Late last year, I read a post on social media about a bride-to-be’s woes on the costs of “taking things to the next level” -- i.e., having a wedding. The woman took to social media to express her surprise (read: frustration) at the cost of reserving a church for a wedding (P35,000), having wedding announcements (P1,000 at most and this varies among different parishes), and behold, the opening of the church doors for the bride to enter and attend her wedding ceremony (another P1,000!). The last one struck a nerve. One thousand pesos. For opening the church doors.
Truly, a person’s life, while short, passes through many phases, rituals, and events; more so in this country that is inclined to consider almost all events as monumental or worthy of being considered an occasion. And in a country like the Philippines where the people consider religion and education as important factors for everyday living, most Filipino lives are peppered with events like baptisms, weddings, and final rites, to name a few.
Somewhere in between baptism and wedding, some of us are provided with the opportunity to be educated in private schools, some which are operated by non-stock, non-profit (NSNP) educational institutions. All these entail cash outlays, which vary widely and depend on one’s financial capabilities. And the payees of these fees are entities that are considered exempt from taxes under the National Internal Revenue Code of the Philippines.
Section 30 of the Tax Code of the Philippines explicitly states that “non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer, or any specific person” shall be exempt from income tax. However, the said section also states that “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” which, in this case, is income tax.
However, with the various fees and charges that are imposed by the schools and religious institutions, it has become more difficult to determine whether these revenues have crossed the line between institutional funds and institutional income. That line being a document showing that the NSNP organization is eligible for an income tax exemption, as certified by the BIR.
The BIR has not been remiss in trying to draw the line; in fact, it has oftentimes been accused of being too restrictive and unreasonable in its requirements for the issuance of the Certificate of Exemption. The BIR requires complete, thorough, and detailed disclosure of the sources and uses of the funds. The evaluators are tasked to examine the modus operandi, financial statements, and other relevant documents and ensure that the earnings of the NSNP organization does not inure to the benefit of any private individual, does not operate for the benefit of private interests such as those of its founder, and does not operate for the purpose of conducting a trade or business not related to its tax-exempt purpose. The Supreme Court has even upheld the BIR when it ruled that the NSNP organization should be exclusively established for charitable purposes to enjoy this exemption.
It appears, however, that the NSNP organizations are still not clear on when the funds that they receive may be considered taxable. The BIR can come up with an issuance on what can be defined as activities deemed to be “conducted for profit” and some criteria to determine which ones are in furtherance of the institution’s rationale for existing. Since the responsibility of proving that the activities are not for profit and therefore exempt from income tax rests on the NSNPs, almost all revenues of the NSNPs may be tucked under activities directed to the objectives for which they are organized for. In this regard, since the NSNPs are being required to be completely transparent on their sources of income and these funds’ utilization in projects and activities, they can be held liable by the guidelines in identifying and justifying the taxable and exempt income.
These being said, it does not seem to suffice that an NSNP organization secure a certificate of exemption for it to avail of the tax exemptions provided under the Tax Code. The certification is a document that merely discloses the entitlement to exemption, although it does specifically provide that the organization shall be subject to examination to ascertain compliance with the conditions for exemption. The burden of proof is with the organization to fully explain whether or not it lives up to its reason for being.
In light of the tax reforms being discussed at the moment, it would be better if the government could find other ways to boost the tax collection and revenue-raising system in the Philippines without necessarily awaiting Congressional approval. The government should not merely focus on finding ways to modify the tax system, tax rates, tax base, and other matters for entities and individuals who are already being taxed as they are; it should continue revisiting the bases on why some entities are currently enjoying tax exemptions.
The basic principle is that non-stock non-profit organizations perform certain governmental functions which government, by itself, cannot adequately provide in return for tax exemption statuses. The privileges, however, have limits and it is also in the interest of the public that the limitations are properly observed. As they say even during the time of Jesus, Give unto Caesar what is Caesar’s.
Cheryl R. Gatdula is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo.
As published in Business World, dated on 28 March 2017