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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By: Garry S. Pagaspas

Once again, the Bureau of Internal Revenue (BIR) has been under fire lately with the issuance of the  Revenue Memorandum Order No. 20-2013 (RMO 20-2013) dated July 22, 2013 entitled “Prescribing the Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-profit Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997, as amended”.

Let us try to discuss the features of this new Revenue Memorandum Order No. 20-2013 (RMO 20-2013) and see for ourselves the new rules for BIR tax exemption of non-stock, non-profit corporations in the Philippines.

Only qualified corporations or associations will be exempted 

Under RMO 20-2013, only corporations or corporations that are duly qualified under Section 30 of the tax Code, as amended, shall be issued Tax Exemption Rulings. Corporations or associations which apply for tax exemption ruling under Section 30(E) of the Tax Code, as amended, must meet the following:

1. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for rehabilitation of veterans.
2.  Must meet organizational test which means that it should limit its purposes to one or more described in Section 30(E) of the Tax Code, as amended.
3. Must meet operational test which mandates that regular activities of the corporation be exclusively devoted to accomplishment for its purpose, otherwise, it should be considered as “activities conducted for profit” and thus, taxable
4. All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person.
5. It must not be a branch of a foreign non-stock, non-profit corporation.

Non-stock and non-profit corporation or association claiming exemptions under Section 30 of the Tax Code, as amended, but is not qualified will be subjected to regular income taxes. This however, may not apply to corporations claiming tax exemptions under special laws or under other provisions of the Tax Code, as amended, other than Section 30 thereof.

Validity of Tax Exemption Ruling

Under RMO 20-2013, a Tax Exemption Ruling in the Philippines shall be valid for three (3) years from date specified in the Ruling, unless, sooner revoked or cancelled. It shall be deemed revoked if there are material changes in the character, purpose, or method of operation of the corporation or association which are inconsistent with the basis for its income tax exemption.

Tax Exemption Ruling could be renewed upon filing an Application for Tax Exemption / Revalidation under the same requirements and procedures provided under RMO 20-2013. Upon approval, the same shall be valid for another three (3) years, unless sooner revoked or cancelled.

Status of Tax Exemptions issued prior to June 30, 2012

Under RMO 20-2013, tax exemption rulings or certificates issued to corporations or associations listed under Section 30 of the Tax Code, as amended, shall be valid as follows:

• Issued prior to June 30, 2012 shall be valid until December 31, 2013. 
• Issued July 1, 2012 or onwards shall be valid for a period of three (3) years from the date of issuance, unless sooner revoked or cancelled.

For those who would fail to file an application for revalidation on December 31, 2013, RR 20-2013 implies that they have lost their income tax exemption.

Processing of Certificate of Tax Exemption

Applications for tax exemptions are required to be filed with the BIR Revenue District Office (RDO) of  registration along with the required documentary requirements for securing BIR Tax Exemption of non-stock, non-profit corporations or associations in the Philippines. After pre-evaluation and findings of the RDO on the qualifications, the RDO shall prepare a recommendation stating the factual and legal bases, and endorse the same to the Office of the Regional Director.

Upon concurrence of the Regional Director, it will forward the docket to the Office of the Assistant Commissioner, Legal Service, Attention: Law Division who shall further review and evaluate the documents submitted. Upon finding in order, the Law Division shall prepare the Tax Exemption Ruling for approval and signature of the Commissioner of Internal Revenue or duly authorized representative.

At the pre-evaluation under RDO level, the applicant may file an appeal to the Regional Director within thirty (30) days from receipt of the RDO denial stating the factual and legal basis for denial.

Documentary requirements

RMO 20-2013 provides specific list of requirements for securing BIR Tax Exemption rulings and certificates. The various requirements are directed to further evaluate the qualifications of the applicant non-stock, non-profit corporation or association. It is not an all inclusive list and BIR may further require additional documentary requirements, if it deem necessary.

Summary

In sum, the BIR is now quite meticulous with the provision of BIR Tax Exemption in seeing to it that only those qualified under a particular provision of law could enjoy the benefits of income tax exemption. The mere fact that a corporation is registered as a non-stock and non-profit is not conclusive as to its income tax exemption as it has to duly establish the fact and the legal basis on its claim for exemption. Failure to do so would mean disqualification, and thus, being subject to income tax.

While RMO 20-2013 has a pending case now for the determination of its validity, we suggest that non-stock and non-profit still pursue with the application to avoid being subjected to tax on its non-profit operations.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting 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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See our quality seminars, workshops, and trainings…

See our in-house tax and accounting seminars…

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