Tax Exemptions of Non-Stock Non-Profit Entities

NON-STOCK NON-PROFIT ENTITIES : RMC 67-2012 – issued on October 31, 2012 circularizes the relevant portions of the Supreme Court Decision in GR Nos. 195909 and 195960 dated September 26, 2012, entitled “CIR vs. St. Lukes Medical Center Inc.”.  Based on the SC Decision, activities for profit should not escape the reach of taxation.  Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax.  An institution cannot use its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned.  This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).  Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax.  An institution under Section 30(E) and (G) does not lose its tax exemption if it earns income from its for-profit activities.  Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income.  However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members, and such profits are reinvested pursuant to its corporate purposes.  St.Luke’s, as a proprietary non-profit hospital, is entitled to the preferential rate of 10% on its net income from its for-profit activities.

Bethuel V. Tanupan
CPA-Lawyer, CMA, MM, DipIFRS
Partner, Diaz Murillo Dalupan and Company is a member of HLB International.