Thursday, November 6, 2014


The Court of Tax Appeals (CTA) has ruled that non-stock, nonprofit organizations engaging in microfinance are subject to the value-added tax (VAT) on such services, and on income tax from such activities.

In the case of Kabalikat Para sa Maunlad na Buhay, Inc. v. Commissioner of Internal Revenue, the CTA dismissed the appeals filed by both the Bureau of Internal Revenue (BIR) and the petitioner with respect to certain issues resolved by the CTA in an earlier decision.

The CTA affirmed the finding that, although the petitioner was subject to VAT and income tax on its microfinance activities, the tax deficiency assessment issued by the BIR had already prescribed because the three-year prescription period for assessment was not effectively extended, because of an invalid waiver of the defense of prescription executed by the petitioner and the BIR.

In dismissing the appeal, the CTA said the microfinancing activities of the petitioner are subject to VAT, and that its income from microfinancing activities are also subject to income tax, as provided  by the Revenue Regulation (RR) 14-2007, which implements Section 30 of the Tax Code.

The CTA said nonstock, nonprofit organizations exempt from income tax under Section 30 are only exempt from income tax with respect to income received by them as such nonstock, nonprofit organizations from activities from which they were authorized to derive income without liabilities to pay income tax.

Section 5 of RR 14-2007 provides the tax treatment for microfinance services rendered by non-governmental organizations (NGOs), as follows: 

"All NGOs falling under the enumeration of Section 30 of the Tax Code of 1997 are exempt from income taxes, in respect of income received by them as such.

However, income of such NGOs from microfinance activities and which are not in respect of their registered activities covered by Section 30 of the Tax Code of 1997 regardless of disposition made of such income, shall be subject to tax under the Tax Coe of 1997."

The CTA also said that, aside from income tax on its income from microfinance activities, the petitioner is also liable to VAT for the microfinance services it provides to its members because such services are not among the services exempt from VAT.

The CTA denied the argument of the petitioner that it should be subject to the zero-percent to 5% tax from gross receipts because it can be considered as a "financial intermediary," which is a taxable entity under the General Banking Act.

The petitioner said that its business is akin to that of a pawnshop, which is subject to the percentage tax on gross receipts, thus, it should also be subject to percentage tax instead of the regular income tax on its microfinance activities.

But, the CTA said the petitioner, as a microfinance provider, cannot be considered as a financial intermediary, like a pawnshop because  pawnshops are specifically classified as nonbank financial intermediaries by the Bangko Sentral ng Pilipinas, under the supervision of the same, while microfinance providers are not.

-News Report by David Cagahastian
BusinessMirror, Nov. 7, 2014, p.B2-1.


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