Tax Articles

Revisiting Section 30 of NIRC - Tax Exemption

By: Atty. Kara Louisse B. Eramis

Taxes are considered the lifeblood of the government. Without taxes, the government would not be able to carry out its functions and achieve its purpose. However, despite the importance collecting taxes, our government also provides assistance to the public by giving some sort of incentives, such as exempting some entities from the payment of taxes.

Section 30 of the National Internal Revenue Code, as amended, provides a list of 11 organizations/entities that are granted exemption from payment of income taxes. Being nonstock nonprofit corporations, these organizations basically have nothing to subject to income taxes, since they have no income to speak of. That’s because funds these corporations receive are primarily coming from donations or grants.

However, these entities cannot also avoid investing the funds they receive in other businesses. The question now is, are these funds flowing from other sources, other than from activities within the purpose of their establishment, within the contemplation of income subject to tax?

Revenue Memorandum Order (RMO) 38-2019 was issued to clarify the nature, character and tax treatment of corporations under Section 30. This is in support to Revenue Memorandum Circular 64-16, which already provides for the clarifications on the nature and tax treatment of corporations and associations. These issuances made clear what organizations/corporations would fall under the exemption of Section 30. Basically, it answers the questions on whether the organization is exempt from income tax or not.

Exemption from the payment of taxes means a diminution of the collection of funds by the government. Hence, this is generally construed against the taxpayer. The latter has the burden to prove that it is entitled to the exemption.

The Memorandum Order provides for a test that would guide the tax authorities to determine what organization would fall under such provision. First, the organization must show in its documents that its primary purpose of incorporation falls under Sec. 30 (Organizational Test); and Second, that its regular activities be devoted exclusively to the accomplishment of the purposes specified in Section 30 (Operational Test).

Further, it made also clear that the income tax exemption is not absolute, though this could already be gleaned from the last paragraph of Section 30, which states that income of whatever kind and character of such organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition shall be subject to income tax. Therefore, interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement, and royalties derived from sources within the Philippines of organizations under Section 30 are subject to the 20 percent final withholding tax.

Moreover, Section 30 is specific and covered under Title II of the Tax Code, entitled “Taxes on Income”, hence the exemption provided under such provision pertains only to income tax. Thus, any purchase of goods or properties or services and importation of goods by a corporation organized and operated under Section 30 may be subjected to VAT. The latter being an indirect tax, it can be passed on to the purchaser of the goods, properties or services.

Note that this memorandum order is applicable to all organizations/corporations under Section 30, except corporations established under paragraph (H), which is governed by another issuance (RMO 44-16).

It is worthy to note that under this memorandum order, it transferred to the Revenue Regions the issuance of Certificate of Tax Exemptions.

Thus, with the interpretations made under this issuance, we hope that this clarifies some of the nonstock, nonprofit corporations’ questions as to their tax exemption and applicability. In the end, these types of corporations and organizations were established to help the country’s socioeconomic development, which in the end will benefit not only the corporation/organization itself, but also the government.