It is the activities of a non-stock, nonprofit corporation that entitle it to a tax exemption.

In a move to clarify the nature, character, and tax treatment of corporations under Section 30 of the Tax
Code, the Commissioner of Internal Revenue (CIR) issued Revenue Memorandum Order (RMO) No. 38-
2019 containing the new guidelines for the processing and issuance of Certificates of Exemption (CTE).

The RMO is a reiteration of Revenue Memorandum Circular (RMC) No. 64-2016, which provides
parameters on which entities fall within the ambit of the so-called “Section 30 corporations,” i.e., tax-
exempt corporations.

Section 30 corporations include (1) labor, agriculture or horticultural organizations not organized
principally for profit; (2) mutual savings banks not having capital stock represented by shares, and
cooperative banks without capital stock organized and operated for mutual purposes and without profit;
(3) beneficiary society orders or associations, operating for the exclusive benefit of the members; (4)
cemetery company, owned and operated exclusively for the benefit of its members; (5) non-stock
corporations or associations operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans; (6) business leagues, chambers of commerce, boards of
trade not organized for profit; (7) civic leagues or those organized exclusively for the promotion of social
welfare; (8) non-stock and nonprofit educational institutions; (9) government educational institutions;
(10) farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation
companies, mutual or cooperative telephone companies, or like organizations of a purely local
character; (11) as well as farmers’, fruit growers’ associations operated as a sales agent for the purpose
of marketing the products of its members.

The RMO shall apply to all tax-exempt corporations listed above except for non-stock and nonprofit
educational institutions which are covered separately by RMC 44-2016.

Mere registration with the Securities and Exchange Commission (SEC) as a non-stock, nonprofit
corporation does not automatically entitle an entity to the tax exemption. It is a corporation’s activities
that determine the true nature of the organization and its taxability or exemption from taxes.

Thus, to determine whether a corporation qualifies for income tax exemption under Section 30 of the
Tax Code, the BIR provided two determinative tests: (1) organizational test; and (2) operational test.

The organizational test requires that the corporation’s constitutive documents (i.e., SEC registration,
Articles of Incorporation (AOI), and By-Laws) show that its primary purpose(s) falls under Section 30 of
the Tax Code. The operational test, on the other hand, requires that the regular activities of the
corporation be exclusively devoted to the furtherance of such primary purpose.

Further, the earnings of a Section 30 corporation that chiefly come from donations, grants, or
contributions should not inure to the benefit of its trustees, organizers, officers, members, or any
specific person. As such, the RMO listed certain payments to individuals that would be considered as
inurement prohibitions.
However, realistically, Section 30 corporations need other sources of income to survive and continue
serving their purpose. Thus, in concurrence with the law, the RMO recognizes that these corporations
are allowed to engage in activities conducted for profit without losing their tax exemption.

The RMO reiterated that the tax exemption granted to Section 30 corporations is not absolute as it
covers only the income received by corporations in furtherance of the purpose for which they were
established; hence, income of whatever kind and character from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition is subject to
tax.

Thus, interest income from bank deposits, gains from investments, rental income from real or personal
properties shall be subject to income tax. Consequently, Section 30 corporations are required to file
quarterly and annual income tax returns to report such other income.

Furthermore, the exemption shall only be limited to income tax. It therefore excludes withholding tax,
value-added tax, or percentage tax. Thus, Section 30 corporations have the responsibility to withhold
taxes on the compensation income of their employees, and on the payments to individuals or
corporations subject to tax. Likewise, their purchases of goods, properties, or services, and importations
shall be subject to the 12% VAT. As an indirect tax, it can be passed on to the purchaser.

Section 30 corporations who availing of the tax exemption are required to secure a Certificate of Tax
Exemption (CTE) or a tax exemption ruling. A CTE shall be valid for three years from the date of its
effectivity, unless sooner revoked or canceled. However, it may be renewed or revalidated for another
three years.

Nonetheless, to ease the process, the securing of CTEs has now been simplified under the RMO. The
request is filed with the Revenue District Office (RDO) where the corporation is registered, and the CTE
is subsequently issued by the Revenue Region.

However, the RMO remains silent on how the CTE requirements apply to new Section 30 corporations.
Specifically, since two of the mandatory requirements are the Income Tax Returns or Annual
Information Returns and Financial Statements of the corporation for the last three years, a new
company will not be able to provide such documentary requirements. In that case, would the AoI and
By-Laws be sufficient documents for them to secure a CTE and consequently, be qualified for tax
exemption for the next three years? At the end of the day, a Section 30 Corporation does not lose its
character as such, and its consequent exemption from taxation merely because it cannot submit certain
documentary requirements.

While the BIR merely seeks to ensure that only qualified taxpayers are rightfully availing of the
exemption, and safeguard against tax evasion and abuse of exemptions, it may be worthwhile to
consider that the tax exemption granted to corporations under Section 30 of the Tax Code is to
compensate them for the services they render to benefit the public. Thus, one would hope that more
leniency and flexibility is afforded to them as long as they comply substantially with the requirements of
the law.
The views or opinions expressed in this article are solely those of the author and do not necessarily
represent those of Isla Lipana & Co. The content is for general information purposes only and should not
be used as a substitute for specific advice.