You get what you give: Reevaluating tax exemptions of non-profit hospitals

Several researches have shown that being ‘charitable’ benefits not only the receiver but also the giver. Aside from the proven emotional and health benefits, charity has a tangible tax benefit. In fact, no less than the Philippine Constitution rewards charity by giving tax exemptions on real properties of charitable institutions which are actually, directly, and exclusively used for such purpose. In addition, Section 34 of the National Internal Revenue Code (NIRC) allows contributions to charitable institutions as deductions from gross income. Probably the most rewarding provision of all is that provided in Section 30 of the NIRC exempting charitable institutions from income tax.

Thus, Revenue Memorandum Circular (RMC) No. 4-2013, requiring proprietary non-profit hospitals to submit a request for revalidation of their tax-exempt status and invalidating all rulings issued prior to Nov. 1, 2012 granting them tax exemption, was not welcomed with open arms by the covered institutions. The Bureau of Internal Revenue (BIR), however, justifies the circular invoking the ruling by the Supreme Court in the case of Commissioner of Internal Revenue v. St. Luke’s Medical Center (Sept. 26, 2012).

In the said case, St. Luke’s Medical Center which enjoyed tax exemption under Section 30(E) of the NIRC was ordered to pay income taxes on services rendered to paying patients as these were considered as activities conducted for profit.

The Supreme Court said that with the introduction of Section 27(B) in the 1997 National Internal Revenue Code (NIRC), proprietary non-profit educational institutions and proprietary non-profit hospitals will be subject to the 10-percent preferential rate instead of the ordinary 30-percent corporate rate under the last paragraph of Section 30.

The Court explained that “proprietary” means private and “non-profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. However, the Court clarified that “non-profit” does not necessarily mean “charitable”. It adopted the definition of “charity” in the Lung Center of the Philippines v. Quezon City case as “a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion by assisting them to establish themselves in life of otherwise lessening the burden of government.”

A charitable institution is not automatically entitled to a tax exemption. The Court declared that under Section 30(e) of the NIRC a charitable institution must be: (1) a non-stock corporation or association; (2) organized exclusively for charitable purposes; (3) operated exclusively for charitable purposes; and (4) no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer of any specific person.  The ‘organization’ of the institution refers to its corporate form while ‘operation’ refers to its regular activities. To be exempt from income taxes, both the organization and the operation of the institution must be exclusively for charitable purposes. Therefore, the Court concluded that if a tax exempt charitable institution conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt.

In light of this ruling, the BIR, through RMC No. 4-2013 now requires all hospitals and non-stock, non-profit organizations operating hospitals to submit a request for revalidation accompanied by (a) a letter application seeking tax exemption under a specific paragraph of Section 30 of the NIRC; (b) copies of the latest Articles of Incorporation and By-laws duly certified by the SEC; (c) Certificate of Registration with the BIR; (d) Tax Clearance issued by the Revenue District Office where the corporation is registered; (e) Copies of Income Tax Returns or Annual Information Returns and Financial Statements for the last three years; and (f) a statement of its modus operandi stating therein its sources of revenues.

The request shall be submitted to the Revenue District Office where the organization is registered which shall determine whether the organization qualifies as an exempt corporation under Section 30 of the NIRC. If the RDO finds that the organization is qualified to be tax-exempt, it shall forward its recommendation to the Office of the Regional Director for review. If The Regional Director agrees with the recommendation, the same shall be forwarded to the Office of the Assistant Commissioner, Legal Division, which will conduct further review, and if in order, shall prepare the appropriate Certificate of Tax Exemption for signature of the Commissioner or her duly authorized representative. These requirements and procedure were set out to ensure uniformity in application since several non-stock non-profit institutions, including St. Luke’s Medical Center, were able to secure tax exemption rulings from the BIR on the ground that they are charitable or social welfare organizations.

Several proprietary non-profit hospitals and non-stock non-profit organizations operating hospitals may claim that this issuance makes it all the more confusing for them because they no longer know where to put their income to make it tax exempt. But looking at it, this circular is based on simple logic: Charitable activities are tax-exempt and Profit-making activities are subject to income tax. Compliance with this circular will help both the covered hospitals   know if they are entitled to tax exemption and the BIR to address the loss of revenue from these sources. 

Maria Arlene S. Borja is a supervisor from the tax group of Manabat Sanagustin & Co., the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].