Introduction

In the Philippines, the tax treatment of donations and tithes to churches and religious organizations is governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended, and related revenue regulations issued by the Bureau of Internal Revenue (BIR). Religious institutions, such as churches, may qualify for tax-exempt status under Section 30(E) of the NIRC, which exempts corporations or associations organized and operated exclusively for religious purposes from income tax, provided no part of their net income or assets inures to the benefit of any private shareholder or individual. However, this exemption is not automatic; it requires formal recognition through a Certificate of Tax Exemption issued by the BIR.

This article focuses on the tax implications for both donors and recipient churches during the period before obtaining such BIR tax-exempt status. During this interim phase—often when a church is newly established, in the process of applying for exemption, or has not yet complied with BIR requirements—the entity is generally treated as a taxable organization under Philippine tax laws. This can affect the taxability of incoming donations and tithes as potential income, as well as the deductibility of such contributions for donors. The discussion is grounded in the Philippine legal framework, including constitutional provisions, statutory laws, and administrative issuances, to provide a comprehensive overview of the rules, potential liabilities, and compliance considerations.

Legal Framework Governing Tax-Exempt Status for Churches

The Philippine Constitution of 1987 provides foundational support for the favorable treatment of religious institutions. Article VI, Section 28(3) exempts churches, parsonages, and buildings actually, directly, and exclusively used for religious purposes from property taxes. However, this constitutional exemption does not extend automatically to income taxes, which fall under the NIRC.

Under Section 30(E) of the NIRC, religious organizations can be exempt from income tax if they meet specific criteria:

Organized and operated exclusively for religious purposes.
No part of net income or assets benefits private individuals.
Not engaged in substantial unrelated business activities.

To operationalize this, Revenue Memorandum Order (RMO) No. 20-2013 and subsequent issuances require religious entities to apply for a Certificate of Tax Exemption with the BIR. The application process involves submitting documents such as articles of incorporation, by-laws, financial statements, and proof of non-inurement. Until this certificate is issued, the church is not officially recognized as tax-exempt and is subject to the general tax rules applicable to non-exempt entities.

In practice, without the BIR certificate, churches are classified as ordinary corporations or associations for tax purposes, potentially liable for corporate income tax (CIT) at the prevailing rate (currently 25% for domestic corporations under the CREATE Act, Republic Act No. 11534, effective 2021). This classification persists even if the church's activities are purely religious, as the exemption requires affirmative BIR approval.

Tax Treatment of Donations and Tithes Received by Churches

Nature of Donations and Tithes

Donations refer to voluntary contributions, gifts, or bequests made to a church without expectation of return consideration. Tithes, a subset of donations, are typically 10% of a member's income, rooted in religious doctrine (e.g., Biblical tithing under Malachi 3:10), and are considered obligatory offerings in many Christian denominations. In Philippine tax law, both are treated similarly as gratuitous transfers unless specified otherwise.

Before BIR tax-exempt status, these inflows are potentially taxable as income under Section 32(A) of the NIRC, which defines gross income broadly to include all income from whatever source, except exclusions like gifts and bequests under Section 32(B)(3). However, the exclusion for gifts applies only if the transfer is purely gratuitous and not in exchange for services or goods.

Taxability as Income: If the church is not exempt, donations and tithes could be deemed taxable if they are seen as compensation for religious services (e.g., masses, baptisms, or counseling). Revenue Regulation (RR) No. 2-98 clarifies that fees for services rendered by non-profit entities may be taxable. For instance, if tithes are linked to membership privileges or spiritual benefits, the BIR might argue they constitute business income. Historical BIR rulings have occasionally treated large, regular contributions as taxable receipts for unregistered entities.
Exemptions and Exclusions: Even without formal exemption, certain donations may qualify for exclusion if proven to be true gifts. Section 32(B)(3) excludes gifts, bequests, and devises from gross income, but this requires substantiation that no quid pro quo exists. Small, irregular donations are less likely to be taxed, while systematic tithing programs might attract scrutiny if the church generates surplus funds used for non-religious purposes.
Value-Added Tax (VAT) Implications: Under Section 109(A) of the NIRC, sales of goods or services by non-exempt entities are subject to 12% VAT if gross receipts exceed PHP 3 million annually (as adjusted). If a church charges for services (e.g., wedding fees) or sells religious items, VAT may apply. Pure donations and tithes, being non-transactional, are generally not VAT-able, but bundled contributions could trigger liability.
Donor-Advised Funds and Earmarked Donations: If donations are earmarked for specific purposes (e.g., building funds), they may still be taxable if the church acts as a conduit rather than owner. Without exemption, the church must report these in its income tax return (ITR) using BIR Form 1702 for non-stock corporations.

Reporting and Compliance Obligations

Non-exempt churches must register with the BIR as taxable entities, obtain a Taxpayer Identification Number (TIN), and file annual ITRs. Failure to do so can lead to penalties under Section 255 of the NIRC (fines up to PHP 50,000 and imprisonment). Books of accounts must be maintained to track donations, with receipts issued for contributions exceeding PHP 100 under RR No. 18-2012.

If donations exceed certain thresholds, withholding taxes may apply if payments are made to suppliers or employees funded by such contributions. For example, expanded withholding tax (EWT) at 1-15% on professional fees or rentals.

Tax Treatment for Donors Making Contributions

Deductibility of Donations

For individual or corporate donors, the ability to deduct donations from taxable income hinges on the recipient's status. Section 34(H) of the NIRC allows deductions for contributions to accredited non-stock, non-profit organizations, limited to 10% of taxable income for individuals and 5% for corporations.

Before Recipient's Exemption: Without BIR tax-exempt status, the church is not considered an "accredited donee institution" under RR No. 13-98. Thus, donors cannot claim income tax deductions for donations or tithes. This contrasts with post-exemption scenarios where full deductibility (up to 100% for certain priority activities under RR No. 5-2021) may apply.
Alternative Tax Benefits: Donors may still exclude donations from gross income if classified as gifts, but this is rare for tithes, which are often habitual. For estate tax purposes, bequests to religious institutions are deductible under Section 87(D) of the NIRC, regardless of exemption status, provided they are for public purposes.
VAT and Other Taxes for Donors: Donations are not subject to donor's tax under Section 98 of the NIRC if made to qualified institutions, but without exemption, regular donor's tax rates (6% under RA 10963, TRAIN Law) may apply if the donation exceeds PHP 250,000 annually to the same donee.

Substantiation Requirements

Donors must secure official receipts from the church to support any claims, even if non-deductible. Failure to substantiate can lead to disallowance during BIR audits.

Potential Liabilities and Risks

BIR Assessments: Without exemption, the BIR may assess deficiency taxes on unreported donations treated as income. Interest (20% per annum) and penalties (25-50%) under Sections 248-249 of the NIRC compound liabilities.
Retroactive Application: If exemption is eventually granted, it may apply retroactively from the date of organization, per BIR rulings, potentially refunding overpaid taxes. However, this requires a successful application and is not guaranteed.
Case Law Insights: Philippine jurisprudence, such as in Commissioner of Internal Revenue v. Court of Appeals (G.R. No. 124043, 1996), emphasizes strict compliance with exemption requirements. Courts have upheld BIR denials where non-inurement is not proven, highlighting risks for non-certified churches.
Special Considerations for Foreign Donations: Cross-border contributions may trigger withholding tax on income from Philippine sources under Section 28(B), unless treaty benefits apply.

Transition to Tax-Exempt Status

While this article focuses on the pre-exemption period, churches should promptly apply for BIR certification to mitigate tax exposures. The process, detailed in RMO No. 8-2014, involves regional BIR offices and can take months. During application, churches may request a ruling to suspend assessments.

Conclusion

Before obtaining BIR tax-exempt status, churches in the Philippines face significant tax risks, with donations and tithes potentially taxable as income, and donors unable to claim deductions. This underscores the importance of early compliance with NIRC provisions to align with the constitutional intent of supporting religious activities without undue fiscal burden. Churches are advised to consult tax professionals to navigate these rules, maintain proper records, and expedite exemption applications to minimize liabilities. Understanding these nuances ensures religious organizations operate within the law while fulfilling their spiritual missions.