Introduction

In the Philippines, the tax system recognizes the vital role played by religious institutions, charitable organizations, and foundations in society. To encourage philanthropy and support non-profit activities, the National Internal Revenue Code (NIRC) of 1997, as amended by various laws including the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, and other relevant regulations, provides specific exemptions and incentives. These rules aim to shield qualifying entities from certain taxes while ensuring that exemptions are not abused for commercial gain.

This article comprehensively explores the tax-exempt status of churches, donations, and foundations under Philippine law. It covers eligibility criteria, types of taxes affected, compliance requirements, limitations, and potential pitfalls. Understanding these provisions is essential for religious groups, donors, philanthropic organizations, and tax practitioners to navigate the Bureau of Internal Revenue (BIR) regulations effectively.

Tax-Exempt Status of Churches and Religious Institutions

Churches and other religious institutions in the Philippines can qualify for tax exemptions primarily under Section 30(E) of the NIRC, which exempts non-stock corporations or associations organized and operated exclusively for religious purposes. To be exempt, the entity must meet several key conditions:

Eligibility Criteria

Non-Stock, Non-Profit Structure: The organization must be registered as a non-stock, non-profit corporation with the Securities and Exchange Commission (SEC). No part of its net income or assets should inure to the benefit of any private shareholder or individual. This means all earnings must be reinvested in religious activities, such as worship services, community outreach, or maintenance of religious facilities.
Exclusive Religious Purpose: The primary activities must be religious in nature, including spiritual guidance, sacraments, and evangelism. Incidental activities like operating a small canteen for members may be allowed if they do not dominate the operations.
No Political Involvement: The entity must not participate in partisan political activities, as per Revenue Regulations (RR) No. 2-98 and related issuances.
BIR Certification: Even if registered with the SEC, the organization must obtain a Certificate of Tax Exemption (CTE) from the BIR. This involves submitting documents like articles of incorporation, by-laws, financial statements, and proof of non-profit operations.

Taxes Exempted

Income Tax: Qualifying churches are exempt from the 25% corporate income tax (reduced from 30% under the CREATE Act for domestic corporations). However, income from unrelated business activities (e.g., renting out church property for commercial events) is taxable at the regular rate under the "unrelated business income tax" rule in Section 30.
Value-Added Tax (VAT): Sales of goods or services by exempt churches are generally not subject to the 12% VAT if directly related to religious functions. For instance, sales of religious books or donations received are VAT-exempt. However, commercial transactions may trigger VAT liability.
Real Property Tax (RPT): Under the Local Government Code (LGC) of 1991, Section 234(a), churches, parsonages, and convents appurtenant thereto, as well as lands used exclusively for religious purposes, are exempt from RPT. This exemption applies only to properties actually, directly, and exclusively used for religious worship; unused portions or commercial uses are taxable.
Donor's Tax and Estate Tax: Not directly applicable to the church itself, but donations received are exempt from donor's tax if the church qualifies as an accredited donee institution.
Other Taxes: Exempt from percentage taxes on non-VAT transactions and certain excise taxes, provided the activities align with religious purposes.

Limitations and Revocation

Exemptions are not absolute. If a church engages in profit-making activities exceeding incidental levels, the BIR may revoke the CTE and impose back taxes, penalties, and interest. Annual information returns (BIR Form 1702) must be filed, even if no tax is due, to maintain transparency. Violations of the "private inurement" doctrine—such as excessive salaries to clergy or family members—can lead to loss of status.

Tax Treatment of Donations

Donations play a crucial role in funding churches and foundations, and Philippine tax law incentivizes giving through deductions and exemptions. The rules distinguish between donations to exempt entities and those to non-qualifying recipients.

Types of Donations and Tax Implications

Donor's Tax Exemption: Under Section 34(H) of the NIRC, donations to qualified donee institutions (including accredited churches and foundations) are exempt from the 6% donor's tax (as amended by TRAIN Law). For non-qualified recipients, donor's tax applies on the excess over PHP 250,000 per year for individuals.
Income Tax Deductions for Donors:
- Individuals: Donors can deduct the full amount of donations to accredited institutions, subject to a limit of 10% of taxable income before the deduction (Section 34(H)(1)).
- Corporations: Deductions are limited to 5% of taxable income before the deduction (Section 34(H)(2)).
- To claim deductions, the donation must be substantiated with official receipts, and the donee must issue a Certificate of Donation (BIR Form 2322).
Special Rules for Certain Donations:
- Government and Accredited NGOs: Donations to the government, accredited non-government organizations (NGOs), or institutions for priority activities (e.g., education, health) may qualify for enhanced deductions up to 100% or 200% under RR No. 9-2021, implementing the Bayanihan to Recover as One Act.
- In-Kind Donations: Valued at fair market value; however, donations of depreciable assets may trigger recapture rules if the donee sells them.
- Bequests and Legacies: Exempt from estate tax if given to qualified religious or charitable institutions (Section 87(D) of the NIRC).

Accreditation Requirements

For donations to be deductible or exempt from donor's tax, the recipient must be an "accredited donee institution." This requires registration with the Philippine Council for NGO Certification (PCNC) or equivalent bodies, followed by BIR approval. Churches and foundations must maintain books of accounts and issue proper receipts to support donor claims.

Potential Issues

Donors risk disallowance of deductions if the recipient loses its exempt status retroactively. Anonymous donations or those with strings attached (e.g., requiring personal benefits) may not qualify. The BIR scrutinizes large donations for potential tax evasion schemes.

Tax-Exempt Status of Foundations

Foundations, typically organized as non-stock, non-profit corporations for charitable, educational, or scientific purposes, fall under Section 30 of the NIRC, similar to churches but under subsections like 30(G) for charitable institutions or 30(H) for foundations.

Eligibility Criteria

Organizational Requirements: Must be SEC-registered as non-stock, non-profit, with purposes aligned with exempt categories (e.g., poverty alleviation, education, health). At least 75% of income must be used for exempt purposes within the Philippines, per RR No. 13-98.
Operational Test: No private inurement; all funds must support stated objectives. Foundations must not operate as conduits for private gain.
BIR and PCNC Certification: Obtain CTE from BIR and, for donor incentives, PCNC accreditation as a donee institution.

Taxes Exempted

Income Tax: Exempt on income from donations, grants, and related activities. Investment income (e.g., interest, dividends) is exempt if used for exempt purposes; otherwise, taxable at 10% under the passive income tax rules post-CREATE Act.
VAT and Percentage Tax: Exempt on core activities; commercial ventures (e.g., fee-based services) may be taxable.
RPT: Exempt under LGC Section 234(b) for properties used exclusively for charitable purposes, including buildings and improvements.
Customs Duties: Importations for charitable use may be duty-free under the Customs Modernization and Tariff Act, subject to Department of Finance approval.

Specific Rules for Private Foundations

Unlike public charities, private foundations (those funded primarily by a single donor or family) face stricter rules. They must distribute at least 5% of net assets annually for charitable purposes to avoid excise taxes, though Philippine law adapts U.S.-inspired rules via RR No. 13-98.
Related-Party Transactions: Prohibited if they benefit insiders; violations can lead to penalties under Section 270 of the NIRC.

Compliance and Reporting

Foundations must file annual information returns, audited financial statements, and reports on fund utilization. Failure to meet the 75% utilization rule can result in taxation on undistributed income.

Interplay Between Churches, Donations, and Foundations

Churches often establish affiliated foundations to handle charitable arms, creating a symbiotic relationship. Donations funneled through foundations can enhance tax benefits, but the BIR requires clear separation to prevent abuse. For instance, a church foundation must not subsidize purely religious activities if certified for charitable purposes.

Under the CREATE Act, minimum corporate income tax (MCIT) does not apply to exempt entities, but gross receipts from unrelated activities may trigger it if exemptions are partial.

Challenges and Enforcement

The BIR actively audits exempt organizations through its Revenue District Offices. Common issues include:

Commercial Creep: When exempt entities expand into profit-making without segregating income.
Documentation Gaps: Lack of receipts or audits leading to disallowed exemptions.
Revocation Proceedings: Under RR No. 20-2018, the BIR can revoke CTEs for violations, with appeals possible to the Court of Tax Appeals.

Taxpayers can seek rulings from the BIR for clarity on specific scenarios, ensuring compliance.

Conclusion

Philippine tax rules provide robust incentives for churches, donations, and foundations to foster societal good, but these come with stringent conditions to prevent misuse. By adhering to non-profit principles, obtaining necessary certifications, and maintaining transparent operations, these entities can fully leverage exemptions. Donors, meanwhile, benefit from deductions that encourage generosity. As tax laws evolve—such as through ongoing amendments—staying informed is crucial for sustained compliance and impact. For personalized advice, consulting a tax professional or the BIR is recommended.