Due to observed substantial revenue losses relating to non-implementation of taxes to non-stock, non-profit organizations and the common perception that all corporations registered as such under Securities and Exchange Commission are automatically exempted from paying taxes, BIR issued Revenue Memorandum Circular (RMC) 64-2016 –Clarifications in Nature, Tax Treatment, Registration and Compliance Requirements of Non-Stock, Non-Profit Organizations.
BIR reiterated that it is the corporation’s regular activities, not its registration as nonprofit entity that entitles it to tax exemption. This is to emphasize that it is expressly stated on the last paragraph of Section 30 of the National Internal Revenue Code that all income derived from their properties or activities conducted for the purpose of gaining profit shall be subject to tax.
The following are the basis of qualifications for non-stock, non-profit corporations/institutions/organizations:
Characteristics and nature of organizations and corporations
- Labor, agricultural and horticultural organizations must carry out activities primarily for improvement on the working condition of its members and production techniques and for increased efficiency in their respective occupations.
- Mutual savings and cooperative banks shall not have capital stocks represented by shares and shall be operated for mutual purposes and without profit.
- Beneficiary societies or associations such as fraternal organizations shall operate exclusively for the benefit of its members and should have a established system of benefit payments to its members and their dependents.
- Cemetery company shall be operated for burial purposes and not permitted by its charter to engage in any business not necessarily incident to its purpose.
- Non-stock corporations that are organized and operated for religious, charitable, scientific, athletic, cultural and rehabilitation purposes.
- Business leagues, chamber of commerce or board of trade shall be directed to the improvement of business conditions and should not engage in regular for-profit business.
- Civic league or organizations must provide regular activities exclusively for promotion of social welfare.
- Non-stock, non-profit organization institutions recognized by DepEd, CHED, TESDA shall have a regular curriculum, faculty and enrolled student. The institutions’ canteens and bookstores are considered ancillary services, shall also be exempt from tax provided they are owned and operated by the educational institution and located within its premises.
- Government educational institutions established by law or a LGU shall be administered and financially subsidized by the government and governed by Board of Trustees/Regents.
- Other mutual/insurance companies shall be owned directly by its members and shall use their income solely to cover losses and expenses with any excess being returned to member or retained to cover future losses and expenses.
- Associations organized and operated as sales agent for the purpose of marketing the products of its members, and turning back to them the proceeds of sales, less the necessary selling expenses, should return to the members the proceeds of sales after deducting the necessary selling expenses, on a proportionate basis.
Use of operational and organization tests
- Organizational test. this requires that the corporation or association’s constitutive documents exclusively limit its primary purpose/s to those described as non-profit.
- Operational test – it requires that the regular activities of the corporation or association be exclusively devoted to the accomplishments of the purposes stated on the characteristics above. A corporation or corporation fails to meet this test if a substantial part of its operations may be considered “activities conducted for profit”.
Non-Profit Inurement Prohibition
The circular also restates that to qualify for tax exemption, the non-stock and non-profit corporation’s net income or assets shall not inure to the benefit of any member, private individual or stockholder. Inurement includes payment of compensation or honorarium to its trustees.
This is to clarify that these qualified NSOs and NPOs are only exempted from income tax and is still subject to other internal revenue taxes such as withholding tax,
Qualified Donee Institutions
- Non-profit educational and/or charitable religious, cultural or social welfare corporations
- Accredited non-government, philanthropic and research organizations
- Provided, not more than 30% of the donations shall be used by the donees for administration purposes.