Decision Date: December 1, 2018
Link: Case Summary Document
Citation: Case No. 9166
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.


This was an appeal from a Final Decision issued by the Commissioner of Internal Revenue of the Philippines (the Commissioner) that found the Perpetual Succour Hospital of Cebu Inc (PSH) liable for an alleged deficiency in income tax for the tax year 2010 in the total amount of ₱19,912,123.87 (approx.. $CAN506.021.00).

PSH is incorporated as a religious, non-stock, non-profit, charitable institution governed by a Board of Trustees, and owned by the Congregation of the Sisters of St. Paul De Chartres (SPC). It is located in Cebu City, Philippines. PSH contended that that being a nonstock corporation, it was exempt from income tax pursuant to Section 30(E) of the National Internal Revenue Code (NIRC). Section 30(E) has two requirements:

  1. That the organization or association is operated exclusively for charitable purposes; and
  2. That there is no inurement or welfare aid and financial assistance to members of the organization or association.

The Commissioner argued that PSH was not operated for exclusively charitable purposes because PSH took paying patients. More importantly for the decision, some of the proceeds of the hospital were used for the support of the SPC (including support for aged sisters who could not work, support for the poor and sick, for education, and for food and shelter requirements for the sisters working at the hospital, but also for SPC’s more general purposes), so that there was aid and financial assistance given to members of the organization. There was no ‘inurement’ to any member of the Board, however. The Commissioner’s position was that PSH should be assessed for tax under section 27(B) of the NIRC, which provides for a preferential tax rate of 10%. This rate applies to ‘proprietary’, meaning ‘private’ in the Philippines, educational institutions and hospitals.

The questions before the appeal court were:

  1. Whether PSH possessed all the qualifications to be exempt from income tax under Section 30 of the NIRC of 1997?
  2. Whether the Commissioner was correct in assessing PSH for deficiency income tax in the aggregate amount of ₱19,912,123.87 for taxable year 2010 plus 25% surcharge and 20% deficiency and delinquency interests for late payment pursuant to Sections 248 and 249 of the NIRC of 1997?

The court relied on the Supreme Court of the Philippines 2012 decision in Commissioner of Internal Revenue vs. St. Luke’s Medical Center Inc. to hold that PSH was liable for the taxation but not for the interest and penalties. That case found that even if a charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing tax-exempt status for its not-for-profit activities. However, the “income of whatever kind and character” of a charitable institution “from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax”. Any income from for-profit activities was therefore subject to income tax at the preferential 10% tax rate under Section 27 (B) of the NIRC of 1997, as amended. Since interest and penalties were not included, PSH was liable for the taxation amount of ₱10,589,651.20 (approx. $CAN269.111.00).

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