Strengthening microfinance NGOs for the poor

SUITS THE C-SUITE By Jay A. Ballesteros

Business World (03/27/2017 – p.S1/4)

In October 2016, the Philippine Statistics Authority reported that poverty among Filipinos has declined in the last decade to 21.6% in 2015 from 26.6% in 2006. However, this still translates to over 26 million poor Filipinos with almost half living in extreme poverty and lacking the means to feed themselves. While the statistics reflect slight improvements resulting from the trickle-down of economic growth to lower-income families, poverty remains a persistent and widespread problem.

On Nov. 3, 2015, Republic Act 10693 or the Microfinance NGOs Act was signed. It aims to pursue a program of poverty eradication wherein poor Filipino families will be encouraged to undertake entrepreneurial activities to meet their minimum basic needs including income security. In line with the vision to eradicate poverty, government will support and work with qualified non-government organizations (NGOs) to promote microfinance and its allied services.

The Implementing Rules and Regulations (IRR) of RA 10693, jointly drawn up by the Departments of Finance, Trade and Industry, and Social Welfare and Development and the Securities and Exchange Commission (SEC), were duly approved on Aug. 16, 2016.

Microfinance is defined in the Regulations as the viable and sustainable provision of a broad range of financial services to poor and low-income individuals engaged in livelihood and microenterprise activities. It uses non-traditional and innovative methodologies and approaches to provide microfinance loans, microinsurance, enterprise development, health care, and microhousing to poor families. When managed correctly, access to convenient, flexible and reasonably-priced financial services can be used to establish small businesses and develop other long-term income-generating activities.

Based on Section 4 of Bureau of Internal Revenue (BIR) Revenue Regulations 3-2017, Microfinance NGOs must secure a 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, as a condition for availing of the incentives of RA 10693. A Microfinance NGO must be a non-stock, non-profit corporation with a capital contribution of at least one million pesos (Php1,000,000) and must meet the following requirements:

1. The word “Microfinance” shall be included in the corporate and trade name of the Microfinance NGO;

2. Its Articles of Incorporation and By-Laws shall specifically state that:

a. It is “non-stock and non-profit”;
b. It has the primary purpose of implementing a microenterprise development strategy and providing microfinance programs, products, and services for the poor;
c. It shall specifically provide that upon dissolution, its net assets shall be distributed to another NGO organized for similar purposes, or the State for public purpose/s or as may be determined by a competent court of justice;
d. No part of the property or income shall inure to the benefit of any member, officer, organizer or any individual person;
e. The trustees shall not receive any compensation or remuneration, except for a reasonable per diem;
f. The level of administrative expenses shall not exceed 30% of the total expenses for the taxable year; and
g. Other requirements which the Council may deem necessary.

A duly registered and accredited Microfinance NGO shall be subject to a 2% preferential tax, which is in lieu of all national taxes, based on its gross receipts from microfinance operations limited to lending activities and insurance commissions which are bundled and form an integral part of its qualified lending activities.

All other income earned shall be subject to all applicable taxes, which shall include but are not limited to: interest income derived from loans and bank deposits; commission fees on the provision of electronic payment systems, money transfer and other remittance services; royalties, prizes and winnings; capital gains; as well as all other form of income not related to microfinance operations (lending activities and insurance commissions) catering to the poor and low-income individuals.

Microfinance NGOs shall also be constituted as withholding agents for Government if they act as employers and any of their employees receive compensation income subject to withholding tax on compensation, or if they make payments to individuals or corporations subject to the withholding taxes at source.

In addition, books of accounts and other pertinent records of Microfinance NGOs shall be subject to periodic examination by the BIR for the purpose of ascertaining whether they are complying with the conditions under which they have been granted tax incentives and their tax liability, if any.

Based on the above provisions, there are potential implications that have arisen from the issuance of the regulations implementing the Microfinance NGOs Act:

1. Effectivity of the 2% preferential tax — Since the Certificate of Accreditation is an essential requirement for granting this incentive to Microfinance NGOs, it can be inferred that the latter can only apply the 2% preferential tax on gross receipts from its microfinance operations prospectively, i.e., as of the date when the Microfinance NGO has been accredited by the Council or certified with no derogatory information by the SEC. This has been affirmed by the Court of Tax Appeals in its Case No. 8480 (Tulay Sa Pag-unlad, Inc. vs. Commissioner of Internal Revenue (CIR) dated June 20, 2016) where the Court ruled in favor of the CIR, stating that while the Microfinance NGOs Act was passed in 2015, there is no indication in the law that the beneficial tax provision may be applied retroactively. Accordingly, income derived prior to the date of accreditation could be subject to corporate taxes unless the Microfinance NGOs holds a tax-exempt status prior to the implementation of the law. It is also worth stressing that under the IRR of the law, the Certificate of Accreditation shall remain valid for three years unless earlier suspended or revoked by the Council.

2. Applicability of DST on microfinance loan agreements — In the Tulay sa Pag-unlad case, the Microfinance NGO failed to show that the loans it extends fall under the documents and papers exempted from DST under Section 199 of the Tax Code, as amended. Section 199, as amended, provides that loan agreements not exceeding P250,000 executed by an individual for the installment purchase (for his personal use or that of his family and not for business or resale) of a house, lot, motor vehicle, appliance or furniture shall not be subject to DST. No evidence was presented to prove that the financing provided to the borrowers were used for the borrowers’ personal use to purchase any of the enumerated items. Thus, the CTA upheld the DST assessment. With the implementation of RA 10693 granting the 2% preferential tax which is in lieu of all national taxes, the BIR will have to clarify whether this rule applies to DST given the provisions of the Tax Code. In prior rulings issued, the BIR has highlighted that DST, as an excise tax, is imposed upon the parties to the contract and leaves the tax to be paid indifferently by either party pursuant to Section 173 of the Tax Code, as amended, which states that whenever one party to the taxable document enjoys exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. Unless the Microfinance NGOs bear the potential DST equivalent to 0.5% of the loanable amount, this could mean additional costs to client-borrowers.

3. Business tax applicable to all other income — Income not generated from lending activities and insurance commissions shall be subject to all applicable taxes, but the BIR did not specify the business tax types to be imposed. Will it be a 12% VAT imposed on lending investors or a 1% or 5% Gross Receipts Tax applicable for non-bank financial institutions? Regardless of the tax type, said business taxes will be an additional burden on borrowers.

The Microfinance NGOs Act is a milestone which underscores Government’s intention to work with qualified NGOs to promote financial inclusion among impoverished Filipino families and spur inclusive growth. Despite the challenges and compliance questions raised by the tax regulations, it is apparent that this Act unites the government and NGOs under a noteworthy common goal — that of alleviating, and hopefully, eventually eradicating poverty in the Philippines.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Jay A. Ballesteros is a Partner of SGV & Co.