RMO No. 20-2013 – Obey or disobey?

Take a trip down memory lane and one may recall a particular issuance of the Bureau of Internal Revenue (BIR) that caused a lot of buzz among non-stock, non-profit corporations and associations.  This is Revenue Memorandum Order No. 20-2013 (RMO No. 20-2013).

RMO No. 20-2013 issued by the BIR last July 22, 2013 requires tax-exempt organizations (enumerated in Section 30 of the Tax Code) to apply for a Tax-Exemption Ruling (TER) in order to be accorded tax-exempt status.  The RMO also provides that the TER shall be valid only for three years and subject to renewal.

On Nov. 29, 2013, a non-stock, non-profit educational institution filed a civil action before the Makati Regional Trial Court (RTC) to declare RMO No. 20-2013 unconstitutional.  In its petition, the non-stock, non-profit educational institution alleged that RMO No. 20-2013 imposes a prerequisite to the enjoyment by non-stock, non-profit educational institutions of the privilege of tax exemption under Section 4 (3) of Article XIV of the Constitution.

On Jan. 3, 2014, the Makati RTC issued a Temporary Restraining Order (TRO) to enjoin the Commissioner of Internal Revenue, agents and representatives of the BIR from implementing RMO No. 20-2013. Subsequently, the Makati RTC issued a writ of preliminary injunction.

On July 25, 2014, the Makati RTC declared RMO No. 20-2013 unconstitutional, made permanent the writ of preliminary injunction, and declared null and void all Revenue Memorandum Orders subsequently issued to implement RMO No. 20-2013.  In its decision, Makati RTC pointed out that under the Philippine Constitution, all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.  This tax-exempt privilege accorded by the Constitution to non-stock, non-profit educational institutions cannot be diminished by legislation or by administrative regulations. According to Makati RTC, RMO No. 20-2013 operates as a pre-requisite to the tax-exempt privilege by requiring the non-stock, non-profit educational institutions to submit an application for tax exemption to the BIR subject to approval by the commissioner of Internal Revenue in the form of a TER which is valid for a period of three years and subject to renewal.  This pre-requisite serves as a diminution of the Constitutional privilege that “all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties”. 

As of the time of writing, the decision of the Makati RTC is not yet final and the tax authorities still has the opportunity to appeal to a higher court.  Nonetheless, since the RMO has been declared unconstitutional and the writ of preliminary injunction over its implementation has been made permanent, there is legal basis to disregard RMO No. 20-2013 until the writ of preliminary injunction and the decision of the Makati RTC are reversed or set-aside by the Appellate Court. 

The victory, however, maybe hollow. Remember that on Feb. 6, 2014, the BIR issued Revenue Memorandum Circular No. 8-2014 (RMC No. 8-2014) directing the withholding agents to require all individuals and entities claiming tax exemption to provide a copy of a valid, current and subsisting tax exemption certificate or ruling. The withholding agent is mandated to withhold taxes if the tax-exempt entity cannot present the TER. Failure on the part of the withholding agent to withhold shall subject him to appropriate penalties.  As such, the withholding agents are practically left with no choice but to require tax-exempt entities to present the TER.  Otherwise, the withholding agents will be forced to withhold taxes on the income payments to tax-exempt entities that do not have the TER.

A hollow victory indeed if the implementation of RMC No. 8-2014 is not also enjoined.

Mark Nette E. Concepcion is a supervisor from the tax group of R.G. Manabat & Co. (RGM&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 RGM&Co. For comments or inquiries, please email [email protected] or [email protected].
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