Taxation of microfinance NGOs

The former secretary general of the United Nations, Kofi Annan, once said microfinance is an idea whose time has come.  Indeed, not only has microfinance arrived, it is actually now trending in the Philippines. Without doubt, the enactment of Republic Act No. 10693, also known as Microfinance NGOs Act, on Nov. 3, 2015, will only spur the growth of microfinance in the Philippines.

As the title of the law (Microfinance NGOs Act) suggests, it was enacted to support microfinance NGOs, defined in the act as “a nonstock, nonprofit organization duly registered with the Securities and Exchange Commission (SEC), with the primary purpose of implementing a microenterprise development strategy and providing microfinance programs, products, and services, such as microcredit and microsavings, for the poor and low-income clients”.

The government support, among others, comes in the form of tax incentives. Under the act, microfinance NGOs shall only pay two percent based on gross receipts from microfinance operations, in lieu of all national taxes.

To avail of the tax incentives, microfinance NGOs are however required to obtain accreditation from the Microfinance NGO Regulatory Council (Council). To be accredited by the Council, the microfinance NGO must provide the required basic minimum core programs and services which are: Microcredit and financial literacy program; and microcredit and capital build-up (CBU) or microsavings. Also, the microfinance NGO must be a non-stock, non-profit corporation with a capital contribution of at least one million pesos (P1,000,000.00) and must conform to the following requirements:

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

2. Its articles of Incorporation and by-laws shall specifically state that:

a. It is a “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. Shall specifically provide that upon dissolution, the 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 reasonable per diem.

f.  The level of administrative expenses shall not exceed 30 percent of the total expenses for the taxable year.

g. Other requirements which the Council may deem necessary.

Only microfinance NGOs with duly issued Certificates of Accreditation by the Council shall be eligible to avail of the two percent gross receipts tax on income from microfinance operations, in lieu of all national taxes. The Certificate of Accreditation is valid for three years.

However, prior to the establishment of the Council, microfinance NGOs which have been certified by the Securities and Exchange Commission (SEC) as having no derogatory information are deemed accredited for a period of one (1) year from the effectivity of the Microfinance NGO Act. Take note that the Certificate of No Derogatory Information has a validity of one year unless earlier suspended or revoked.

Earlier this year, the Department of Finance issued Revenue Regulations (RR) No. 03-2017 to implement the tax provisions of the Microfinance NGOs Act. The RR took effect on March 14  2017, 15 days after its publication. The RR clarifies that the preferential tax rate two percent only refers to lending activities and insurance commission which are bundled and forming integral part of the qualified lending activities of the microfinance NGO.  Hence, all other income by the microfinance NGO which are not generated from the aforesaid activities shall be subject to all applicable taxes. These activities include the following:

1. Interest income derived from loans other than those extended to qualified borrowers under RA No. 10693. 

2. Commission fees and other charges on the provision of electronic payment system such as mobile or any innovative digital platforms or channels.

3. Commission fees and other charges on the provision of money transfer and other related remittance services.

4.  Interest income from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements including a depository bank under the expanded foreign currency deposit system.

5.  Royalties. 

6. Prizes and other winnings. 

7. Cash and/or property dividends.

8. Capital gains from the sale or dispositions of real property

9.  Capital gains tax on the sale, barter, exchange or other disposition of shares of stock in a domestic corporation.

10. Stock transaction tax on the sale, barter, or exchange of shares of stock listed and traded through the local stock exchange

11. All other forms of income not related to microfinance operations (lending activities and insurance commission) catering to the poor and low-income individuals.

The RR also provides that the microfinance NGO shall be constituted as a withholding agent for the government if they act as employer and any of their employees receive  compensation income subject to compensation withholding tax, or if they make payments to individuals or corporations subject to withholding taxes.

Further, microfinance NGOs are not exempt from the regular tax audit as the RR emphasizes that the books of accounts and other pertinent records of the microfinance NGO shall be subject to periodic examination by the revenue officers of the tax office.  The goal here is to ascertain that the microfinance NGO is complying with the conditions under which they have been granted tax incentives.

Finally, duly registered and accredited microfinance NGOs are required to update their registration with the concerned Revenue District Offices (RDOs) to reflect their accreditation as microfinance NGOs.  The clients of the microfinance NGOs are also required to have a TIN. It may apply for the issuance of the TIN on behalf of clients provided there is authorization for this purpose.

With the tax incentives and clarity in the taxation of microfinance NGOs, it is expected that microfinance will continue to expand in the Philippines. Hopefully, the accredited microfinance NGOs can provide the poor and those in the marginalized sector of the community the much needed access to funding to help them meet their basic needs and even encourage them to undertake entrepreneurial activities.

Marianne Chrystelle M. Lacanilao is an associate from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].