Inurement Prohibition on Non-stock Corporations Philippines

By: Tax and Accounting Center Philippines

Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 51-2014 dated 6 June 2014 entitled “Clarifying the Inurement Prohibition under Section 30 of the National Internal Revenue Code of 1997”

In relation to the pronouncement of the Supreme Court in the Case of Commissioner of Internal Revenue (CIR) versus St. Lukes Medical Center, Inc. under G.R. No. 195909 and 195960 dated 26 September 2012 the following terms where defined:

Non-stock corporation Philippines

“Non-stock” means “no part of its income is distributed as dividends to its members, trustees, or officers” and that any profit “obtained as an incident to its operations shall, whenever necessary and proper, be used for the furtherance of the purpose or purposes for which the corporation was organized”.

Non-profit corporation Philippines

“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 purpose and all its activities conducted not for profit”.

Inurement prohibition under Section 30

In relation to the above, the BIR has clarified that in order to qualify as a non-stock and / or non-profit corporation or association or organization exempt from income tax in the Philippines under Section 30 of the National Internal Revenue Code (NIRC), as amended, its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.

Under RMC 51-2014, the following are considered “inurements” of such nature:

• Payment of compensation, salaries, or honorarium to its trustees or organizers;
• The payment of exorbitant or unreasonable compensation to its employees;
• The provision of welfare aid and financial assistance to its members. An organization is not exempt from income tax if its activity is to receive and manage funds associated with savings or investment programs, including pension or retirement programs. This does not cover a society, order, association, or non-stock corporation under Section 30(C) of the NIRC providing for payment of life, sickness, accident, and other benefits exclusively to its members or their dependents;
• Donation to any person or entity (except donations made to other entities formed for the purpose/purposes similar to its own)
• 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 has an interest, and
• When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members. Its assets must be dedicated to its exempt purpose. Accordingly, its constitutive documents must expressly provide that in the event of dissolution, its assets shall be distributed to one or more entities formed for the purpose or purposes similar to its own, or to the Philippine government for public purpose.

All other issuance inconsistent with RMC No. 51-2014 are hereby repealed or modified accordingly.

Summary

The present pronouncements on non-stock and non-profit seems to be meticulous on the stick signification of non-stock and non-profit for purposes of tax exemptions and BIR seem to be clear on that. Accordingly, non-stock and non-profit corporations are advised to review its operations in line with the recent developments on the requirements for tax exemption of non-stock and non-profit corporations in the Philippines. They should exert extra effort in seeing to it that their operations complies with the requirements to avoid unnecessary consequence.

Reference:

• Revenue Memorandum Circular No. 51-2014

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 please send mail at info(@)taxacctgcenter.org)

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