With few days before BIR Commissioner Kim Henares steps down, one can expect the surge of last-minute revenue circulars, orders and issuances from the Bureau of Internal Revenue (BIR). Just recently, two revenue orders were issued laying down the guidelines and procedures in the conduct of investigation on the financial capacity of parties to acquire properties.
Last week, Revenue Memorandum Circular (RMC) 64-2016 was circularized which provides clarification on the nature, tax treatment, registration and compliance requirement of corporations and associations under Section 30 of the National Internal Revenue Code (NIRC) of 1997, as amended (1997 Tax Code). This did not come as a surprise as tax-exempt entities are under the close radar of the BIR when it comes to tax compliance and collection goal. As substantial revenue losses are incurred relating to non-implementation of taxes to non-stock non-profit organization whose organization and operation is not within the ambit of Sec. 30 of the 1997 Tax Code, RMC 64-2016 was issued to consolidate all the rules affecting the tax-exempt corporations and associations.
The RMC provides for the detailed description, characteristics, purpose and respective operations of corporations and association that fall within the contemplation of the eleven (11) categories under Sec. 30 of the 1997 Tax Code. The RMC also highlights the significance of the last paragraph of Section 30 which expressly states that, "notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code." In other words, the RMC was issued to take out the perception that all corporations registered as non-stock, non-profit with the Securities and Exchange Commission (SEC) automatically fall under Section 30 of the 1997 Tax Code and that all income derived by them are totally exempt from income tax or all taxes for that matter.
In determining entitlement to tax exemption, the RMC reiterates the use of two tests: organization test and operational test. Organizational test requires that the corporation or association constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code. On the other hand, operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. "A corporation or association fails to meet this test if substantial part of its operation are considered "activities conducted for profit."
Does this provision mean that the corporation or association loses its tax-exempt status if substantial part of its operations are activities conducted for profit? Or would only the income derived from activities conducted for profit be subject to income tax? What if the income derived from activities conducted for profit is used in furtherance of the purpose of the corporation, will it make the income, tax-exempt? While the RMC did not provide a straight answer on this, it is clear from the last paragraph of Sec. 30 and from decided cases of the Supreme Court (SC) that income from activities conducted for profit, regardless of the "disposition made of such income" shall be subject to tax.
The RMC also restates several instances where "inurements" are present which disqualifies corporations/association from tax exemption. Since corporations in Sec. 30 are organized not for profit, no net income or assets must accrue to or benefits any members or specific person. Tax-exempt entities under Sec. 30 must not be organized or operated for the benefit of private interest such as specific individuals, incorporators or his family, shareholders of the organization or person controlled directly or indirectly by such private interest. The organization must serve a public rather than a private purpose. In other words, to qualify as non-stock and/or non-profit corporation/association/organization exempt from income tax under Sec. 30 of the 1997 Tax Code, it must demonstrate that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.
Donation to any person or entity by the non-stock non-profit organizations (except donation to other entities formed for the purpose/s similar to its own) is considered inurement. This means, only donation to entities formed for the purpose/purposes similar to its own are allowed. If this is the case, does this mean if charitable institution and other foundation donates goods and services to qualified individual beneficiaries, the charitable institution loses is exemption from tax? The RMC, however, has no clear answer to this issue.
The RMC also emphasizes that income tax exemption is not absolute. Tax exemption only covers income received as such by corporations organized and operated in accordance with Sec. 30 provision. Sec. 30 corporations are still subject to the corresponding internal revenue taxes under the NIRC on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income, rental income from real or personal properties) which income should be reported for taxation purposes. Further purchase of goods or properties or services and importation of goods by corporation organized and operated as Sec. 30 corporations shall be subject to the 12% VAT since shifting of the VAT does not make these corporation directly liable and therefore, it cannot invoke its tax exemption privilege under Sec. 30 of the 1997 Tax Code to avoid the passing on or shifting of the VAT.
Further, the RMC clearly sets the rules on tax exemption of non-stock, non-profit educational institution. Revenues derived from assets used in the operation of cafeterias, canteen, and bookstores are exempt from taxation provided they are owned and operated by the education institution as ancillary activities and the same are located within the school premises. This is therefore, in accordance with the constitutional mandates that revenue and assets of nonstock, nonprofit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.
Moreover, the RMC provides guidelines and procedures for registration of Sec. 30 corporations/organization and sets out the rules on administrative compliance. Corporations or association organized as a Sec. 30 corporation shall for the first three years of operations, accomplish and file an account information form (BIR Form 1702- AIF) on or before the 15th day of fourth month following the end of the taxable year. The AIF shall be filed together with the annual income tax return. The RMC also distinguishes the compliance requirements of corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation as such and those corporations with mixed income having other activities involving sale of goods and/or services not in connection with its primary purpose.
For those corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation it must file annual income tax return (BIR Form No. 1702- EX) and attach a copy of the confirmatory ruling or certificate of tax exemption, if any. They are no longer required to file the monthly and quarterly VAT/Percentage tax returns and quarterly income tax returns unlike those corporations with mixed income or having other profit-oriented activities.
It was noted, however, that the RMC fails to provide the timeline in the processing of the certificate of tax exemption. It cannot be discounted that securing a tax rulings poses a major hurdle to corporations. Thus, fixing the number of days in processing the certificate of tax exemption will not only provide comfort and relief to corporations of Sec. 30 but also encourages efficiency and transparency in the BIR.
While there are still some issues not addressed by the RMC, BIR should be still be lauded on its effort for issuing said RMC. With the enumeration of the characteristics, corporate purposes and defining the actual operations of entities per each category under Sec. 30, tax leakages arising from inaccurate interpretation of Sec. 30 are minimized. Corporations and associations are well-guided on whether or not they are organized and operated for the purpose described in Sec. 30 and thus, entitled to tax exemption. The clear set of rules provided in the RMC will help corporations organized under Sec. 30 to ascertain existence of income derived from non-exempt activities and its proper tax treatment. In the long run, it will promote strict compliance as doubts and ambiguities are reduced.
Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
As published in Business World, dated June 28, 2016