BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday.

Tax-exemption rulings for nonstock, nonprofit corporations

THIS article is intended to update, as well as supplement, the previous one I have written
on the subject, titled 2013 Tax-exemption Guidelines for Nonstock, Nonprofit Corporations and
published here on August 1, 2013. In that article, I discussed the then-prevailing policies and
guidelines that were embodied in Revenue Memorandum Order (RMO) 20-2013.

Just last week the Bureau of Internal Revenue (BIR) issued RMO 34-2014, which basically
amends certain provisions of RMO 20-2013 and RMO 28-2013. This new RMO is a clarificatory
issuance meant to address and rectify the common mistakes of applicants, as well as the
problems encountered by the BIR in handling various requests for rulings filed by nonstock,
nonprofit corporations that want to avail themselves of the tax exemption provided for by law
and implementing rules and regulations.

As to the nature of the applications filed, RMO 34-2014 emphasized and explained that tax-ex-
emption rulings neither confer nor abrogate exemptions granted by law. On the contrary, they
only seek to confirm or validate whether the conditions set by law for the granting of a tax
exemption are present in each case. Likewise, the BIR aims to determine whether the nonstock,
nonprofit corporation or association is earning any income from activity conducted for profit and,
thus, taxable, pursuant to the last paragraph of Section 30 of the Tax Code of 1997, as
amended.

The previous rule under RMO 20- 2013 was that tax-exemption rulings or certificates issued to
corporations or associations prior to June 30, 2012, shall be valid until December 31, 2013,
while those issued after June 30, 2012, shall continue to be valid for three years from the date
of issuance, unless revoked or canceled earlier than that.

This was clarified under the new RMO, which declares that the absence of a valid, current and
subsisting tax-exemption ruling will not move to divest qualified entities of the tax exemption
provided under the 1987 Philippine Constitution or Section 30 of the Tax Code of 1997, as
amended. However, as a caveat, those who fail to secure such tax-exemption rulings will have
to prove that they have complied with the conditions set forth in the law for tax exemption during
the tax investigation.

Further, it must be recalled that grounds for the revocation of tax-exemption rulings were laid
down under RMO 20-2013. These are:

1) If there are material changes in the character, purpose or method of operation of the
corporation or association that is inconsistent with its tax-exempt status.

2) If the tax-exemption ruling has expired.

3) If there is failure to file the annual information return.

Further, RMO 28-2013 expressly states that failure to renew the tax-exemption ruling shall be
deemed a revocation thereof upon the expiration of the three-year period.

In RMO 34-2014, it was clarified that nonstock, nonprofit entities that fail to renew their tax-
exemption ruling may file their applications with the revenue district office they registered in, and
these shall be treated as a new application. Because of that, the previous tax-exemption ruling
need not be presented.

Notwithstanding such leeway, nonstock, nonprofit entities that fail to present their valid, current
and subsisting tax-exemption rulings to their withholding agents, as required by RMC 08-2014,
will make them liable for withholding taxes on their corresponding transactions, subject to
withholding. Likewise, if the withholding agents fail to withhold, then they will be liable for the
applicable penalties.

Among the salient features of RMO 34-2014, the most notable is that it now allows umbrella or-
ganizations or confederations to file applications for tax-exemption rulings on behalf of any of its
member-entities. These organizations or confederations only need to submit the appropriate
board resolution authorizing them to file such an application, as well as the other documentary
requirements necessary for that application, as provided by RMO 20-2013.

With these favorable developments, it is of utmost importance that all qualified nonstock,
nonprofit corporations and associations continue to be updated and compliant.

****
The author is a senior associate of Du-Baladad and Associates Law Offices, a member-firm of
the World Tax Services Alliance.

The article is for general information only, and is neither intended nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should be, therefore, supported by a professional
study or advice. For comments or questions about the article, e-mail the author at
filamer.miguel@bdblaw.com.ph or call (632) 403-2001, local 360.