BIR gives 2% preferential tax rate to microfinance NGOs

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A MICROFINANCE nongoverment organization (NGO) should only pay a 2 percent tax on gross receipts from operations related to servicing the poor and low-income individuals, according to the Bureau of Internal Revenue (BIR).

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This is according to BIR’s newly issued regulation on tax provisions for Republic Act (RA) 10693 or The Microfinance NGOs Act, which was signed into law in 2015 to pursue poverty eradication by encouraging poor Filipino families to be entrepreneurs to meet their minimum basic needs and gain income security.

The law encourages non-government microfinance institutions to work with the government in community development and improving the socioeconomic welfare of the poor and other marginalized sectors through inclusive and pro-poor financial and credit policies and mechanisms such as microfinance and allied services.
According to the BIR, a registered and accredited microfinance NGO must pay a 2 percent tax—in lieu of all national taxes —based on gross receipts from microfinance operations.

The preferential tax rate covers only NGOs that operate as microfinance for the poor and low-income individuals, in line with the main goal of RA 10693 to alleviate poverty, the bureau said.

“Provided, further, that the Certificate of Accreditation issued by the Microfinance NGO Regulatory Council or the Certificate of No Derogatory Information issued by the Securities and Exchange Commission, as the case may be, shall be an essential requirement for granting the 2 percent preferential tax treatment of Microfinance NGOs,” it added.

The preferential tax rate based on gross receipts should only refer to lending activities and insurance commissions integral to the qualified lending activities of the Microfinance NGO.

All other incomes not generated from lending activities and insurance commissions are subject to all applicable taxes, including royalties; interest income from loans other than those extended to qualified borrowers under RA No. 10693; commission fees and other charges on electronic payment system such as mobile or any innovative digital platforms or channels; commission fees and other charges on money transfers and other related remittance services; and interest income from any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, including a depository bank under the expanded foreign currency deposit system.

Also disqualified from the preferential tax rate are prizes and other winnings; cash and property dividends; capital gains from the sale or dispositions of real property; capital gains tax on the sale, barter, exchange or other disposition of shares of stock in a domestic corporation; stock transaction tax on the sale, barter, or exchange of shares of stock listed and traded on the local stock exchange; and all other forms of income not related to microfinance operations catering to the poor and low-income individuals.

“The availment of the benefits under RA 10693 by Microfinance NGOs for their microfinance operations shall be evaluated in conjunction with their other lines of business in order to determine the appropriate tax treatment of revenues derived from those other activities,” the BIR said.

Microfinance NGOs are constituted as a withholding agent for the government if acting as employer and any of their employees are receiving compensation income subject to withholding tax, or if they make payments to individuals or corporations subject to withholding taxes at source as required under the Tax Code of 1997, the bureau noted.

The books and other pertinent records of microfinance NGOs are subject to periodic examination by revenue enforcement officers to ascertain their tax liability, if any, under the Tax Code and compliance with the conditions under which they have been given tax incentives and.

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