TOP OF MIND: YOU GET WHAT YOU GIVE

Several researches have shown that being charitable benefits not only the receiver but also the giver.
Aside from the proven emotional and health benefits, charity has a tangible tax benefit. In fact, no less
than the Philippine Constitution rewards charity by giving tax exemption to real properties of charitable
institutions which are actually, directly, and exclusively used for such purpose. In addition, Section 34 of
the NIRC allows contributions to charitable institutions as a deduction from gross income. Probably the
most rewarding provision of all is that provided in Section 30 of the NIRC exempting charitable
institutions from income tax.
Thus, Revenue Memorandum Circular (RMC) No. 4-2013 received a vehement opposition from the
covered institutions saying that the BIR has gone too far. The said Circular not only requires proprietary
non-profit hospitals to submit a request for revalidation of their tax-exempt status but also invalidates
all rulings issued prior to November 1, 2012 granting them tax exemption. The Bureau of Internal
Revenue (BIR), however, justifies the circular invoking the ruling by the Supreme Court in the case of
Commissioner of Internal Revenue v. St. Lukes Medical Center.
In the said case, St. Lukes Medical Center which enjoyed tax exemption under Section 30(E) of the NIRC
was required to pay income taxes on services rendered to paying patients as these were considered as
activities conducted for profit.
The Supreme Court said that with the introduction of Section 27(B) in the 1997 National Internal
Revenue Code (NIRC) proprietary non-profit educational institutions and proprietary non-profit hospitals
will be subject to the 10% preferential rate instead of the ordinary 30% corporate rate under the last
paragraph of Section 30.
The Court explained that proprietary means private and non-profit means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institutions purposes and all its activities conducted not for profit. However, the Court clarified that
non-profit does not necessarily mean charitable. It adopted the definition of charity in the Lung
Center of the Philippines v. Quezon City case as a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion by assisting them to establish themselves in life of otherwise lessening
the burden of government.
A charitable institution is not automatically entitled to a tax exemption. The Court declared that under
Section 30(e) of the NIRC a charitable institution must be: (1) a non-stock corporation or association; (2)
organized exclusively for charitable purposes; (3) operated exclusively for charitable purposes; and (4)
no part of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer of any specific person. The organization of the institution refers to its corporate form while
operation refers to its regular activities. To be exempt from income taxes, both the organization and
the operation of the institution must be exclusively for charitable purposes. Therefore, the Court
concluded that if a tax exempt charitable institution conducts any activity for profit, such activity is not
tax exempt even as its not-for-profit activities remain tax exempt.
In light of this ruling, the BIR, through RMC No. 4-2013 now requires all hospitals and non-stock, non-
profit organizations operating hospitals to submit a request for revalidation accompanied by (a)a letter
application seeking tax exemption under a specific paragraph of Section 30 of the NIRC; (b) copies of the
latest Articles of Incorporation and By-laws duly certified by the SEC; (c) Certificate of Registration with
the BIR; (d) Tax Clearance issued by the Revenue District Office where the corporation is registered; (e)
Copies of Income Tax Returns or Annual Information Returns and Financial Statements for the last three
years; and (f) a statement of its modus operandi stating therein its sources of revenues.
The request shall be submitted to the Revenue District Office where the organization is registered which
shall determine whether the organization qualifies as an exempt corporation under Section 30 of the
NIRC. If the RDO finds that the organization is qualified to be tax-exempt, it shall forward its
recommendation to the Office of the Regional Director for review. If The Regional Director agrees with
the recommendation, the same shall be forwarded to the Office of the Assistant Commissioner, Legal
Division, which will conduct further review and if in order, shall prepare the appropriate Certificate of
Tax Exemption for signature of the Commissioner or her duly authorized representative.
This Circular is intended to address the substantial loss of income and value-added taxes from these
sources and to avoid the abuse of the tax exemption privileges by these hospitals.