“But the poor will not always be forgotten. (Psalm 9:18)” This Bible quote gives a fine touch to the “should-be” reality that even those in the marginalized sectors of the society, such as the poor, are still an integral part of the nation and should never be forgotten.
In the early times, Jehovah gave the ancient nation of Israel a body of law that, if obeyed, would minimize poverty. For example, the Law commanded the people to leave the edges of their fields unharvested that poor people could glean from. In addition, if the poor had to borrow money, the Law forbade Israelites to charge interest.
Undeniably, provisions which are geared towards alleviating the socioeconomic welfare would help ease the challenges faced by the poor such as lack of proper clothing to protect them from harsh weather conditions, lack of funds to obtain proper medical care and quality education, and lack of resources to buy food.
Adding bitterness to such a situation is the sad reality that poor families are considered “unbankable” loan clients. They find it hard to obtain credit approval from legitimate and formal lending entities due to collateral and documentary requirements. As such, the poor are sometimes compelled by necessity to borrow from informal sources such as loan sharks.
But, like the will of God, a new ray of light has arrived. Poor families can now tap government funding to open up small businesses with the enactment of Republic Act (RA) No. 10693, otherwise known as the “Microfinance NGOs Act.”
Under this Act, poor Filipino families shall be encouraged to undertake entrepreneurial activities to meet their minimum basic needs including income security. It aims to encourage nongovernment microfinance institutions to work with the government to pursue community development and improvement in the socioeconomic welfare of the poor and other basic and marginalized sectors through financially inclusive and pro-poor financial and credit policies and mechanisms, such as microfinance and its allied services.
To encourage microfinance NGOs (MNGOs) to support its poverty eradication program, the government grants a 2% preferential tax rate based on MNGOs’ gross receipts from microfinance operations which shall be, in lieu of all national taxes, provided the conditions under Section 20 of RA 10693 are complied with.
Relative to this and in pursuant to the Tax Code, the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, issued Revenue Regulations (RR) No. 03-2017 which implements the tax provisions of RA 10693.
The salient features of the new regulations are as follows:
ACCREDITATION OF MNGOS
MNGOs are required to secure a Certificate of Accreditation from the MNGO Regulatory Council (“Council”) in order to avail of the incentives under RA 10693. MNGOs must be non-stock, non-profit corporations with a capital contribution of at least P1,000,000.00. Only MNGOs with duly issued Certificates of Accreditation shall be eligible to avail of the 2% gross receipts tax on income from microfinance operations.
MNGOs which have been certified by the Securities and Exchange Commission (SEC) as having no derogatory record are deemed accredited as MNGOs for a period of one year from the effectivity of RA 10693, unless sooner revoked. These entities shall likewise be entitled to avail of the 2% gross receipt tax on its income from microfinance operations.
TAXATION OF MNGOS
As earlier mentioned, a duly registered and accredited MNGO shall pay 2% tax based on its gross receipts from microfinance operations in lieu of all national taxes provided that such preferential tax treatment shall be accorded only to MNGOs whose primary purpose is microfinance and only on their microfinance operations catering to the poor and low-income individuals.
It must be noted that the preferential rate of 2% tax based on gross receipts from microfinance operations should only refer to lending activities and insurance commission which are bundled and forming an integral part of the qualified lending activities of the MNGOs.
In case the MNGOs have other sources of income, which are not generated from the lending activities and insurance commissions, the same shall be subject to applicable taxes such as but not limited to:
a. Interest income derived from loans other than those extended to qualified borrowers under RA 10693;
b. Commission fees and other charges on the provision of electronic payment systems such as mobile or any innovative digital platforms or channels;
c. Commission fees and other charges on the provision of money transfer and other related remittance services;
d. Prizes and other winnings; and
e. All other forms of income not related to microfinance operations (lending activities and insurance commission) catering to the poor and low-income individuals.
For MNGOs to avail of the benefits under RA 10693 for their microfinance operations shall be evaluated in conjunction with their other lines of business in order to determine the appropriate tax treatment of revenues derived from those other activities.
Finally, MNGOs’ books of accounts and other pertinent records shall be subject to periodic examination by the BIR in order to ascertain whether they are complying with the conditions for availing the tax incentives and their tax liability, if any.
UPDATE OF BIR REGISTRATION
Duly registered and accredited MNGOs, including those deemed accredited, are required to update their registrations with their respective Revenue District Offices (RDO) to reflect their accreditation as MNGOs. Moreover, their clients are required to have Taxpayer Identification Numbers (TIN). For this purpose, MNGOs are encouraged to assist their clients in securing the TINs.
Notably, on the socioeconomic agenda of the current administration is to improve social protection programs in order to protect the poor against instability and economic shocks. This means that those who have less in life are not forgotten and that they have a seat at the discussion table of the government.
On the other hand, the grant of fiscal incentives implies that the government recognizes the role of MNGOs in nation-building. It is hoped that the new BIR regulations be implemented cautiously, taking into account the administration’s policy of increasing competitiveness and the ease of doing business. With this, it can also be said that the hands supporting the poor are likewise not forgotten.
Renato R. Balisacan, Jr. is a manager with 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 21 March 2017