Transparency and consistency: Tax exemption and revalidation rulings for non-stock, non-profit corporations and associations

It has always been said that taxes are the lifeblood of the nation. Thus, tax exemptions are construed strictly against the taxpayer and in favor of the government. The taxpayer must prove that the law has expressly granted such exemption. Otherwise, its claim shall be denied. On July 22, 2013, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 20-2013, prescribing the policies and guidelines on tax exemption rulings to qualified non-stock, non-profit corporations and association under Section 30 of the Tax Code, as amended, to closely monitor the compliance and qualifications of the covered institutions.

Noteworthy to mention is the provision obtaining a confirmatory ruling and revalidation of the qualified non-stock, non-profit corporations and associations that are exempted from income taxation under Section 30 of the Tax Code, as amended. Under RMO No. 20-2013, corporations and associations under Section 30 of the Tax Code, as amended, including those which  have been issued tax exemption rulings/certificates prior to June 30, 2012, must file their respective applications for tax exemption/revalidation with the Revenue District Office (RDO) where they are registered.  From the perusal of the RMO, it seems to apply to all non-stock, non-profit institutions covered by Section 30 of the Tax Code, as amended. These are labor, agricultural or horticultural organization not organized principally for profit, or other benefits exclusively to the members of such society; non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes; business league; chamber of commerce; and non-stock, non-profit educational institutions, among others.

Per RMO No. 20-13, the following documentary requirements, must be submitted for purposes of tax exemption ruling, among others: Articles of Incorporation (AOI) and by-laws; the BIR Certificate of Registration; and a certification by the treasurer of the association as to the amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers.

Guidelines are likewise provided in evaluating applications for tax exemptions/revalidation, among others as follows:  (a) no part of the corporation or association’s net income shall inure to the benefit of any private individual and the trustees of the non-profit corporation or association do not receive any compensation or remuneration; and (b) that the assets of the corporation or association are permanently dedicated to the tax-exempt purposes. Maybe because of the need for these conditions/terms to be found in the AOI, the RMO provided a sweeping provision that a branch of a foreign non-stock, non-profit corporation will not qualify as a tax-exempt corporation.

Further, the evaluation will involve the examination of the institution’s modus operandi and financial statements to determine whether: (i) its earnings do not inure to the benefit of any private individual; (ii) it does not operate for the benefit of private interest such as those of its founder or the founder’s family; and (iii) it does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose. Moreover, the RDO should verify the institution’s source of revenues and other transactions to determine which are taxable and non-taxable. Non-stock, non-profit institutions are tax-exempt only on the income received by them as such. Any income derived from any other activity or for profit shall be subject to tax.

Tax exemption ruling issued under this RMO shall be valid for three years from the date specified in the ruling, unless sooner revoked or cancelled. It may be renewed upon filing of a subsequent application for tax exemption/revalidation; otherwise, the exemption shall be deemed revoked upon expiration of the tax exemption ruling. Tax exemption ruling or certificates issued to corporations and associations under Section 30 of the Tax Code, as amended, prior to June 30, 2012 shall be valid until Dec. 31, 2013. Tax exemption rulings or certificates issued after June 30, 2012 shall continue to be valid for a period of three years from date of issuance, unless sooner revoked or cancelled.

Olivia P. Taganas is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&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 view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co.

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