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, or 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, which are generally not discussed in this Note because of 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, 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 (Sec. 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. In the case of an accredited NGO, donations are deductible in full (Section 3(b), Revenue Regulation No. 13-98). An accredited NGO is also subject to additional restrictions, including a requirement that it devote no more than 30% of its total expenses for the taxable year to administrative expenses (Section 1(b)(ii), Revenue Regulation No. 13-98).
Under the Corporation Code, a non-stock corporation may be formed or organized for “charitable, religious, educational, professional, cultural, recreational, 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 PHP1,000,000; 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 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 annually file annually with the Commission its General Information Sheet; Audited Financial Statement, a sworn statement on (a) Source and Amount of Funds, (b) planned, ongoing and accomplished Program/Activity, and (c) Application of Funds; as well as a 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. For this purpose, 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).
To qualify for accreditation, a non-stock, non-profit corporation must be organized for one or more of the following purposes:
religious;
charitable;
scientific;
athletic;
cultural;
rehabilitation of veterans; or
social welfare.
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 (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:
scientific;
research;
educational;
character-building;
youth and sports development;
health;
social welfare;
cultural; or
charitable purposes.
Further, no part of the net income of the NGO may inure to the benefit of any private individual (Section 34, 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). [3]
IV. Specific Questions Regarding Local Law
A. Inurement
No part of the income of a non-stock corporation 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, purchasing any security and/or property for more than adequate consideration, selling any of the organization’s property for less than adequate consideration, and diverting income of the organization to founders, directors, and persons closely related to them, 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 engaging in any activity which is contrary to law, public order or public policy (Section 10, Revenue Regulation No. 13-98).
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 payments. 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 shareholders; no part of the income of the 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).
C. Dissolution
The assets of non-stock corporations remaining after the satisfaction of liabilities and other obligations of the corporation 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 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 in the court shall best accomplish the general purpose for which the dissolved NGO was organized (Section 1(b)(iii), Revenue Regulation No. 13-98).
D. Activities
1. General Activities
A non-stock corporation (like a stock corporation) 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, 87, Corporation Code).
Non-stock corporations 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 (Sec. 88, Corporation Code). Those with NPO accreditation, however, are limited to narrower lists of purposes.
2. Public Benefit Activities
As noted above, non-stock corporations 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 social welfare (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 them (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, particularly those receiving government funding and those receiving tax benefits, are prohibited from soliciting or receiving any contributions for purposes of affecting election results (Section 95, Batas Pambansa Bilang 881).
F. Discrimination
The Philippine Constitution contains general provisions obligating the state to ensure access to education for all children (Article XIV, Sec. 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. Therefore, it would seem prudent for a grantmaker undertaking an equivalency determination to review the governing documents and activities of the educational institution, as well as any special legislation under which the educational institution is established, to ensure compliance with U.S. law.
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 (which will lead to additional IRS scrutiny) or by an American grantor charity (which requires that the charity specifically so provide in the affidavit).
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 contributions, 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). [4]
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 trade, business or profession as computed without the benefit of this deduction. Donations to accredited NGOs, by contrast, can be deducted in full. (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 12-month period must register as a VAT taxpayer (Sec.4. 109-1 of Revenue Regulation 16-2005, VAT-Exempt Transactions). The standard VAT rate is 10 percent. Certain goods and services are exempted from VAT (i.e., exempt without credit for input VAT), including medical, dental, and hospital services; educational services provided by privateand government educational institutions; and educational services rendered by private educational institutions duly accredited by the Department of Education (DepED), the commission on Higher Education (CHED), and the Technical Educational and Skills Development Authority (TESDA) and government educational institutions (Sec. 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 12-month period or in an amount as adjusted thereafter every after three (3) years depending on the annual Consumer Price Index are required to register with the Bureau of Internal Revenue as Non-VAT entities and, with the exception of cooperatives which are not electric cooperatives, pay the corresponding registration fee. (Sec. 9.236-2 (3) and (4) of Revenue Regulation 16-2005). Non-VAT registered entities subject to a tax of 3 percent of their monthly gross sales or receipts (Sec. 116, Tax Code; Revenue Regulation 14-2003).
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 (Sec. 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 an accrediting entity, on the basis of which the Bureau of Internal Revenue grants the status. The Philippine Council for NGO (PCNC) Certification is currently the sole organization designated by the Department of Finance to serve as an accrediting entity.
[3] 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).
[4] 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.
