The Bureau of Internal Revenue has issued another set of new rules imposing the additional requirements on the exempt status taxpayers for strict implementation of Non-stock and Not-for-Profit corporations and associations. In its goal to increase tax collections, the Revenue Memorandum Order (RMO) 20-2013 has been passed to regulate taxpayers who were previously granted and will be granted tax exemption.
Objective of RMO 20-2013
- Ensure compliance with the conditions attached to the tax exemption
- Ascertain the existence of other income derived from non-exempt activities and provide proper tax treatment thereon
- Enforce the payment of other taxes for which no exemption was granted under Philippine tax laws (e.g., withholding taxes, fringe benefits tax, and documentary stamp tax)
- Minimize tax leakages arising from inaccurate interpretation of relevant tax laws and administrative issuances
NEW RULE: Revalidation of tax exemption certificates and application for confirmatory BIR rulings
Tax Exemption Certificates issued prior to June 30, 2013 are only VALID up until December 31, 2013. Hence, all non-stock, not-for-profit organizations with an old tax exemption certificate needs to comply on the new ruling of tax exemption, otherwise, they will lose their exempt status on the start of the year 2014.
NEW RULE: Three (3) Years Validity of the Tax Exemption Status from the date of issuance
A Tax Exempt Status being granted by the Bureau shall be valid for a period of three (3) years from the date of effectivity as specified in the RMO 20-2013 ruling, unless sooner revoked or cancelled. The 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. The revocation takes effect as of the date of the material change.
- Original copy of application letter for issuance of Tax Exemption Ruling. The letter shall cite the particular paragraph of Section 30 of the NIRC, as amended, under which the application for exemption/revalidation is being based;
- Certified true copy of the latest Articles of Incorporation and By-Laws issued by the Securities and Exchange Commission;
- Original copy of Certification under Oath by an executive officer of the corporation or association as to: (i) all previous amendments/changes in the Articles of Incorporation and By-Laws, (ii) manner of activities, and (iii) the sources and disposition of income, if any, of the subject corporation or association. If there are no amendments/changes, the Certification shall state this fact;
- Certified true copy of the Certificate of Registration with the BIR;
- Original copy of the Certification under Oath by the Treasurer of the corporation or association as to the amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers. Provided, that, a corporation sole, which, by its nature, does not have trustees, corporate officers or executive officers need not submit the certification required under this subparagraph.
- Original copy of the Certification issued by the RDO where the corporation or association is registered that the corporation or association is not the subject of any pending investigation, on-going audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; or if thereby be any, the Original copy of the Certification issued by the RDO on the status thereof;
- Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation or association for the last three (3) years; and
- Original copy of a statement under Oath by an executive officer of the corporation or association as to its modus operandi which shall include:
i. A full description of the past, present, and proposed activities of the corporation or association;
ii. A narrative description of anticipated receipts and contemplated expenditures; and
iii. A detailed description of all revenues which it seeks to be exempted from income tax. All other revenues which are not included in the statement/ application shall be subject to income tax.
There are also additional documentary requirements for Educational Institutions as prescribed by the RMO 20-2013.
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.
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 grant of tax exemption is 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. 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.
Feedbacks 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.
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).