Tax Compliance / Tax Guide
– Religious Associations, Corporations and Organizations
Topic Outline
1. Four-Dimensional Elements2. Structure and Administrative Models2.1 The Pastor and Bishop Model (Episcopal)
2.2 The Pastor, Elder and Deacons Model (Pentecostal)
2.3 The Congregational Model
2.4 The Pastor, Council President and Board of Elders Models (Lutheran)
2.5 The Pastor, Deacons and Treasurer Model (Baptist)3. Church Finance3.1 Sources of Funds3.2 Church Finance Committee
3.3 Counting the Money3.4 Protect Church Assets3.5 May generate profits for furtherance of religious purpose4. Freedom of Religion4.1 Religious Corporations may be incorporated by one or more persons4.2 “may be” incorporated4.3 Freedom of religion in the Philippines is guaranteed by the Constitution4.4 Freedom of religion in the Philippines4.4.1 Two-fold Aspect
4.4.2 Freedom to Believe
4.4.3 Freedom to Act on One’s Belief4.5 Applicable Revised Corporation Code (RCC) governing laws4.6 Forms of Religious Organization4.7 Classification of Religious Corporations4.8 Advantages of An Incorporated Church4.9 Disadvantages of An Incorporated Church4.10 Legal Requirements Of The Church To The Sec
2. Operational Test
2. To qualify as Non-Profit exempt from income tax
3. Meaning of “inure”
4. Considered “inurements”
Part 1 – Basic Overview of Financial and Operating Environment of Religious Organizations
Connecting with people in the community
- building relationships with people in their sphere of influence, introducing them to faith in Christ/Equivalent, and connecting them with the church.
Worship gathering
- gather for worship, celebration, fellowship, and teaching of the Word
Spiritual growth
- facilitate the spiritual growth of the believers in the fellowship; discipleship -- indoctrination/foundational doctrines; developing core spiritual disciplines and skills; spiritual transformation journey
Serving
- help every believer in the church find and commit to serving in the church and in the community
- Episcopal Model
- Pentecostal Model
- Congregational Model
- Lutheran Model
- Baptist Model
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Episcopal Model
In the Episcopal model, the pastor, or priest, is the leader of the local congregation. The bishop usually leads a group of pastors.
In this model, the pastor is responsible for conducting worship and overseeing the spiritual side of parish life. The bishop takes responsibility for specific duties that may be beyond what the local pastor can do on his own time and resources, such as:
- Ordaining new priests and deacons
- Serving as a liaison between local churches and other Christian denominations outside their geographical jurisdiction
- Periodically meeting with clergy from within his/her diocese to discuss pastoral care needs
- Conducting confirmations at individual parishes
- Overseeing the distribution of communion to hospitalized membersWith this model, the pastor can focus on church growth strategies and leave the bishop to his religious duties.
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Pentecostal Model
Pentecostals believe that these church leadership structure models are prescribed in Scripture, so they believe they should follow them as closely as possible. For this reason, most Pentecostal churches have three leadership positions.
At the top, there is the pastor. They are the head of the church and are responsible for teaching the Word.
Next, there are the elders. The congregation elects these men to oversee the spiritual needs of a particular local body member.
Following this position are the deacons. The members of a congregation also elect them. They help with the day-to-day operations of the church like those mentioned above.
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Congregational Model
In congregational church leadership structure models, each local congregation is independent and self-governing. In this model, the church itself determines policy, doctrine, and leadership issues.
Structures may vary, but most have some form of elder board or board of deacons to handle administrative duties while the pastor is responsible for preaching and teaching.
In a congregational model, the pastor is hired by the church board or by a vote of the members. The pastor does not have any authority over other churches and represents only himself and his congregation.
This model allows for significant autonomy but leaves it up to the church to determine its leaders and structure. Even though there are many different forms of this model, they all share one thing in common: each church is self-governing, with no outside authority having jurisdiction over them except that granted by its membership.
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Lutheran Model
A Lutheran church is led by three different positions: pastor, council president, and chairman of the board of elders.
The pastor is the spiritual leader of a congregation. They oversee worship services and work closely with members to provide community counseling and other support. At the same time, these pastors also teach in schools connected to their congregations.
The council president leads a higher-level management team, the board of directors. This team sets the congregation's budget, makes personnel decisions, and is responsible for building maintenance.
The chairman of the Board of Elders leads another group that provides spiritual guidance for members and leaders within the congregation.
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Baptist Model
Baptist churches have a fairly simple model of church leadership.
At the top is the pastor, who has ultimate authority and makes final decisions on all matters.
Deacons are appointed by the congregation to provide spiritual guidance and to serve in an advisory capacity. They also handle the business affairs of the church, such as taking care of property maintenance, deciding on budgets, etc.
The treasurer keeps track of money and books, making sure bills get paid on time and collecting tithes and donations from members.
If a church is not registered with the Securities and Exchange Commission, does that imply it is operating illegally?
Is SEC registration necessary for a local church to legally operate and engage in religious activities like evangelism, worship, discipleship, and missions?
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Religious Corporations may be incorporated by one or more persons
Title XIII, Chapter II Section 107, Revised Corporation Code (RCC)
Section 107. Classes of Religious Corporations. - Religious corporations may be incorporated by one (1) or more persons. Such corporations may be classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on nonstock corporations insofar as applicable.
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“may be” incorporated
The provision explicitly uses the term "MAY BE," which, in legal interpretation, signifies discretion rather than a mandatory requirement.
According to our Corporation Code, there is no mandate for religious organizations, groups, or churches to register with the SEC for their operation as a church.
The decision to register lies within the discretion of the church, board of elders, church leaders, or pastor.
In other words, anyone can establish a church in the Philippines without obtaining government permits.
This is due to our constitutional right as Filipino citizens to freely practice and enjoy our religious profession and worship, as stated in Article 3, Section 5 of the Constitution.
IT IS NOT REQUIRED BY LAW FOR THE CHURCH TO EXIST AS A CHURCH.
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Freedom of religion in the Philippines is guaranteed by the Constitution of the Philippines.
Article III Section 5, 1987 Philippine Constitution
No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.
Source: 1987 Philippine Constitution
Freedom of religion in the Philippines
- the Government must uphold
Separation of Church and State
Religious practice shall be forever be allowed, without discrimination or preference. Our government must uphold the Separation of Church and State, refraining from favoring one religion over another. The state should remain impartial and neutral, avoiding preferential treatment for some while disparaging others.
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Two-fold Aspect
Religious worship/exercise has two fold aspect:
(1)THE FREEDOM TO BELIEVE and
THE FREEDOM TO ACT ON ONE’S BELIEF.
TITLE XI
NONSTOCK CORPORATION
Section 86. Definition. - For purposes of this Code and subject to its provisions on dissolution, a nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, That any profit which a nonstock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose of purposes for which the corporation was organized, subject to the provisions of this Title.
The provisions governing the stock corporations, when pertinent, shall be applicable to nonstock corporations except as may be covered by specific provisions of this Title.
Section 87. Purposes. - Nonstock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes. like trade industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of nonstock corporations.
TITLE XIII
SPECIAL CORPORATIONS
CHAPTER II
RELIGIOUS CORPORATIONS
Section 107. Classes of Religious Corporations. - Religious corporations may be incorporated by one (1) or more persons. Such corporations may be classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on nonstock corporations insofar as applicable.
Section 108. Corporation Sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect or church.
Section 109. Articles of Incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any religious denomination, sect or church must file with the Commission articles of incorporation setting forth the following:
(a) That the applicant chief archbishop, bishop, priest. Minister, rabbi, or presiding elder represents the religious denomination, set or church which desires to become a corporation sole;
(b) That the rules, regulations and discipline of the religious denomination, sect or church are consistent with becoming a corporation sole and do not forbid it;
(c) That such chief archbishop, bishop, priest, minister, rabbi or presiding elder is charged with the administration of the temporalities and the management of the affairs, estate and properties of the religious denomination, sect or church within the territorial jurisdiction, so described succinctly in the articles of incorporation;
(d) The manner by which vacancy occurring in the office of chief archbishop, bishop, priest, rabbi or presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church; and
(e) The place where the principals office of the corporation sole is to be established and located, which place must be within the territory of the Philippines.
The articles of incorporation may include any other provisions not contrary to law for the regulation of the affairs of the corporation.
Section 110. Submission of the Articles of Incorporation. - The articles of the incorporation must be verified, bu affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi, presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi, or presiding elder, duly certified to be correct by any notary public.
From and after filing with the Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or manage as such chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall be personally held in trust as a corporation sole, for the use, purpose, exclusive benefit and on behalf of the religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums parsonages, and cemeteries thereof.
Section 111. Acquisition and Alienation of Property. - A corporation sole may purchase and hold real estate and personal property for each church, charitable, benevolent, or educational purposes, and may received bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Regional Trial Court of the province where the property is situated upon proof that the notice of the application for leave to sell or mortgage has been made through publication or as directed by the Court, and that it is in the interest of the corporation that leave to sell or mortgage be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi, or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations, and discipline of the religious denomination, set or church, religious society, or colder concerned represented by such corporation sole regulate the method of acquiring, holding, selling, and mortgaging real estate and personal property, such rules, regulations and discipline shall govern, and the intervention of the courts shall not be necessary.
Section 112. Filling of Vacancies. - The successor in the office of any chief archbishop, bishop, priest, minister, rabbi, or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such upon filing a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public with the Commission.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any donomination, sect or church incorporated as a corporate sole, the person or persons authorized by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate, and properties of the corporation sole shall exercise all the powers and authority of the corporation sole during such vacancy.
Section 113. Dissolution. - A corporation sole may be dissolve and its affairs settled voluntarily by submitting to the Commission a verified declaration of dissolution, setting forth:
(a) The name of the corporation;
(b) The reason of dissolution and winding up;
(c) The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; and
(d) The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.
Section 114. Religious Societies. - Unless forbidden by the competent authority, the Constitution, pertinent, rules, regulations, or discipline of the religious denomination, sect or church of which it is part, any religious society, religious order, diocese, or synod, or district organization of any religious denomination, sect or church, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties, and estate by filing the management of its affairs, properties, and estate by filing with the Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious denomination, sect or church, setting forth the following:
(a) That the religious society or religious order, or diocese, synod, or district organization is a religious organization of religious denomination, sect or church;
(b) That at least two-thirds (2/3) of its membership has given written consent or has voted to incorporate, at a duly convened meeting of the body;
(c) That the incorporation of the religious society or religious order, or diocese, synod, or district organization is not forbidden by competent, authority or by the Constitution, rules, regulations or discipline of the religious denomination, sect or church of which it forms part;
(d) That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate;
(e) The place within the Philippines where the principal office of the corporation is to be established and located; and
(f) The names, nationalities, and residence addresses of the trustees, not less than five (5) no more than fifteen (15), elected by the religious society or religious order, or the diocese, synod or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization.
There are two (2) classes of religious corporation by which it can be organized:
a) Corporation Sole (Sec. 108, RCC)
b) Religious society (Sec. 114, RCC)
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DISTINCTION OF CORPORATION SOLE AND RELIGIOUS SOCIETY
1. NUMBER OF INCORPORATORS
Corporation Sole is incorporated by “one” person only. It is a special form of corporation usually associated with a clergy;
whereas, Religious Society is incorporated by “more” persons.
BOT not BOD
Avoid referring to the members of the board as "Board of Directors" since that term is specific to stock corporations; instead, use "Board of Trustees."
However, in a Religious society, alternative terms such as "Elders," "Regents," "Governors," etc., may be used interchangeably with "trustees."
2. FORMATION
In Corporation Sole – it can be formed by a bishop, minister or presiding elder of the church as one person. The position, property and power of the Corporation sole are handed over to one named successor on death, or retirement or for any other reason;
whereas, the Religious Society – can be formed by an incorporating trustees, not less than 5 but not more than 15 with the written consent of 2/3 of its membership who have voted to incorporate.
3. TRUSTEEship
In Corporation Sole - the administration and management of the affairs, properties and temporalities of any religious denomination or church is governed by the concerned bishop, minister or presiding elder as a TRUSTEE of the church.
In Religious Society – it is governed by the elected board of trustees duly elected by the membership.
There is no board of trustees in Corporation Sole.
1. It can acquire properties under its corporate name.2.It can enter into contracts in the name of the organization such as sale, lease, mortgage, loan, etc.3. It can sue or be sued as an organization. This means that legal action maybe prosecuted and defended in the name of the incorporation not in the name of the bishop, minister or pastor of the church.4. It can maintain bank accounts under its corporate name since banking practice requires submission of Articles of Incorporation and By Laws duly approved by SEC.5. It can issue official receipts when required because only registered corporations, partnership and single proprietorship can be registered with the BIR.6. It is exempted from taxations for donations and real property taxes. Under the Internal Revenue Code, the donor, to claim for exemption, religious corporation must be registered as non-stock and non-profit with the SEC.
Even if leaders die or become incapacitated, a religious corporation persists. Its existence stems from the charter, not the individuals who incorporated it. Leadership changes do not impact its continuity.
- Corporations must comply with legal controls in the Corporation Code, ensuring articles of incorporation and bylaws align with provisions for non-stock corporations and religious societies.
- SEC mandates the submission of annual reports, including the General Information Sheet and Financial Statement. Failure incurs penalties, and persistent non-compliance may result in registration revocation.
- Regularly update your member list at the SEC using the provided red book. Remove inactive members to maintain eligibility for corporation meetings, voting, and officer/trustee elections.
IF THE CHURCH IS OFFICIALLY REGISTERED WITH THE SEC, it must adhere to the following:
1. Submit annual reportorial requirements, including the General Information Sheet and financial statements.
2. Annually update the membership list, reporting new officers and members to the SEC as indicated in the General Information Sheet.
3. Conduct elections in accordance with the By-laws.
4. If the church employs staff, fulfill obligations such as tax withholding and payments to SSS, PHIC and Pagibig.
Part 2 – Characteristics and Nature of Organizations and Corporations Under Section 30, NIRC, as amended, related to Religious Association or Corporation
Item II, E, RMO 38-2019
E. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans, no part of its net income or asset belongs to or inures to the benefit of any member, organizer, officer or any specific person;
Source: RMO 8-2019
a) A non-stock corporation or association
b) Organized and operated exclusively for :
i. religious,
ii. charitable
iii. scientific
iv. athletic, or
v. cultural purposes or
vi. for the rehabilitation of veterans,
c) No part of its net income or asset belongs to or inures to the benefit of any member, organizer, officer or any specific person.
a) Religious purpose - refers to the promotion, propagation and accomplishment of any form or religion, creed or religious belief recognized by the Government of the Republic of the Philippines.
Source. RMO 38-2019
Actual operation: A corporation is exempt from tax on its income if it meets two tests:
(a) It is organized and operated for one or more of the above-specified purposes; and
(b) no part of its net income or assets inures to the benefit of private stockholders or individuals.
Source: RMO 38-2019
Part 3 – Tax Exemption
Section 28 (3), 1987 Philippine Constitution
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(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
SEC. 30, NIRC, as amended. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:
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(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
a. The request for CTE shall be filed with the RDO where the corporation is registered.
The RDO or his designated Revenue Officer of the Day must pre-evaluate the corporation;s submission using the checklist (Annex "A").
- If there is incomplete submission of the documentary requirements, the applicant shall be notified thereof and the entire documents shall be returned to the applicant for his completion.
b. Upon receipt of the complete documentary requirements (docket) in support of the application, the concerned RDO personnel shall pre-evaluate the same and shall determine whether or not the applicant qualifies as an exempt corporation or association under Section 30 of the NIRC, as amended.
i. If based on the pre-evaluation, the RDO is of the position that the corporation or association is qualified, he shall prepare the CTE (Annex "B"), together with a memorandum stating the factual ans legal basis for recommending the issuance of the CTE, and endorse the docket to the Office of the Regional Director. If the Regional Director concurs with the RDO's recommendation, he shall sign the CTE and issue the same to the requesting corporation. Otherwise, he shall return the docket to the RDO together with his findings/instructions.
ii. If the RDO is of the position that the corporation or association does not qualify, he shall notify in writing the applicant of such findings, stating the factual and legal bases for the denial. The applicant may appeal the denial to the Regional Director within thirty (30) days from the date of receipt of the written notice of denial.
If the application for tax exemption/revalidation is denied, the corporation or association shall be held liable for income tax and shall be accordingly assessed for deficiency taxes, inclusive of penalties and interest.
Source: RMO 38-2019
Revenue Memorandum Order No. 38-2019
VII. Validity of Tax Exemption Ruling
A CTE issued under this Order shall be valid for a period of three (3) years from the date of effectivity specified in the Rulings, unless sooner revoked or cancelled. The CTE may be revalidated for another period of three (3) years under the same procedure set forth herein.
The Tax Exemption Ruling shall be deemed revoked if there are material changes in the character, purpose, or method of operation of the corporation or association which are inconsistent with the basis for its income tax exemption. The revocation takes effect as of the date of the material change.
Source: RMO 38-2019
Part 4 – Operational and Organizational Tests in Determining Entitlement to Exemption
The requirements for the grant of tax exemption are specified by the law granting it and such grant is strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the government. Thus, a corporation claiming tax exemption must be able to show clearly that it is organized and operated for the purposes under Section 3o of the NIRC, and that its income is derived pursuant thereto.
Organizational Test: This requires that the corporation or association;s constitutive documents (SEC Registration, Article of Incorporation and By-Laws) must show that its primary purpose/s of incorporation fall under Section 30 of the NIRC.
Operational Test: This requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in Section 3o of the NIRC. A corporation or association fails to meet this test if the corporation has no activities conducted in furtherance of the purpose for which it was organized, of if a substantial part of its operations constitutes "activities conducted for profit".
Source: RMO 38-2019
Part 5 – Non-Profit, Inurement Prohibition
Corporations falling under Section 30 of the NIRC, as amended, must be non-profit. "Non-profit" means that "no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit."
Thus, in order for an entity to qualify as a non-profit corporation exempt from income tax, it must demonstrate that its earnings or assets do not inure to the benefit of any of its trustees, organizers, officers, members or any specific person. It must not be organized or operated for the benefit of private interests such as specific individuals, incorporators or his family, shareholders of the organization, or persons controlled directly or indirectly by such private interests. The organization must serve a public rather than a private purpose.
Source: RMO 38-2019
The following are considered "inurements" of such nature:
- The payment of compesation, salaries or honorarium to its trustees or organizers;
- The payment of exorbitant or unreasonable compensation to its employees;
- The provision of welfare aid and financial assistance to its members. An organization is not exempt from income tax if its principal activity is to receive and manage funds associated with savings or investment programs, including pension or retirement programs. This does not cover a society, order, association, or non-stock corporation under Section 30 (C) of the NIRC providing for the payment of life, sickness, accident and other benefits exclusively to its members or their dependents;
- Donation to any person or entity (except donations made to other entities formed for the purpose/purposes to its own);
- The purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries have an interest; and
- When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members. Its assets must be dedicated to its exempt purpose. Accordingly, its constitutive documents must expressly provide that in the event of dissolution, its assets shall be distributed to one or more entities formed for the purpose/purposes similar to its own, or to the Philippine government for public purpose.
Part 6 – Taxation of Organizations and Corporations Under Section 30, NIRC, as amended, related to Religious Association or Corporation
Churches must register with the Bureau of Internal Revenue (BIR)
BIR Registration for Non-Individual
- Accomplish BIR Form 1903
- Attach Documentary Requirements
Register and Keep Books of Accounts
The National Internal Revenue Code (NIRC) mandates that a Taxpayer (TP) shall keep Books Of Accounts.
Keeping of Books of Accounts
Legal Basis:
Sec.232 (A), NIRC, as amended. Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts. - All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep and use relevant and appropriate set of bookkeeping records duly authorized by the Secretary of Finance wherein all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the year.
Provided, that corporations, companies, partnerships or persons whose gross annual sales, earnings, receipts or output exceed Three Million pesos (P3,000,000), shall have their books of accounts audited and examined yearly by independent Certified Public Accountants and their income tax returns accompanied with a duly accomplished Account Information Form(AIF) which shall contain, among others, information lifted from certified balance sheets, profit and loss statements, schedules listing income-producing properties and the corresponding income therefrom and other relevant statements
Thus, a Taxpayer shall apply and register for Books Of Accounts (BOA) with the Bureau of Internal Revenue (BIR), the only body which has authority over Books Of Accounts
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What Books Of Accounts must be registered with the BIR?
1. Income tax exemption covers only the income derived by the corporation in furtherance of the purposes for which it was organized under Section 30 of the NIRC of 1997.
2. Section 30 corporations are still subject to the corresponding internal revenue taxes imposed under the NIRC of 1997 on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income from bank deposits, gains from investments, rental income from real or personal properties), which income should be reported for taxation purposes.
3. The 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% final withholding tax. Moreover, the interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 15% final withholding tax pursuant to Section 27 (D) (1) in relation to Section 57 (A), both of the NIRC of 1997, as amended.
Source: RMO 38-2019
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INCOME TAX RATES FOR NON-INDIVIDUALS
Withholding Taxes - Sec.58(A), NIRC
- A manner or system of collecting taxes with the end in view of collecting in advance the full amount of tax or at least the approximate tax due from the payee on certain income payments
- The amount withheld is a special trust fund in trust for the government until paid or remitted by WA to BIR
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1. The tax exemption granted under Section 30 of the NIRC of 1997 does not cover withholding taxes on compensation income of the employees of the corporation, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the NIRC of 1997. The corporation or association is therefore constituted as a withholding agent for the government if it acts as an employer and any of its employees receives compensation income subject to withholding tax under Section 79(A), Chapter XIII, Title II of the NIRC of 1997, as implemented by Revenue Regulations No. 2-98, or if it makes income payments to individuals or corporations subject to the withholding tax provided for in Section 57 of the NIRC of 1997, also, as implemented by Revenue Regulations No. 2-98, as amended.
Source: RMO 38-2019
1. Purchase of goods or properties or services and importation of goods by a corporation organized and operated as a Section 30 corporation shall be subject to the 12% VAT pursuant to Section 107 of the NIRC of 1997, as amended.
It should be noted that VAT is an indirect tax payable by the seller not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessess of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the NIRC of 1997 to avoid the passing or on shifting of the VAT.
2. Section 105 of the NIRC of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed under Sections 106 to 108 of the same code.
The phrase " in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells its good exclusively to members or its guests), or government entity.
Hence, if the corporation is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, its revenues derived therefrom shall be subject to the 12% VAT, in case the gross receipts from such sales exceed Three Million Pesos (₱3,000,000.00), or to the 3% percentage tax, if gross receipts do not exceed ₱3,000,000.00.
(H) Charitable and Other Contributions. –
(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net [48] income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full:
(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. -The term 'nongovernment organization' means a non-profit domestic corporation:
(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net [49] income of which inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.
An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
Source: Section 34 H, NIRC
SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. [83]–
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. [4]
(B) In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines. –
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
(C)Tax Credit for Donor's Taxes Paid to a Foreign Country.–
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each
of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts.