Income Tax Exemption of Religious Institutions or Churches in Philippines

By: Garry S. Pagaspas

Being an entity registered with the Securities and Exchange Commission (SEC) as non-stock religious institution or church in Philippines does not automatically mean income tax exemptions and considering that tax exemption is an exception, extra care should be made on determining the applicable tax exemptions of religious corporations, institutions, associations, or church in the Philippines with respect to its income, receipts, revenues (e.g. tithes and offerings, donations  from members, etc.) from religious operations. By this article, let us tackle the income tax exemptions of religious corporations or institutions or churches in the Philippines imposed by the Bureau of Internal Revenue (BIR).

Under Section 30(E), National Internal Revenue Code, as amended, religious institutions or corporations in the Philippines are exempted from income tax, as follows:

“Section 30(E). Non-stock corporation or association organized and operated exclusively for religious, xxx, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person”

To be entitled to the tax exemptions under Section 30(E) of the Tax Code, as amended, the religious corporation or association or church in Philippines must meet the requirements in accordance with Revenue Memorandum Order No. 20-2013 (RMC 20-13) dated July 22, 2013, as amended, which could be summarized as follows:

1. Organizational test or that the religious institution or association or church is a non-stock, and non-profit

Under Section 87 of the Corporation Code, “Non-stock” means “no part of its income is distributable as dividends to its members, trustees, or officers” and that any profit “obtained as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.” On the other hand, in on Supreme Court case, “Non-profit” means that “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.”

In relation to being non-stock, and non-profit, BIR issued Revenue Memorandum Circular No. 51-2014 (RMC 51-14) clarifying the inurement prohibition under Section 30(E) of the Tax Code, as amended, and providing the following instances as “inurement”, to wit:

1. The payment of compensation, salaries, or honorarium to its trustees or organizers;
2. The payment of exorbitant or unreasonable compensation to its employees;
3. The provision of welfare aid and financial assistance to its members;
4. Donation to any person or entity (except donations made to other entities formed for the purpose/purposes similar to its own;
5. The purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries and an interest; and,
6. When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members.

In a number of requests for BIR rulings on income tax exemption of religious institutions or associations or churches in the Philippines, the BIR has used RMC 51-14 in determining qualifications for income tax exemptions. It should also be noted that the religious corporation or institution or church should not be a branch of a foreign non-stock, non-profit corporation.

2. Operational test or that it is operated exclusively for religious purposes

Under Section 1(E) of Revenue Regulations No. 13-1998 (RR 13-98), “Religious purpose” shall refer to the  promotion, propagation and accomplishment of any form of religion, creed or religious belief recognized by the Government of the Republic of the Philippines.

In one Supreme Court case, “exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” x x x The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitution and the law. Solely is synonymous with exclusively.”

In other words, the above operational test requires that the purpose for which the religious corporation or association or church in the Philippines should be exclusively for religious purposes. Should the religious institutions or associations or churches in the Philippines fail to prove such qualification to be exempted from income tax in the Philippines, they shall be subject to income tax in same manner as an ordinary corporation.

Certificate of Tax Exemption of Churches in Philippines

For the income tax exemption of the religious institutions or associations or churches in the Philippines, RMO 23-2013 provides for the Application for Tax Exemption or Revalidation that would indicate specifically the income, receipts, revenues (e.g. tithes and offerings, donations from members, etc.) that are covered by income tax exemptions of such religious institution or church in Philippines along with other tax implications. Application is to be filed with the Revenue District Office (RDO) of registration based on such requirements for securing Certificate of Tax Exemption in Philippines and is valid for three (3) years from issuance and subject to renewal.

Appeal from BIR Denial of Request for Tax Exemption

In case of BIR denial of the request for certificate of tax exemption on the income tax exemption of religious institutions or associations or churches in the Philippines, the applicant may file a request for review with the Department of Finance (DOF) under DOF Department Order No. 007-02 dated May 7, 2002 within 30 days from receipt of the BIR denial. Pending such reversal, the BIR ruling denying such request is presumed valid.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about fifteen (15) years now helping out taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has been helping out some foreign clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.org.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.org, or you may post a question at Tax and Accounting Center Forum and participate therein.

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