Tighter rules on tax exemption

When it rains, it pours and that’s what non-stock, non-profit corporations or associations, which include nongovernmental organizations, are going through at present.

Recently, several NGOs came under fire for alleged complicity in the misappropriation of billions of pesos worth of pork barrel funds of some congressmen and senators.

The Inquirer’s exposé on this scam underscored the need to tighten the pork barrel system and to closely monitor the activities of the organizations that benefit from what the Catholic Bishop Conference of the Philippines describes as the “discretionary funds” of politicians.

By uncanny coincidence, as the controversy heated up, the Bureau of Internal Revenue issued Revenue Memorandum Order No. 20-2013, dated July 22, 2013, which prescribes the policies and guidelines in the issuance of tax exemption rulings to qualified non-stock, non-profit corporations and associations.

The order seeks to put an end to the misuse and abuse of the tax-exempt privilege that organizations supposedly engaged in missionary activities claim as essential to the accomplishment of their objectives.

If the directive is strictly enforced, many of the corporations or associations, in particular, foundations, that have been given such financial concession are expected to lose that status.

Requirements

Compared to previous years, securing a tax exemption from the BIR under the said order would be like going through a wringer. The applicant (initial or renewal) has to submit eight original or certified copies of documents that prove that its organization falls squarely in the list of entities that may be granted that privilege.

This includes non-stock, non-profit educational institutions, and corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans.

In the case of the latter organizations, it is essential that no part of its income or net asset shall belong to or redound to the benefit of any member, organizer, officer or any specific person.

The toughest of the documentary requirements is a statement under oath of an officer of the organization that contains (a) a description of its past, present and proposed activities; (b) its anticipated receipts and contemplated expenditures; and (c) a detailed description of all the revenues it seeks to exempt from income tax. All other revenues not included in this recital shall be subject to income tax.

Thus, it is critical that the enumeration should be comprehensive, or else those omitted but should otherwise be included in the list would lose tax exempt status, if any.

What’s more, since the statement is under oath, any misrepresentation or inaccuracy in its contents could put the officer in trouble for perjury of false affirmation.

Verification

If you think the documentary requirements are tough, the evaluation process is not any easier.

After making sure the documents submitted meet their prescribed contents, the revenue district officer to whom the application (or renewal) is filed has to determine, among others, that the organization does not operate for the benefit of private interest, such as those of its founder or his family; and does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose.

From these conditions, it is apparent the BIR has wizened up to the practice of some senators and congressmen (or their relatives) of organizing foundations that draw their funds from pork barrel “donations” which ultimately find their way into their own pockets.

In the evaluation process, two tests must be met to earn tax exempt status: organizational, i.e., its documents clearly show that its purpose is to engage in one or more specified social activities; and operational, i.e., its activities are exclusively devoted to the accomplishment of those purposes.

And even if the two tests are met but the organization happens to be a branch of a foreign non-stock, non-profit corporation, no tax exemption will be issued.

The BIR did not give any explanation for the prohibition, but it’s a wise move considering that many of the so-called local branches of foreign charitable organizations are being used as conduits to finance the conduct of activities that have no bearing on their supposed noble social objectives.

Limitations

Under the order, tax exemptions no longer enjoy the character of permanency they once had.

From here on, tax exemption rulings that may be issued shall be valid only for three years from the date of their effectivity, unless earlier revoked or cancelled.

The privilege shall be considered revoked if there are material changes in the character, purpose or method of operation of the organization which are inconsistent with the basis for the exemption. The revocation shall take effect as of the date of the material change.

As presently worded, no notice of revocation based on material change has to be issued by the BIR for the organization concerned to lose its tax exemption. The revocation is considered self-executory, meaning it is triggered when the change happens and its adverse effects could be retroactively suffered if later discovered by the BIR.

Thus, the pressure is on the organization to police itself, or make sure it complies with all the conditions for exemption even without the BIR looking over its shoulder or monitoring its activities.

The organizations that have existing exemption rulings have no reason to think they are better situated than new applicants.

The order states that if they got their exemption before June 30, 2012, the privilege shall be good only until Dec. 31, 2013. If issued after June 30, 2012, the exemption shall remain valid for three years from the date of its issuance, unless sooner revoked or cancelled.

The limited life of tax exemption rulings may look like good news for lawyers or accountants whose services would be needed for their renewal. But considering the Scrooge-like attitude of the BIR on tax exemptions, with hundreds of such requests still pending since the incumbent commissioner took over the BIR, it is doubtful if they have to be reason to be optimistic.

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