The Inurement Prohibition

“Taxation is the rule and exemption is the exception.” This basic principle in taxation law has been sustained in a number of decided cases by no less than our Supreme Court. The highest tribunal has consistently held that the law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.

Amongst these tax exemptions is the exemption from income tax mentioned under Section 30 of the Tax Code granted to non-stock and/or non-profit corporations/ associations/ organizations. On June 6, 2014, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 51-2014 (RMC).

The RMC, citing Section 27 of the Corporation Code, defines a “non-stock” corporation to mean that no part of its income is distributable to its members, trustees, or officers, and that any profit obtained as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which it was organized. Meanwhile, citing CIR v. St. Luke’s Medical Center, Inc. dated Sept. 26, 2012, a “non-profit” corporation 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. A common requisite, therefore, in order for an entity to qualify as a non-stock and/or non-profit corporation/ association/ organization exempt from income tax under Section 30, is that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person; thus, the “Inurement Prohibition”.

Compliance with the Inurement Prohibition is critical in determining whether a corporation is exempt from income tax under Section 30. The RMC lays down several instances which it considers as violations of the said pre-condition: “1) The payment of compensation, salaries, or honorarium to trustees or organizers. 2) The payment of exorbitant or unreasonable compensation to employees. 3) The provision of welfare aid and financial assistance to 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. 4) Donation to any person or entity ( except donations made to entities formed for purpose/ purposes similar to its own. 5) 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 has an interest thereto. 6) 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.” Performance of any of the foregoing will bar a claim of exemption under Section 30.

Time and again, our tax authorities have declared that taxes are necessary to enable the government to carry out its functions and to achieve its mandate in promoting the general welfare and maintaining a civilized society. It is for this reason why statutes allowing tax exemptions are interpreted strictly against the grantee and liberally in favor of the government. At this point where the BIR has been exhibiting enthusiasm in performing its functions, this strict interpretation is very well implemented as it should be. Since the RMC has now further clarified the inurement prohibition under Section 30 of the tax code, corporations seeking relief beneath this cloak of exemption should therefore ensure to clearly prove that no earnings or assets inure to, or benefit any of their trustees, organizers, officers, members or any specific person; otherwise, tax authorities might just enforce the basic tax principle: “Taxation is the rule and exemption is the exception.”

Roniel D. Muñoz is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. –Roniel D. Muñoz (The Philippine Star)

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.

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