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

Multinational companies and foreign corporations are allowed to do business in the Philippines as a representative office in the Philippines under the Corporation Code of the Philippines (Batas Pambansa Bilang 68), Foreign Investments Act (Republic Act No. 7042), and related implementing rules and regulations. Under this, a foreign corporation’s legal entity abroad is being licensed to do business in the Philippines through a formal application form (SEC Form No. F-104 and related documentations) as a representative office of liaison office is a cost center entity fully subsidized by the parent company but could deal directly with clients of the parent company abroad undertaking activities such as but not limited to information dissemination and promotion of parent company’s products as well as quality control of products. Based on such operations, let us take up the Bureau of Internal Revenue (BIR) tax implications of representative office in the Philippines as follows:

Income tax exemptions of Representative Office in Philippines

The representative office is licensed to do business in the Philippines and not allowed to engage in income producing activities, as such, for tax purposes, it is classified for tax purposes as a non-resident foreign corporation not engaged in trade or business in the Philippines. Not being allowed to earn income from operations, it is exempted from income tax in the Philippines. Some BIR rulings provides that the same is exempt from filing of the corporate income tax return (ITR). However, with the Securities and Exchange Commission’s (SEC) requirements of annual audited financial statements of a representative office in Philippines with stamp received by the BIR and in relation for the annual income tax return for exempt entities (BIR Form No. 1702 EX), filing of annual income tax returns seems applicable, if not practical.

In some opinions of the Securities and Exchange Commission (SEC), it clarified that what is prohibited is the operational income for the representative office and it could earn passive income such as trading of listed shares. In such instance, the representative office shall be subject to the corresponding tax on such passive income, e.g. stock transaction tax on listed shares.

Learn more about Income Taxation in the Philippines, click HERE.

Value-added Tax (VAT) exemptions of Representative Office in Philippines

VAT is imposed upon those engaged in trade or business and as such, representative office is exempted from VAT on sales, not being engaged in any income-generating business activity in the Philippines. Such VAT exemption of representative office in Philippines applies only to VAT directly due from representative office in Philippines. This would mean that representative offices can be passed on 12% VAT by suppliers such as for utilities, office rental, professional services, and etc. Learn more about Value Added Tax in Philippines, click HERE.

Expanded/ Final Withholding Tax obligations of Representative Office in Philippines

Representative office in Philippines is also constituted as withholding agent with respect to its income payments in the Philippines subject to creditable/ expanded withholding tax (CWT/ EWT), or final withholding tax (FWT) in the Philippines. Accordingly, it is required to file BIR returns and reports related to withholding taxes (e.g. BIR Form No. 1601Q, BIR Form No. 1604s, alphalist of payees, etc.).

Withholding tax on compensation of Representative Office employees

Representative office in Philippines is also constituted as withholding agent with respect to its compensation payments to employees – local and expatriates based on the applicable rates under the Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 effective January 1, 2018 as follows:

• 20-35% graduated tax rates for local employees
• 20-35% graduated tax rates for resident expatriates
• 25% for non-resident expatriates, not engaged in trade or business in the Philippines

Representative office in Philippines is likewise required to withhold fringe benefits tax of 35% of grossed up monetary value under the Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 effective January 1, 2018 on fringe benefits to managerial and supervisory employees, and file related returns and reports. Learn more about the following:

• Fringe Benefits Tax in the Philippines, click HERE.
• Withholding tax on compensation in Philippines, click HERE.

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 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.ph.

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.