RMO No. 38-2019: Clarifies the Tax Exemption of Non-Stock, Non-Profit Corporations under Section 30 of the National Internal Revenue Code of 1997, as Amended

Summary

RMO No. 38-2019 clarifies the nature and tax treatment of organizations and corporations under Section 30 of the NIRC, which are not taxed under Title II on income received as such. It also devolves issuance of Certificates of Tax Exemption (CTEs) to the Revenue Regions.

Key points

1. Organizations covered. Section 30 covers eleven kinds of entities, including labor, agricultural or horticultural organizations, mutual savings and cooperative banks, beneficiary societies, company-owned cemeteries, and non-stock religious, charitable, scientific, athletic or cultural corporations. It also covers business leagues, civic leagues, non-stock non-profit and government educational institutions, certain mutual local companies, and farmers’ marketing associations.
2. Tests for exemption. The corporation must show it is organized and operated for Section 30 purposes. The Organizational Test looks at the constitutive documents, and the Operational Test requires regular activities exclusively devoted to those purposes, and fails if a substantial part is activities conducted for profit.
3. No inurement. Earnings or assets must not benefit trustees, organizers, officers, members or any specific person. Listed inurements include salaries to trustees or organizers, exorbitant compensation, donations to anyone except entities with similar purposes, above-market purchases from entities in which officers have an interest, and distributing assets to insiders on dissolution.
4. Taxes still due. The exemption covers only income in furtherance of the organization’s purposes. Income from properties or activities conducted for profit remains taxable, interest income from currency bank deposits and royalties are subject to 20% Final Withholding Tax, and interest under the expanded foreign currency deposit system is subject to 15%.
5. Withholding and VAT. The exemption does not cover withholding taxes on employees’ compensation or on income payments subject to Section 57, so the organization acts as a withholding agent. Purchases and importations are subject to 12% VAT, and sales in the course of trade or business are subject to 12% VAT if gross receipts exceed Three Million Pesos (P3,000,000.00), or 3% Percentage Tax if they do not exceed P3,000,000.00.
6. Certificates of Tax Exemption. A CTE is valid for three (3) years from the effectivity date in the Ruling, unless sooner revoked or cancelled, and may be revalidated for another three (3) years. The ruling is deemed revoked on material changes in character, purpose or method of operation, and Regional Directors submit a Quarterly Summary Report to the Assistant Commissioner, Legal Service on or before the 20th day of the month after each quarter.

Who is affected

• Section 30 non-stock, non-profit corporations and organizations
• Regional Directors

Deadlines and effectivity

• CTE valid for three (3) years, revalidated for another three (3) years
• Quarterly Summary Report on or before the 20th day of the month following quarter end

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.