A new source of tax collection for the BIR

THE BUREAU of Internal Revenue (BIR) continued to fall short of its tax collections as it missed its collection target in the first nine months of the year. However, the BIR is not taking this serious matter sitting down.

 
In the hope of improving its tax collections, the BIR has adopted several tax measures which include the following: (a) it clarified that clubs organized and operated exclusively for pleasure and recreation are not tax-exempt organizations; (b) clarified that the association dues, membership fees and other assessments/charges collected by condominium corporations are subject to income tax and value added tax (VAT); (c) clarified that the deposits/cash advances for expenses received by a taxpayer from its clients/customers are subject to income tax and to VAT or percentage tax; (d) imposed a limit on the deductibility of depreciation expense, input tax and all related expenses on purchase of motor vehicles; (e) issued the transfer pricing regulations; (f) tightened audit of industries and self-employed professionals; and (g) filed charges against suspected tax evaders.

These tax measures have contributed to the 21.11% higher tax collections in September 2013 than in the same month last year, though the bureau missed its target for the month.

Where could the BIR source its tax collection to fill-in the gap? From non-stock, non-profit corporations and associations.

It can be remembered that in July 2013, the BIR issued Revenue Memorandum Order (RMO) No. 20-2013, which prescribes the guidelines in applying for tax exemption, revalidation of tax exemption certificates and application for confirmatory BIR rulings of non-stock, non-profit organizations under Section 30 of the Tax Code. The purpose of the RMO is to ensure that only non-stock, non-profit organizations qualified for tax exemption under Section 30 of the Tax Code, as amended shall be issued the Certificate of Tax Exemption.

In the said RMO, before the issuance of the Certificate of Tax Exemption, the BIR will ascertain whether or not the non-stock, non-profit corporation or association meets the following requirements:

   i. It is a non-stock, non-profit corporation or association;

  ii. The purpose for which it was created is one of those enumerated under Section 30 of the NIRC, as amended;
 iii. No part of the corporation or association’s net income shall inure to the benefits of any private individual; and
  iv. The trustees of the non-profit corporation or association do not receive any compensation or remuneration.

Likewise, the BIR will determine whether or not the non-stock, non-profit corporation or association is operating as an organization under Section 30 of the NIRC, as amended, by examining its modus operandi, financial statements and other relevant documents. The examination must show that:

   i. Its earnings do not inure to the benefit of any private individual;
  ii. It does not operate for the benefit of private interest such as those of its founder or the founder’s family; and
 iii. It does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose.

Recently, the BIR denied the application for revalidation of the tax exemption ruling of certain non-stock, non-profit corporations on the ground that they did not qualify as a tax-exempt corporation under Section 30 of the Tax Code.

In one of the rulings denied by the BIR, the concerned non-stock, non-profit corporation has the following purposes:

   1. to promote the recognition of supply management profession as a science, and to stress its importance in commerce and  industry;
   2. to undertake the promotion of research and study or local and international market conditions;

   3. to promote the establishment of acceptable basic standards of product, and to influence manufacturers to improve the       quality of their goods;

   4. to promote local and international exchange of supply management experience and knowledge;

   5. to extend supply management technology and training of personnel of member companies;

   6. to foster closer, more mutual understanding and more friendly relations among members of the profession;

   7. to unify and bring into one compact organization the entire supply management profession in the Philippines; and

   8. to publish and circulate among members an organ for the dissemination of activities of the corporation and such other information useful to the supply management profession.

The BIR’s basis in denying its application is straight and simple -- the tax exemption of the non-stock, non-profit corporation lacks factual and legal basis. The BIR invoked the principle that tax exemptions should be construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. It should be noted that in the said ruling, the BIR did not elaborate the reason such organization did not qualify in any of the provisions under Section 30 of the Tax Code, as amended.

In RMO 20-2013, the BIR prescribed the criteria/requirements in order that a non-stock, non-profit corporation or association would qualify for tax exemption. Isn’t it reasonable enough if the BIR will identify and discuss in its ruling which of the criteria/requirements in RMO No. 20-2013 the non-stock, non-profit corporation or association fails to meet?

The consequence of the denial of tax exemption is that the net income of these non-stock, non-profit corporations will be subject to the 30% regular income tax rate while the revenue/collection of membership fees will be subject to 12% VAT, as if they are classified as corporations engaged in trade or business or practice of profession.

Imagine how many non-stock, non-profit corporations and associations similarly situated above will have their income tax exemptions denied by the BIR? How much of the net income of such non-stock, non-profit corporations and associations will be taxed at 30% regular income tax rate? How much of the revenue/collection of membership fees will be subjected to 12% VAT? Clearly, this is a new source of tax collection for the BIR. But, we are hoping that the BIR will thoroughly evaluate the operations/activities of the concerned organizations before denying their tax exemption.

Nikkolai F. Canceran

Let’s Talk Tax 

Punongbayan and Araullo