Code provides
exemptions for certain non-stock corporations from income tax, this
incentive is not absolute. It reiterated that in order to enjoy immunity
from taxation, the following requirements for exemption must
continually be satisfied by the taxpayer: (a) The taxpayer must be a
non-stock corporation or association; (b) Organized exclusively for
charitable purposes; (c) Operated exclusively for such purposes; and (d)
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.
In the foregoing case, the CTA ruled in favor of the BIR, declaring that
while there was no sufficient evidence to prove that any income or
asset inured to the benefit of any member or officer of the institution,
the 10% preferential tax rate applicable to proprietary hospitals which
are nonprofit (under Section 27(B) of the Tax Code) should be imposed
since the taxpayer was not operated “exclusively” in charitable
purposes. Although not barred from engaging in activities conducted for
profit, any income the hospital derives from profit-oriented activities
should not escape the reach of taxation. Thus, an organization with both
non-profit and profit-generating activities may still enjoy its tax
exempt status but only on income from not-for-profit activities. Any
income generated from activities conducted for profit shall strictly be
subject to income tax.
As basis, the CTA also cited previous cases (G.R. Nos. 195909 and 195960
dated September 26, 2012) where the Supreme Court extensively discussed
the application of Section 30(E) of the Tax Code, as amended, and
upheld the same decision.
For taxpayers, an important takeaway from this case is that in order to
enjoy immunity from taxation, all of the requirements for the same must
continually be satisfied by the taxpayer. Thus, being a non-stock and
non-profit charitable institution does not automatically exempt an
institution from paying taxes.
Generally, just relying on the specific tax-exemption provision of
charitable institutions from our Tax Code, a non-stock, non-profit
corporation is exempt from paying income taxes at first glance. In some
instances, organizations tend to overlook the succeeding provision
clearly stating that the exemption only applies to income from
non-profit activities. Through this case, the CTA reiterated the
prevailing tax position in the Philippines that income from
profit-generating activity is taxable, regardless of the disposition of
the income earned from such activities. Nonetheless, while this may be
the case, an organization may still, at the same time, remain tax-exempt
on income from its actual charitable activities. Therefore, it may be
deduced that at the end of the day, the determining factor for
taxability lies in whether an activity is for profit or not.
To be exempt from tax, the challenge is for charitable and religious
organizations to have a better appreciation of the rationale behind
their tax-exempt status. As a rule, taxation is the overarching
principle and exemption is the exception; as such, the burden of proof
rests upon the party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed.
The views or opinions expressed in this article are solely those of the
author and do not necessarily represent those of Isla Lipana & Co.
The content is for general information purposes only, and should not be
used as a substitute for specific advice.
Nadine E. Chan is a manager at the Tax Services Department of Isla
Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 845-2728
nadine.e.chan@ph.pwc.com
source: Businessworld
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