Another look at the tax-exempt status of charitable institutions

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

Exempt or not exempt: this is the question

STRICTISSIMI juris. Of the strictest right or law, exemption from taxation is never favored, never presumed. Tax exemption is always construed against the taxpayer and liberally in favor of the taxing authority. It must be justified with words that are too plain to be mistaken and too conclusive to be misinterpreted.

Revenue Memorandum Circular No. (RMC) 8-2014 is an embodiment of this primordial but universal rule of tax exemption through the requirement of providing a valid, current and subsisting tax exemption certificate or ruling.

Before the issuance of RMC 8-2014, Revenue Regulations No. (RR) 2-98, as amended, of the National Internal Revenue Code (NIRC) of 1997 granted exemption from creditable withholding tax for the (1) national, provincial, city and municipal government, including its instrumentalities, and (2) persons enjoying exemption from payment of income taxes, such as entities registered with the Board of Investments (BoI), Philippine Economic Zone Authority (PEZA) and Subic Bay Metropolitan Authority (SBMA), non-stock and non-profit corporations, general professional partnerships, and joint ventures under an energy service contract with the government, without much question to the claim.

That was the case until a mandate in 2013 was promulgated, requiring non-stock and non-profit corporations to secure confirmatory rulings or certificates of tax exemption from the Bureau of Internal Revenue (BIR), highlighting the fact that tax exemptions granted under the tax code are neither automatic nor absolute.

So, what happens now? Does this mean that those entities specifically classified by the NIRC and RR 2-98 as exempt from creditable withholding tax are no longer exempt? Does this show that RMC 8-2014 inconspicuously contravenes with the long-established right of exemption for such entities? Does the BIR reify just and appropriate tax treatment in subjecting the now disputable exempt entities to creditable withholding tax?

In probing the circular, it seems as though in order to avail of the exemption from creditable withholding tax, taxpayers need to secure a certificate of exemption or a confirmatory ruling with the BIR. But, how long will it take for the application for a certification to be granted or the ruling to be released? Given that the circular mandates immediate compliance, will the entity retain its exempt status while waiting for the BIR’s approval? Will a mere application for a certification or ruling serve as sufficient and acceptable proof for the withholding tax agent to exempt the entity in question from creditable withholding tax? Will the possible tax exposure from non-withholding be treated retrospectively when after a long wait, the application for a certificate of exemption or a ruling is, for some reason, denied? Will the certificate of entitlement to incentives issued by special governing agencies like the BoI, PEZA and the SBMA have the same bearing with or be honored by the BIR as a valid, current and subsisting proof of tax exemption?

These confounding issues place the affected taxpayers in a precarious situation. With the lack of clarificatory issuances from the BIR to date, it is best to take prudent measures. How? For taxpayers claiming exemptions from creditable withholding tax, obtain a BIR-approved ruling at the earliest opportunity possible. While certificates of exemption have defined expiration dates, rulings, on the other hand, are valid and enforceable until a new law or opposing interpretation revokes the opinion of the previously issued rulings. Nevertheless, the option to secure either a certificate of exemption or a BIR ruling is up to the taxpayer.

For withholding agents, exercise proactivity in requiring every income recipient claiming exemption from creditable withholding tax to present an indispensable proof of exemption during the process of settling income payments.

Failure to present a legitimate proof will nullify the taxpayer’s assertion of exemption from creditable withholding tax; hence, subject to the applicable withholding tax rates. Likewise, failure of the withholding agents to withhold in lieu of the lack of tax exemption certificate or ruling will exact a penalty equivalent to the total amount of tax not withheld, plus compromise penalties of up to P25,000.

Questions are piling up. Interpretations are multifarious. Will the circular hold true and valid amid the controversy of its scope and intent?

One thing is clear, though: a comprehensive guideline is highly essential to explicate the letter and spirit of RMC 8-2014 with words that are too plain to be mistaken and too conclusive to be misinterpreted. Then, and only then, can the BIR effectuate the fundamental substance of the circular for compliance to the presently critical thinking public.

The author is a senior at the Cebu branch of Punongbayan & Araullo’s tax advisory and compliance division. P&A is a member firm within Grant Thornton International Ltd.

source:  Businessworld