Strictly by the letter: No room for interpretation

Tax exemptions, by their very nature are “highly disfavored”, never presumed and are therefore strictly construed against the grantee. Thus, it is reasonable to expect a taxpayer to rely on previously accepted doctrines on tax exemptions and at least have the assurance that, relying on the previously consistent interpretations by tax authorities, it should be able to enjoy the exemption. However, in the current regime where government policies are more focused on enhanced tax collection, there can be risks associated with relying on what appear to be established precedents.

A revenue memorandum circular (RMC) recently issued by the Bureau of Internal Revenue (BIR) appears to underscore this risk. In RMC No. 7-2012, the BIR circularized BIR Ruling No. 23-10 dated Aug. 4, 2010. In the said ruling, the BIR held that the sale of a condominium unit by a non-stock, non-profit corporation, regardless of its disposition of the income derived from the sale, was subject to capital gains tax. The BIR appears to have based its ruling on the last paragraph of Section 30 of the National Internal Revenue Code, as amended, which provides that “not withstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made on such income, shall be subject to tax imposed under this Code.”

While it appears that the BIR has a valid point in declaring that the income derived by the non-stock, non-profit corporation is subject to capital gains tax, it has been issued at the expense of several precedent rulings where the BIR had concluded that the same or similar transactions were not subject to capital gains tax. Although not explicitly mentioned in the ruling itself, it may be inferred that the taxpayer’s request for exemption is based on a series of previous BIR rulings which held that income to be derived from the sale of a parcel of land by a non-stock, non-profit corporation is not within the contemplation of the last paragraph of Section 26 of the National Internal Revenue Code, as amended (now Section 30 of the same Code), and will not result from the productive use of real properties, but from a single transaction which is merely incidental to the religious purposes for which it was created, hence, exempt from the capital gains tax. Therefore, there appears to have been an operative exemption previously granted by the BIR in similar situations despite the apparently unambiguous provisions of the National Internal Revenue Code. Considering this, the taxpayer may have had ample reason to believe that it could claim the exemption on the basis of its reliance on previous BIR rulings which granted these exemptions on the basis that income derived from these single transactions are ostensibly incidental to its religious purposes. However, in light of a more conservative and revenue driven BIR, the bureau appears to have taken a contrary position and has construed Section 30 in its strictest sense, without leaving any room for interpretation.

It must be noted that, based on the decision of the Supreme Court in the case of the Commissioner of Internal Revenue vs. YMCA of the Philippines (G.R. No. 124043. Oct. 14, 1998), the High Court appears to have properly ruled that the income from the property of the organization taxable, regardless of how that income is used — whether for profit or non-profit purposes. Therefore, insofar as abiding by its duty of correctly interpreting Philippine tax laws, the BIR appears to have done its job properly. However, for taxpayers, it is important to note the circularization of a 2010 ruling which abandons a previously granted exemption. Rather than an isolated act, the BIR has shown a predisposition to strictly enforcing tax laws, removing previously granted exemptions and has shown an overall aggressive nature in dealing with taxpayers. Considering the current government’s goals of enhancing revenue collection without imposing new taxes, this should come as no surprise. Besides non-stock, non-profit corporations being guided as to the lifting of a previously granted tax exemption, all taxpayers should take notice of this issuance as part of a growing trend and are advised to take more conservative actions with respect to their tax planning strategies. 

Joseph Rod Allan C. Alano is a supervisor from the tax practice of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of Manabat Sanagustin & Co., or KPMG International. For comments or inquiries, please email [email protected] or [email protected]