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Further regulating the privilege of non-stock, non-profit organization

Further regulating the privilege of non-stock, non-profit organizations by: Charity P. Mandap

IN THE MIDST of its goal to increase tax collections, the Bureau of Internal Revenue (BIR) has issued new rules imposing additional requirements on taxpayers for the strict implementation of our tax laws. The most recently issued rules are directed to non-stock, non-profit organizations.
Non-stock, non-profit organizations are created to achieve a specific purpose other than generating profit. They undertake activities which would otherwise have been the responsibility of the government. As a way of rewarding this social contribution, non-stock, non-profit organizations are given tax exemptions.

Under the 1987 Philippine Constitution, charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. For non-stock, non-profit educational institutions, all income and assets used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.

A similar grant of tax exemption is also provided for in the Tax Code, which states that non-stock, non-profit educational institutions, as well as a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, shall be exempt from tax on income received by them as such.

Note however, that the tax exemption privileges of non-stock, non-profit organizations are not absolute. It does not cover all types of income and activities. In fact, under the Tax Code, income from properties and activities conducted for profit by non-stock, non-profit corporations is subject to income tax. Thus, for proper implementation of this tax exemption, non-stock, non-profit organizations are required to comply with certain regulatory requirements of the BIR and other government agencies. It is not unknown that there have been instances when non-stock non-profit organizations were used to escape taxation. Under Revenue Memorandum Circular No. (RMC) 76-03, the BIR initially provided guidelines for the proper implementation of taxes due to non-stock, non-profit corporations. The said RMC discussed the nature of the income exempt from and subject to tax.

In connection to this, the BIR recently issued Revenue Memorandum Order No. (RMO) 20-2013, which prescribes guidelines for the applications for tax exemption, revalidation of tax exemption certificates and application for confirmatory BIR rulings. The RMO provides a list of documentary requirements and guidelines for the evaluation of the applications.

Among others, the BIR requires submission of a statement under oath executed by an executive officer of the non-stock, non-profit corporation or association containing its modus operandi. The statement shall include: (a) a full description of the past, present and proposed activities; (b) a narrative description of anticipated receipts and contemplated expenditures and; (c) a detailed description of all revenues which it seeks to be exempted from income tax.

Initial feedback among the organizations is that compliance with this requirement may be difficult, particularly with information pertaining to future income and activities which may or may not push through depending on the circumstances. With the strict requirement that all other revenues not included in the statement shall be subject to income tax, it is possible that some unexpected sources not included in the application will be unreasonably taxed.

The RMO further provides for the causes of revocation of the tax exemption certificate or ruling. A tax exemption ruling 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. In addition, non-renewal of the tax exemption ruling and non-revalidation of tax exemption certificate shall revoke the exemption. Further, the income tax -- exempt status shall be lost if the corporation or associated which has been issued a tax exemption ruling fails to file an annual information return.

For the guidance of non-stock, non-profit organizations, tax exemption rulings or certificates issued prior to June 30, 2012 shall be valid until Dec. 31, 2013. While those issued after June 30, 2012 shall continue to be valid for a period of three years from the date of issuance unless sooner revoked or cancelled. It is advised that organizations with expiring tax exemption rulings and certificates start the preparation of the lengthy list of requirements to avoid revocation of their exemption.

On one hand, this issuance would, once and for all, set clear guidelines on the compliance requirements for non-profit organizations. Many times in the past, they fail to avail of their privileges for failure to comply with some requirements which they are not aware of.

On the other hand, while the rules under RMO 20-2013 are necessary to ensure compliance with the conditions attached to the tax exemption, the BIR should ensure that the requirements will not be unreasonably stringent. The BIR should consider that, in addition to its rules, non-stock, non-profit organizations also have to comply with the requirements imposed by other government agencies such as the Department of Education, Department of Finance and Philippine Council for non-government organizations (NGOs).

Bear in mind that regulation should not hinder the availment of the privilege afforded to non-stock, non-profit organizations under our laws.