Tax Exemptions for Non-Stock & Non-Profit Corporations
The amended section 30 of the National Internal Revenue Code of 1997 (NIRC) lists the corporations and associations that are exempt from income tax, except those whose income was earned from activities conducted for profit. This was nicely explained by Atty. Filamer D. Miguel of Business Mirror.
Secure a confirmatory Bureau of Internal Revenue (BIR) ruling or a certificate of tax exemption before appealing any tax exemption and its benefits availed of.
Guidelines for tax exemption of corporations or associations listed under Section 30 of the National Internal Revenue Code of 1997 (NIRC). Revenue Memorandum Order (RMO) 20-2013, issued by the BIR on July 22, which specifically prescribes the new policies and guidelines in issuing tax-exemption rulings for qualified non-stock, non-profit corporations and associations, whether as first-time applicants or for re-validation.
Pursuant to this Revenue Memorandum Order (RMO), tax-exemption rulings or certificates issued to corporations or associations prior to June 30, 2012, shall be valid until December 31, 2013. Those issued after June 30, 2012, will continue to be valid for three years from the date of issuance, unless revoked or canceled earlier.
Under Section 2 of the RMO, applications for tax exemption/re-validation must be filed with Revenue District Office (RDO) where concerned corporation or association is registered, before it is forwarded to legal services of the national office for second review and elevated to BIR commissioner for signature.
- Sections 3 and 4 pertain to the documentary requirements.
- Section 8 discusses the procedures to be followed.
- Section 5 – RDO concerned shall verify whether the corporation or association falls under any of the organizations listed under Section 30 of the NIRC by examining its articles of incorporation, by-laws and other constitutive documents: modus operandi, financial statements/other relevant documents; and sources of revenues, and other transactions to determine which are taxable and non-taxable.
In addition, RDO will check if there are stop-filer or accounts-receivable cases and verify whether the corporation or association is subject of any pending administrative, judicial or quasi-judicial proceeding that may warrant a denial of the application for tax exemption/re-validation.
In order for tax-exemption ruling/re-validation to be issued, guidelines in Section 6 must be complied with by the applicant. These are:
- It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans.
- It needs to meet the organizational test, requiring the corporation or association’s constitutive documents exclusively limit its purposes to one or more of those described in paragraph E of Section 30 of the NIRC; The operational test mandates that the regular activities of the corporation or association be exclusively devoted to accomplishment of purposes specified in paragraph E of Section 30 of the NIRC.
- All net income or assets of the corporation or association must be devoted to its purpose/s, and no part of its net income or asset accrues to or benefits any member or specific person. Any profit must be plowed back and must be devoted or used altogether for the furtherance of the purpose for which the corporation or association was organized.
- It must not be a branch of a foreign non-stock, nonprofit corporation.
- It is significant to note that if a corporation or association has been issued a tax-exemption ruling fails to file its annual information return, it automatically lose its income tax-exempt status beginning the taxable year for which it failed to file that return, in addition to the sanctions imposed under Section 250 of the NIRC.
- Compliance with the above requirements and new guidelines introduced by RMO 20-2013 is a must. In view of the deadline set, affected taxpayers must secure the necessary ruling/re-validation at the soonest possible time. Otherwise, the entitlement to the benefits of tax exemption may be lost.
Christopher Lim, CFC, CIS, CRB, CWM, PMP, RFP
He is a Financial Coach, Investment Adviser and Resource Speaker on Personal Finance, Mutual Funds, Stocks, Estate Planning, and Real Estate.