Introduction

Value-Added Tax (VAT) is a fundamental component of the Philippine tax system, designed to impose a broad-based consumption tax on goods, properties, and services. Governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963 (TRAIN Law), Republic Act No. 11534 (CREATE Law), and subsequent regulations issued by the Bureau of Internal Revenue (BIR), VAT applies at a rate of 12% on the gross selling price or gross receipts derived from the sale or lease of taxable goods, properties, or services. This article examines the specific implications of VAT liability in the context of churches renting buildings in the Philippines. Churches, as religious organizations, enjoy certain tax privileges, but these do not universally extend to all transactions, particularly those involving third-party lessors. The focus here is on the VAT obligations of the lessor when leasing property to a church, the church's role as a lessee, applicable exemptions, compliance requirements, and potential penalties for non-compliance.

Overview of VAT on Lease of Properties

Under Section 108 of the NIRC, the lease of properties is considered a taxable service subject to VAT. This includes the rental of real properties such as buildings, land, or spaces used for commercial, residential, or other purposes. The VAT is imposed on the lessor, who is required to add 12% VAT to the rental fee and remit it to the BIR. The lessee, in this case, the church, pays the VAT-inclusive amount but does not bear the primary liability for remittance.

Key elements of VAT on leases include:

Tax Base: VAT is computed on the gross rentals received, including any advance payments, security deposits applied to rent, or other charges related to the lease.
Threshold for VAT Registration: Lessors whose gross annual receipts or rentals from leasing activities exceed PHP 3,000,000 are required to register as VAT taxpayers under Section 236 of the NIRC. Those below this threshold may opt for VAT registration or remain as non-VAT taxpayers, in which case they are subject to 3% percentage tax instead of VAT (Section 109(1)(V)).
Exemptions Specific to Leases: Section 109(V) exempts the lease of residential units with a monthly rental not exceeding PHP 15,000. However, this exemption applies only to residential properties and does not extend to commercial or institutional leases, such as those for church use. There is no blanket exemption for leases based on the lessee's status as a non-profit or religious entity.

In practice, if a building is rented to a church for purposes like worship services, administrative offices, or community activities, the lease is generally treated as a commercial transaction unless it qualifies under narrow exemptions.

Tax Status of Churches in the Philippines

Churches and religious organizations are recognized as tax-exempt entities under Philippine law, primarily for income tax purposes. Section 30(E) of the NIRC exempts corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes from income tax, provided no part of their net income inures to the benefit of any private individual. This exemption is reinforced by Article VI, Section 28(3) of the 1987 Philippine Constitution, which grants tax exemptions to charitable institutions, churches, parsonages, convents, mosques, and non-profit cemeteries for properties actually, directly, and exclusively used for religious, charitable, or educational purposes.

However, this constitutional and statutory exemption is limited:

It primarily covers income tax and property taxes (real property tax under the Local Government Code, if used exclusively for exempt purposes).
VAT treatment is distinct. Churches are not automatically exempt from paying VAT on their purchases or leases, as VAT is a tax on consumption. When a church acts as a buyer or lessee, it pays VAT but cannot claim input tax credits because its activities (e.g., religious services) are typically VAT-exempt outputs under Section 109(A), which exempts services performed in the exercise of a profession or calling not subject to VAT.

Thus, while churches do not generate VAT liability on their core religious activities, they incur VAT costs on inputs like rentals, which become a final expense rather than a creditable tax.

VAT Liability When a Church Rents a Building

Perspective of the Lessor

The lessor bears the primary VAT liability. If the lessor is a VAT-registered taxpayer (mandatory if annual gross rentals exceed PHP 3,000,000), they must:

Charge 12% VAT on the rental payments received from the church.
Issue a VAT official receipt or invoice.
File and pay VAT returns quarterly (BIR Form 2550Q) and annually.

There is no specific exemption in the NIRC that relieves the lessor of VAT liability merely because the lessee is a church. The tax is on the service provided by the lessor, not on the lessee's tax-exempt status. For instance:

If the building is used for religious worship, this does not alter the lessor's obligation, as the exemption under Section 109 does not cover such scenarios.
Even if the church qualifies as a non-stock, non-profit entity, the lease transaction remains taxable for the lessor.

Exceptions could arise if the lessor itself is a tax-exempt entity (e.g., another religious organization leasing to a church), but this is rare and would require case-specific BIR ruling.

Perspective of the Church as Lessee

The church, as the renter, is obligated to pay the VAT-inclusive rent but has no direct VAT remittance responsibility. Key considerations:

Non-Creditable Input VAT: Since churches typically do not engage in VAT-taxable activities, the VAT paid on rent is not creditable against any output VAT. It becomes an additional cost absorbed by the church.
Withholding Obligations: If the church is considered a withholding agent (e.g., if it has employees or engages in business-like activities), it may need to withhold 5% creditable withholding tax on rentals under Revenue Regulations No. 2-98, as amended. However, pure religious activities do not trigger this unless the church crosses into commercial ventures.
Exemption Claims: Churches may seek BIR confirmation of their tax-exempt status via a Certificate of Tax Exemption (CTE). This CTE can help in negotiations or disputes but does not exempt the lessor from charging VAT.

Special Scenarios

Sub-Leases: If a church sub-leases part of the rented building (e.g., for events), it may incur VAT liability on the sub-lease income if it exceeds thresholds, potentially losing pure exempt status.
Government-Owned Properties: If the building is owned by the government or a government-owned corporation, VAT may still apply under Section 106(A)(2), but with possible exemptions for certain public services.
Donations Disguised as Rent: If the "rent" is nominal or a donation, it might not trigger VAT, but this requires scrutiny to avoid reclassification as a taxable lease.
Impact of Lease Term: Long-term leases (over one year) may involve advance payments, which are subject to VAT upon receipt.

Registration and Compliance Requirements

For Lessors: Mandatory VAT registration if thresholds are met. Non-compliance leads to penalties, including 25% surcharge, interest, and compromise penalties.
For Churches: No VAT registration required for core activities. However, if a church engages in ancillary taxable activities (e.g., renting out facilities for profit), it must register and comply.
Documentation: Leases must be documented via a written contract. Lessors should maintain records of rentals, VAT computations, and payments for at least five years (Section 235, NIRC).
BIR Rulings and Audits: Churches or lessors can request BIR rulings for clarification. Audits may scrutinize whether the church's use qualifies for any indirect exemptions.

Penalties for Non-Compliance

Violations of VAT provisions carry severe consequences under Sections 254-272 of the NIRC:

Civil Penalties: 25% surcharge for late filing/payment, plus 12% annual interest (reduced to 6% post-TRAIN).
Criminal Penalties: Willful failure to pay VAT can result in fines from PHP 10,000 to PHP 1,000,000 and imprisonment from 2-6 years.
For Churches: Misrepresentation of exempt status could lead to loss of exemptions and back taxes.
Administrative Sanctions: Closure of business or revocation of tax-exempt certificates.

Recent Developments and Reforms

Amendments under the TRAIN Law (2018) increased the VAT threshold to PHP 3,000,000 and adjusted exemptions, but did not introduce new relief for religious lessees. The CREATE Law (2021) lowered corporate income tax rates but maintained VAT rules on leases. Ongoing discussions in Congress occasionally propose broader exemptions for non-profits, but as of current knowledge, no changes specifically address church rentals.

Conclusion

In summary, VAT liability for a church renting a building in the Philippines primarily rests with the lessor, who must charge and remit 12% VAT unless the transaction falls under limited exemptions like low-rent residential units. Churches benefit from income tax exemptions but bear the economic burden of non-creditable input VAT on rentals. Compliance is crucial to avoid penalties, and entities should consult BIR rulings for specific cases. This framework ensures that while religious organizations are protected for their core missions, the tax system maintains equity in commercial transactions like property leases. For tailored advice, professional legal or tax consultation is recommended.