Abstract

In the Philippines, churches and religious organizations enjoy important tax privileges rooted in the Constitution and the National Internal Revenue Code (NIRC). But those privileges are not automatic in practice. Before the Bureau of Internal Revenue (BIR) recognizes a church’s tax-exempt status—typically through registration and issuance of a Certificate of Tax Exemption (CTE) or equivalent ruling—the organization sits in a legally sensitive “pre-exemption” stage. This article explains the tax treatment of donations and tithes received during that stage, what taxes may technically apply, how constitutional exemptions operate even without BIR paperwork, and how religious organizations can manage risk and compliance while awaiting formal recognition.

I. Legal Framework

A. Constitutional Anchors

Three constitutional provisions matter most:

Religious freedom and non-establishment. The State cannot unduly burden the free exercise of religion. This underlies favorable tax treatment for churches’ religious activities.
Exemption of religious property from tax. The Constitution exempts from real property tax (RPT) “charitable institutions, churches and parsonages or convents appurtenant thereto… and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.” Key point: This is a use-based exemption. It depends on actual, direct, exclusive use—not on BIR registration.
No law respecting an establishment of religion. This supports neutrality: tax rules may apply to churches when they act like ordinary economic actors, but must not target religious practice.

B. Statutory Base: NIRC

Within the NIRC, the relevant pillars are:

Income tax exemption for religious and non-stock, non-profit entities on income used actually, directly, and exclusively for religious purposes.
Donor’s tax rules for gifts and contributions.
Withholding tax system on certain payments.
VAT and percentage tax rules on sale of goods/services.
Documentary stamp tax (DST) on certain instruments.

The BIR’s administrative issuances (revenue regulations, memoranda, rulings) operationalize these rules through registration and substantiation requirements.

II. What Counts as “Donations” and “Tithes”?

A. Donations

A donation is a voluntary transfer of property or money without consideration. In church settings, this includes:

Cash offerings
Love gifts
Special project contributions
In-kind gifts (equipment, food, building materials)
Pledges later fulfilled

B. Tithes

A tithe is a faith-based voluntary contribution, often computed as a percentage of income. For tax purposes, BIR generally treats tithes as donations unless structured as a fee for services.

C. Key Distinction: Donation vs. Payment for Service

If money is given in exchange for something measurable (tuition-like fees, event tickets, rentals), it becomes income from business or activity rather than donation. That classification drives whether income tax/VAT may apply.

III. The “Pre-Exemption” Stage Explained

A. Meaning

“Before BIR tax-exempt status” typically refers to any of these situations:

Newly formed church not yet registered with BIR.
Church registered with BIR but still awaiting a CTE/ruling confirming exemption.
Church has applied for exemption renewal but the certificate has lapsed or has not been re-issued.

B. Practical Reality

Even though exemption may exist by law or Constitution, the BIR will not automatically recognize it without paperwork. In audits or bank dealings, the church may be presumed taxable unless it can prove otherwise.

IV. Tax Treatment of Donations and Tithes Before BIR Recognition

A. Income Tax (Church Side)

1. General Rule

Donations and tithes are not considered income subject to income tax if they are:

Voluntary gifts, and
Used actually, directly, and exclusively for religious purposes.

This is consistent with the church’s character as a religious non-stock, non-profit entity and with the constitutional protection of religious exercise.

2. Pre-Exemption Risk

Before BIR recognition, the risk is not the substantive rule but the burden of proof:

The BIR may treat receipts as taxable income during an audit if the church cannot show its non-profit religious nature and proper use of funds.
Lack of BIR CTE can lead to temporary classification as an ordinary corporation.

3. How to Defend Non-Taxability Without CTE

Even pre-recognition, churches can substantively rely on:

Articles of Incorporation/By-laws showing religious purpose
SEC/DTI/other registrations
Minutes and financial records showing use for worship, ministry, charity
Evidence that funds are not distributed as profits

Bottom line: Donations/tithes remain functionally exempt, but defensibility rests on documentation.

B. Donor’s Tax (Donor Side)

1. Who is liable?

Donor’s tax is imposed on the donor, not the church.

2. General Rule

Donations to religious organizations may be exempt from donor’s tax if:

The church is a qualified non-stock, non-profit religious/charitable institution, and
The donation is actually used for qualified purposes.

3. Pre-Exemption Effect

Without BIR tax-exempt certificate:

Donors may face uncertainty about donor’s tax exemption.
Large donations might be conservatively treated as taxable gifts unless backed by proof that the recipient qualifies.

4. Practical Implication

Many donors, especially corporate donors, require:

A BIR CTE, and
A BIR-registered official receipt acknowledging the donation.

Thus, pre-exemption status affects donor compliance more than the church’s substantive exemption.

C. Withholding Taxes

1. On Donations/Tithes Received

There is no withholding tax on pure donations or tithes.

2. On Church Payments to Others

Even before exemption, a church acts as a withholding agent when it pays:

Salaries/honoraria to pastors/employees
Professional fees (lawyers, accountants, speakers)
Rent, contractors, suppliers (if subject to expanded withholding)

Failure to withhold can create liabilities independent of exemption.

D. Value-Added Tax (VAT) / Percentage Tax

1. Donations/Tithes are NOT VAT-able

VAT applies to sales of goods/services in the course of trade or business. Donations and tithes are not sales.

2. When VAT/Percentage Tax May Arise

Before BIR recognition, if a church operates revenue activities such as:

Bookstores selling merchandise
Cafés
Paid seminars with commercial character
Rentals of halls to outsiders
Schools or training centers charging fees then VAT or percentage tax may apply to those transactions, regardless of pending exemption.

Pre-exemption status increases risk that all receipts might be viewed as business receipts unless segregated.

E. Documentary Stamp Tax (DST)

Donations involving instruments may trigger DST—e.g.:

Deeds of donation (real property)
Transfers of shares or securities DST is not automatically removed by a church’s pending exemption; applicability depends on the instrument and law.

F. Local Taxes (RPT, Business Tax, Fees)

1. Real Property Tax (RPT)

Constitutional RPT exemption is self-executing based on actual use:

Actually, directly, and exclusively used for worship/ministry → exempt.
Partly used for commercial rentals → taxable to that extent.

Even without BIR status, LGUs must honor constitutional exemption if use criteria are met, though churches often need to apply locally and prove use.

2. Local Business Taxes / Permits

If the church engages in business (bookstore, rentals, etc.), local business taxes and permits can apply to the business portion, pre-exemption or not.

V. Key Jurisprudential Principles (Philippine Context)

Use-based exemptions are construed strictly but fairly. If property or income is partly commercial, exemption covers only the religious portion.
Non-stock, non-profit status is about substance. The decisive test is whether net income is distributed to members or used for religious/charitable ends.
The State may tax proprietary activities. When a church crosses into commerce, neutrality allows taxation of that activity, not of the faith practice.
Administrative recognition is evidentiary, not creative. BIR certificates confirm and facilitate exemption; they do not create religious character where none exists, nor negate it where it truly exists—though they matter a lot for practical dealings.

VI. Compliance Duties While Awaiting BIR Exemption

A. Register with BIR Anyway

Even tax-exempt entities must register:

Obtain TIN
Register books of accounts
Register official receipts
File “no-payment” returns where required

Pre-recognition churches should do this early to avoid presumptive taxation.

B. Keep Donations and Business Receipts Separate

Maintain:

Separate ledgers
Separate bank accounts if feasible
Clear documentation of projects funded by donations

This prevents reclassification of donations as taxable business income.

C. Issue Proper Donation Receipts

Even pre-exemption:

Issue acknowledgment receipts
Indicate “donation” / “tithe”
Avoid language implying quid pro quo

D. Observe Withholding and Payroll Rules

Church exemption does not remove employer duties:

Withhold income tax on compensation
Remit government contributions where applicable
Withhold on professional/contractor payments

E. Prepare for Audit Defense

Organize:

SEC papers
Minutes showing religious mission
Program budgets
Disbursement vouchers
Beneficiary records for charitable outreach

VII. Common Pitfalls in the Pre-Exemption Stage

Treating all income as “donations.” If money is tied to a service or product, it may be taxable.
No paper trail of religious use. Exemption hinges on “actually, directly, exclusively” religious use.
Failure to register or file. Non-registration can lead to penalties and a presumption of taxability.
Commingling funds. Mixing donations with business income invites full taxation.
Unclear pastor compensation structures. Stipends and honoraria are generally taxable to the recipient; the church must withhold where required.

VIII. Practical Guidance for Churches and Donors

For Churches

Apply for BIR tax-exempt recognition promptly, but operate as if you will be audited tomorrow.
Use donation-friendly language and avoid implied payments for services.
Limit or separately incorporate commercial ventures.
If commercial activity is significant, consider a separate taxable entity to isolate risk.

For Donors

For large gifts, request:
- Proof of religious non-stock, non-profit character (SEC papers),
- Church acknowledgment/receipt,
- Evidence that the gift is unrestricted or for qualified religious/charitable use.
If donor’s tax exposure is material, seek formal BIR confirmation or structure the transaction carefully.

IX. Bottom Line

Even before a BIR Certificate of Tax Exemption is issued, donations and tithes to a genuine religious non-stock, non-profit church are substantively not subject to income tax and are generally outside VAT. The Constitution and the NIRC anchor that status.

However, pre-exemption creates practical vulnerability:

The BIR may presume taxability unless the church proves its nature and the qualified use of funds.
Donors may hesitate or face donor’s tax uncertainty without formal BIR recognition.
Business-like activities of the church remain taxable, and must be segregated.

So the real rule is simple: exemption is about purpose and use, but survival in practice is about documentation and segregation.