In
the Philippines, not-for-profit organizations (hereinafter "NPOs")
are typically organized as "non-stock corporations"
registered under the Corporation Code. Non-stock corporations can be
formed for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or
similar purposes, such as trade, industry, agricultural and like
chambers, or any combination thereof (Section 88, Corporation Code).
In
turn, the tax laws provide additional benefits to two categories of
non-stock corporations: accredited "non-stock, non-profit
corporations or organizations" (hereinafter "non-stock,
non-profit corporations") and accredited "non-governmental
organizations" (hereinafter "NGOs").
Among
other requirements, accredited
non-stock, non-profit corporations must be organized exclusively for
one or more of the following purposes: religious, charitable,
scientific, athletic, social welfare, cultural purposes, or the
rehabilitation of veterans (Section 1(a), Revenue Regulation No.
13-98).
Accredited
NGOs must be organized and operated exclusively for one or more of
the following purposes: scientific, research, educational,
character-building, youth and sports development, health, social
welfare, cultural, or charitable purposes (Section 1(b), Revenue
Regulation No. 13-98).
Other
not-for-profit forms not generally discussed in this Note due to
their limited interaction with foreign grantmakers include:
unregistered NPOs, labor unions, trade unions, mutual savings banks,
cooperatives, and entities established or governed by special
laws.[1] This Note also excludes "mutual
benefit associations" which, under Philippine law, are
insurance companies and are explicitly precluded from assuming the
character of a "charitable or benevolent organization"
(Chapter VII, Title I, Insurance Code).
B.
Tax Laws
Exemption
from income tax is extended to a broad range of organizational forms,
including:
Non-stock corporations
organized exclusively for religious, charitable, scientific,
athletic or cultural purposes, or for the rehabilitation of
veterans;
Civic leagues or
organizations operated exclusively for the promotion of social
welfare; and
Each
of these entities is exempt from income tax on donations, grants, and
gifts, provided that the organization's net income does not inure to
the benefit of any private shareholder or individual. Profits
generated from business activities are taxed, regardless of the
disposition of the income (Section 30, Tax Code).
An
NPO may seek additional tax benefits by becoming an accredited
non-stock, non-profit corporation or an accredited NGO (together,
hereinafter "accredited NPOs"). This certification
vests the organization with donee institution status, which entitles
it to receive tax-deductible donations.[2]
In
the case of an accredited non-stock, non-profit corporation,
donations are deductible up to 5% of taxable income for corporate
donors and 10% for individual donors (Section 3(a), Revenue
Regulation No.13-98). For this purpose, "income"
refers to the donor’s income derived from trade, business or
profession as computed without the benefit of this deduction (Section
3(a), Revenue Regulation No.13-98).
In
the case of an accredited NGO, donations are deductible in full,
subject to additional restrictions (Section 3(b), Revenue Regulation
No. 13-98). For example, in order to qualify to receive fully
deductible donations, an accredited NGO cannot devote more than 30%
of its total expenses for the taxable year to administrative expenses
(Section 1(b)(ii), Revenue Regulation No. 13-98).
SEC Memorandum
Circular No. 2, series of 2006; and
SEC Memorandum
Circular No. 8, series of 2006.
III.
Relevant Legal Forms
A.
General Legal Forms
Under
the Corporation Code, a non-stock corporation may be formed or
organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civil service, or
similar purposes, like trade, industry, agriculture and like
chambers, or any combination thereof (Section
88, Corporation Code). By definition:
No part of the income
of non-stock corporations shall be distributed as dividends to
their members, trustees, or officers; and
Any profit incidental
to their operations shall be used in furtherance of their purpose
or purposes (Section
87, Corporation Code).
A
non-stock corporation may use the word "foundation" in
its corporate name, provided that it:
meets
the requirements stated above;
has
initial capital of at least one million Philippine Pesos
(PHP1,000,000) as evidenced by a Notarized Certificate of Bank
Deposit issued by the bank;
conducts
its public fundraising campaigns in compliance with applicable law
and consistent with its submitted Modus Operandi or Plan of
Operation; and
submits
to the Securities and Exchange Commission (SEC) in the Philippines
(which is also the registration authority for non-stock
corporations) a written statement of its willingness to allow the
Commission to conduct an audit of its corporate books and records.
An
SEC-registered foundation is required to file annually with the
Commission the following documents:
General
Information Sheet;
Audited
Financial Statement with a sworn statement by its President and
Treasurer on (a) Source and Amount of Funds, (b) planned, ongoing
and accomplished Program/Activity, and (c) Application of Funds; [3]
and
Certification
from the local government office and/or the national Social Welfare
and Development or Health agencies on the existence of the subject
Program/Activity in the locality in which it exercises jurisdiction
(SEC Memorandum Circular No. 8, series of 2006).
In
the SEC-registered foundation context, the term "foundation"
refers to a non-stock, non-profit corporation established for the
purpose of extending grants, or endowments to support its goals or
raising funds to accomplish charitable, religious, educational,
athletic, cultural, literary, scientific, social welfare or other
similar objectives (SEC Memorandum Circular No. 8, series of
2006).
A non-stock, non-profit corporation, including an NGO,
that intends to engage in microfinance activities, is required to
state in its incorporation papers that it is conducting microfinance
operations pursuant to Republic Act No. 8425 (otherwise known as the
Social Reform and Poverty Alleviation Act). For this purpose, an NGO
is defined under RA 8425 as a duly registered non-stock, non-profit
organization that focuses on the "upliftment of the basic or
disadvantaged sectors of society by providing advocacy, training,
community organizing, research, access to resources and other similar
activities" (SEC Memorandum Circular No. 2, series of 2006).
Further,
no part of the net income or assets of the accredited organization
may belong to or inure to the benefit of any member, organizer,
officer, or specific person (Tax Code sec 30 (E), Section
1(a), Revenue Regulation No. 13-98).
To
qualify for accreditation as an NGO, an NPO must be organized and
operated exclusively for one or more of the following purposes:
Further,
no part of the net income of the NGO may inure to the benefit of any
private individual (Section 34(H)(2)(c)(1)), Tax Code and Section
(1)(b), Revenue Regulation No. 13-98). Accredited NGOs are also
subject to other requirements, including restrictions on the amount
of administrative expenses that can be incurred (limited to 30% of
total expenses) and limitations on the distribution of assets upon
the organization’s dissolution (Section
1(b), Revenue Regulation No. 13-98). [4]
IV.
Specific Questions Regarding Local Law
A.
Inurement
No
part of the income of an NPO may inure to the organization’s
members, trustees, or officers. Any earnings of the organization must
be used exclusively to promote its statutory objectives (Section
87, Corporation Code).
Accredited
NPOs are prohibited from undertaking a variety of transactions that
would lead to direct or indirect private inurement. These include:
lending
any part of the organization’s income or property without
adequate consideration (with an exception for some formal
micro-credit or micro-finance programs);
purchasing
any security and/or property for more than adequate consideration;
selling
any of the organization’s property for less than adequate
consideration;
diverting
income or property rights of the organization to founders, principle
officers, directors, and persons closely related to them or to any
corporation controlled directly or indirectly by those same
individuals;
using
any part of its property, income or seed capital for any purpose
other than that for which the corporation was created or organized;
or
Further,
the members of the Board of Trustees of accredited NPOs are
prohibited from receiving compensation or remuneration. They may,
however, receive reasonable per diem (Section 30, Corporation Code as
read in conjunction with Section 87, Corporation Code). There is no
such prohibition against remuneration of corporate officers. For
accredited NGOs, administrative expenses, including compensation and
remuneration, may not exceed, on an annual basis, 30% of total
expenses for the taxable year (Section
1(b)(ii), Revenue Regulation No. 13-98).
B.
Proprietary Interest
NPOs
are prohibited from having stockholders. No part of the income of an
NPO is distributable as dividends to its members, trustees or
officers; and all profits shall be used in furtherance of the
organization’s objectives (Section
87, Corporation Code). In addition, for accredited non-stock,
non-profit corporations, the law specifically states that no part of
the net income or assets may "belong" to any member,
organizer, officer, or specific person (Section
1(a), Revenue Regulation No. 13-98 and Sec 30(E) and (G) of the
Tax Code).
C.
Dissolution
An
NPO’s assets remaining after the satisfaction of liabilities
and other obligations are generally distributed in the following
manner:
When the assets are
held upon a condition requiring a return, transfer or conveyance,
the same shall be returned, transferred or conveyed in accordance
with such requirements (Section
94(2), Corporation Code).
When the assets are
received or held subject to limitations permitting their use only
for charitable or similar purposes but not held upon a condition
requiring return, they shall be transferred or conveyed to one or
more corporations, societies, or organizations engaged in activities
in the Philippines substantially similar to those of the dissolving
corporation (Section
94(3), Corporation Code).
Otherwise, the
remaining assets of non-stock corporations may be distributed in the
manner and to those individuals or organizations indicated in the
Articles of Incorporation (Section
94(4), Corporation Code).
More
restrictive rules apply to accredited NGOs. Assets remaining upon
dissolution must be distributed to another accredited NGO for similar
purposes, or distributed by a competent court to another accredited
NGO to be used in such manner as in the judgment of the court shall
best accomplish the general purpose for which the dissolved NGO was
organized (Section 1(b)(iii), Revenue Regulation No. 13-98. The
regulation also states that the assets may be distributed to the
State for public purpose.).
D.
Activities
1.
General Activities
An
NPO can sue and be sued in the corporate name, admit members, buy and
sell real and personal property, and "exercise such other powers
as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation" (Sections
36 and 87, Corporation Code).
NPOs
may be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social,
civic service, or similar purposes (such as trade, industry,
agricultural and like chambers), or any combination thereof (Section
88, Corporation Code). Those with NPO accreditation, however, are
limited to narrower lists of purposes (Section 1 (a) and (b), Revenue
Regulation No. 13-98).
2.
Public Benefit Activities
As
noted above, NPOs may have a wide range of purposes. In contrast,
accredited non-stock, non-profit corporations must exclusively
advance one or more of the following purposes: religious, charitable,
scientific, athletic, cultural, or social welfare purposes, or the
rehabilitation of veterans (Section
1(a), Revenue Regulation No. 13-98). Similarly, accredited NGOs
must be organized and operate exclusively for one or more of the
following purposes: scientific, research, educational,
character-building, youth and sports development, health, social
welfare, cultural or charitable purposes (Section
1(b), Revenue Regulation No. 13-98). Revenue Regulation 13-98
defines each of these terms.
In
general, accredited NPOs can advance their purposes through
exercising the powers of non-stock corporations, listed above.
3.
Economic Activities
NPOs
may not engage primarily in business or economic activities. They may
engage only in those income-generating activities expressly allowed
in their governing documents (i.e., Articles of Incorporation) or
necessary or incidental to the statutory objectives of the
organization. Any profit generated from economic activities must be
used in furtherance of the organization’s objectives (Section
87, Corporation Code). These rules apply both to accredited and
unaccredited NPOs.
E.
Political Activities
NPOs
can engage in lobbying activities but not directly expend funds on
"any political party or candidate or for purposes of partisan
political activity" (Section
36(9), Corporation Code), and the lobbying activities must
conform to the norms for acceptable advocacy under Article 19 of the
Civil Code. As for campaign activities, NPOs receiving government
funding and those receiving tax benefits are prohibited from making
indirect or direct contributions for purposes of partisan political
activity (Section
95(b to f) and (h), Philippine Omnibus Election Code).
Section
81 of the Election Code states that it is unlawful
for any foreigner, whether a judicial or natural person, to aid any
candidate or political party, directly or indirectly, or take part in
or influence any election, or to contribute or make any expenditure
in connection with any election campaign or partisan political
activity. The Election Code also states that it is unlawful for any
person, including a political party or public or private entity to
solicit or receive, directly or indirectly, any aid or contribution
of whatever form or nature from any foreign national, government or
entity for the purposes of influencing the results of an election.
(Sections 81 and 96, Philippine
Omnibus Election Code).
F.
Discrimination
The
Philippine Constitution contains general provisions obligating the
state to ensure access to education for all children (Article
XIV, Section 4, Constitution). There are no explicit provisions
in the Constitution or Corporation Code, however, dealing with
discrimination by educational institutions on the basis of race.
G.
Control of Organization
There
are no provisions under Philippine law restricting the ability of
foreign entities or individuals to control NPOs. It is thus possible
that a Philippine NPO may be controlled by a for-profit entity or by
an American grantor charity (which requires that the charity
specifically so provide in the affidavit). [5]
V.
Tax Laws
The
following section discusses relevant tax legislation, recognizing
that taxes may affect the amount of the grant actually flowing to the
grantee.
A.
Tax Exemptions
The
income tax law provides an exemption for a variety of organizations,
including:
non-stock corporations
and associations organized exclusively for religious, charitable,
scientific, athletic or cultural purposes, or for the rehabilitation
of veterans, provided that no part of the organization’s net
income or assets shall belong to or inure to the benefit of any
member, organizer, officer or any specific person (Section 30 (e),
Tax Code);
civic leagues or
organizations not organized for profit but operated exclusively for
the promotion of social welfare (Section 30 (g), Tax Code); and
This
exemption explicitly applies to grants and contributions –
whether from domestic or foreign sources. The organizations are,
however, required to pay tax on their activities "conducted for
profit" regardless of the disposition of such income (Section
30, Tax Code). [6]
B.
Incentives for Philanthropy
Corporations
and individuals who derive income from a trade, business, or
profession may deduct gifts, donations or contributions to accredited
non-stock, non-profit corporations up to 5% of taxable income for
corporate donors and 10% for individual donors (Section
3(a), Revenue Regulation No. 13-98). "Income"
refers to the donor’s income derived from a trade, business or
profession as computed without the benefit of this deduction.
Donations to accredited NGOs, by contrast, can be deducted in full,
subject to some limitations. (Section
3(b), Revenue Regulation No. 13-98).
In
addition to income tax, donations and gifts to accredited NPOs (and
certain other entities) are also exempt from the donor’s tax,
provided that not more than 30% of the donations and gifts for the
taxable year are used by the accredited NPO for administrative
expenses (Section
3(c), Revenue Regulation No. 13-98).
C.
Value Added Taxes and Tax on Gross Receipts
An
organization regularly engaged in commercial or economic activities
with gross sales (for sale of goods) or receipts (for sale of
services) in excess of PHP1,500,000 during any twelve month period
must register as a VAT taxpayer (Section 4. 109-1 of Revenue
Regulation 16-2005, VAT-Exempt Transactions). The standard VAT rate
is 12%.
Certain
goods and services are exempted from VAT, including medical, dental,
and hospital services, except those rendered by professionals; and
educational services provided by private and government educational
institutions (Section 109 (l) and (m) of the Tax Code as amended and
Section 4.109-1 (g) and (h) of Revenue Regulation 16-2005, VAT-Exempt
Transactions).
Non-stock,
non-profit organizations and associations engaged in trade or
business whose gross sales or receipts do not exceed PHP1,500,000 for
any twelve month period or an amount as adjusted every after three
years thereafter depending on the annual Consumer Price Index are
required to register with the Bureau of Internal Revenue as non-VAT
entities and pay the corresponding registration fee. (Section 9.236-2
(3) and (4) of Revenue Regulation 16-2005). Non-VAT registered
entities are subject to a tax of 3% of their monthly gross sales or
receipts (Section 7 of RA 9337, which amends Section 109(z) of the
Tax Code, and Section 4.116-1 of Revenue Regulation 16-2005).
D.
Import Duties
Many
goods relevant to NPOs are exempted from customs duties, including:
books
imported for use by educational institutions;
articles
donated to public or private institutions established solely for
educational, scientific, cultural, charitable, health, relief,
philanthropic or religious purposes, for free distribution among, or
exclusive use of, the needy;
and
food, clothing, house-building and sanitary-construction materials,
and medical, surgical and other supplies for use in emergency relief
work, when imported by or directly for the account of any victim,
sufferer, refugee, survivor or any other person affected thereby
(Section 105, Customs Code).
E.
Double Tax Treaties
The
Republic of the Philippines and the United States signed a double-tax
treaty which entered into force on October 16, 1982.
[1] Entities governed
by special laws include those termed "nongovernmental
educational institutions." Though classified as corporations,
they are distinct from non-stock corporations formed for educational
purposes under Section 88 of the Corporation Code. Rather,
nongovernmental educational institutions are governed in the first
instance by special laws, then by special provisions of the
Corporation Code, and then by general provisions of the Corporation
Code. As discussed below, they are also subject to special tax
treatment.
[2] To acquire donee
institution status, an NGO must first receive certification from the
Philippine Council for NGO Certification (PCNC), an accrediting
entity, on the basis of which the Bureau of Internal Revenue will
issue the Certification of Registration as a Qualified Donee
Institution (Executive Order 720, April 11, 2008). Under a prior
executive order, several government agencies including the Department
of Science and Technology, the Department of Social Welfare and
Development, and the Commission on Higher Education were responsible
for accrediting qualified donee institutions. The relevant agency
depended on the focus area of the donee.
[3]
These sworn statements embodied in SEC Forms- Sworn Statement on the
Sources, Amount and Application of Funds and Program/Activity
Planned, Ongoing, and Accomplished (SSSAA) and Certificate of
Existence of Program/Activity (COEP)- are integral attachments to the
Audited Financial Statements.
[4] In addition,
accredited NGOs are subject to detailed "utilization"
rules requiring the expenditure of funds within a certain time period
(Sections 1(b) and (c), Revenue Regulation No. 13-98).
[5]
While Philippine law is silent on the ability of foreign entities or
individuals to control NPOs, it is advisable that foreign entities
contemplating such "controlling" structures seek
consultation with the Philippine SEC prior to corporate registration
in order to be advised as to the proper registration requirements
(i.e. documentary requirements and capitalization, if applicable as a
foreign investor) specific to their circumstances and intended
operations in the country.
[6] A complication
arises with regard to non-stock, nonprofit educational institutions.
Under the Constitution, all
revenues and assets of such entities used actually, directly and
exclusively for educational purposes shall be exempt from taxes and
duties (Philippine Constitution 1987, Article XIV, Section 4).
Privately owned educational institutions are allotted similar
exemptions, though limited by restrictions on dividends and
reinvestment. Notwithstanding the constitutional provision, however,
Section 30(f) of the Tax Reform Act of 1997 imposes tax on the income
of non-stock educational institutions derived from any of their
properties (real or personal) or their economic activities. The
constitutional dilemma created by this provision has yet to be
resolved, and the provision in the tax code is still enforced by the
Bureau of Internal Revenue.
Furthermore,
Section 27(B) of the Tax Reform Act of 1997, as amended by RA 9337,
imposes on proprietary educational institutions and hospitals, which
are not-for-profit, a 10% tax on their taxable income (except passive
sources of income) with the further limitation that, if the gross
income from unrelated trade, business or other activity exceeds 50%
of the total gross income derived by such educational institutions or
hospitals from all sources, the tax applicable to for-profit entities
shall be imposed on the entire taxable income.
The
term "unrelated trade, business or other activity" means
any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function.
A
"Proprietary educational institution" is any private
school maintained and administered by private individuals or groups
with an issued permit to operate from the Department of Education,
Culture and Sports, or the Commission on Higher Education, or the
Technical Education and Skills Development Authority, as the case may
be, in accordance with existing laws and regulations.
