RMO No. 34-2014: An interim clarification?

The grant of tax exemptions to non-stock, non-profit corporations and associations under Section 30 of the Tax Code was summed up by the Supreme Court in one case as quid pro quo. In essence, the tax exemption according to the High Court is effectively a social subsidy given by the State to exempt institutions who, in turn, perform activities benefitting the government and the general public. To this end, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order No. 20-13 (RMO No. 20-13), as amended by Revenue Memorandum Order No. 28-13 (RMO No. 28-13), which sets out the policies and guidelines in the issuance of Tax Exemption Rulings to qualified non-stock, non-profit corporations and associations. RMO No. 20-13 seeks to “enhance” the monitoring of these corporations and associations. The backbone of the aforementioned RMOs lies on the application of these non-stock, non-profit organizations of a Tax Exemption Ruling (TER) with the Revenue District Office (RDO) where they are registered for them to be extended a tax-exempt status.

Despite the objectives and mandate of the Bureau in implementing the stated RMOs, it is not unexpected that the entities directly affected coalesce in challenging it and striking it down as unconstitutional and unlawful. In fact, St. Paul College of Makati questioned RMO No. 20-13 and filed an action before the Regional Trial Court (RTC) of Makati City praying for the declaration of its unconstitutionality. As of the writing of this article, the RTC of Makati already handed out a verdict and declared RMO 20-13 unconstitutional as it diminishes the tax-exempt privilege given by the Constitution to non-stock, non-profit educational institutions.

In response to the questions posed against RMO 20-13 and 28-13, the Bureau issued last Sept. 18, 2014 Revenue Memorandum Order No. 34-2014 (RMO No. 34-2014) which seeks to clarify certain provisions of RMO No. 20-2013, as amended by RMO No. 28-2013, on the issuance of Tax Exemption Rulings for qualified non-stock, non-profit corporations and associations under Section 30 of the Tax Code.

Under RMO No. 34-2014, it is provided that Tax Exemption Rulings do not confer tax exemptions which are not provided for by law. Also, the same RMO states that Tax Exemption Rulings do not abrogate or annul the tax exemptions to non-stock, non-profit corporations and associations which are granted by law. In reviewing the applications for TERs, the Bureau merely seeks to validate or confirm whether the conditions set forth by law for the grant of tax exemption are existent or whether such conditions have been complied with by the applicant. In addition, TERs may discuss the tax treatment of any income generated from activities which are conducted for profit.

Another point of clarification under the said RMO relates to the effects of non-filing, late filing and/or revocation of Tax Exemption Rulings under RMO No. 20-2013, as amended by RMO No. 28-2013. Specifically, RMO No. 34-2014 provides that the absence of a valid, current and subsisting Tax Exemption Ruling will not operate to divest qualified entities of the tax exemption provided under the Constitution or Section 30 of the Tax Code. Also, non-stock, non-profit entities which fail to secure a TER for a given taxable year or shorter period, are duty bound to prove compliance with the conditions laid down by the law in the event of a tax investigation.

Entities which fail to renew their Tax Exemption Ruling before the lapse of its validity period can still file their applications with the RDO where they are registered as soon as they are able to do so. In this case, the presentation of the previously issued TER or certificate is not necessary as the BIR will treat the same as a new application.

Lastly, the RMO also provides that the application for Tax Exemption Rulings may be filed by umbrella organizations or confederations duly recognized by the BIR on behalf of its members-entities subject to the submission of the appropriate Board Resolution authorizing said organization or confederation to file said application and other documentary requirements under RMO No. 20-2013.

Despite the clarifications introduced under RMO No. 34-2014, one may question the completeness of said measure as it reproduced the mandate of RMC No. 8-2014 which impels withholding agents to withhold taxes upon the failure of qualified entities to present their valid, current and existing TER. To this end, despite the declaration in RMO No. 34-2014 that TERs do not confer nor abrogate the tax exemptions granted by law, the necessary effect is that qualified exempt entities may still be taxed due to its failure to apply for or renew its TER. At this juncture, qualified non-stock, non-profit organizations and associations may be left with no choice but to await another clarificatory order which will address the hanging implications of RMC No. 8-2014.   

Garizaldy H. Anteola 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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