There are periodic calls for the government to tax the church. And the church would reply that the government can’t tax it, because their tax-exempt status is guaranteed in the Constitution and the Internal Revenue Code. If we look at the Constitution and actual practice, however, the case is not so simple. The Church is not as tax exempt as they make themselves out to be. They actually pay a lot of taxes: dividends tax, employee contributions, VAT. But at the same time, there is a lot in terms of property and business taxes that the church should pay, but doesn’t.
Real Estate Tax Exemption
The constitution mentions church tax exemption in Article 6, Section 28(2):
“Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all land, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt for taxation.”
Thus, it is clear: church buildings are exempt from real estate tax. Note that this doesn’t refer to “the church” as an institution, or its constituent dioceses, parishes and congregations, which are entities that are much more than mere buildings. If we go by the above provision, other church property should be taxed if they are not ‘exclusively’ used for religious purposes. Convents, for example, are subject to property tax. School buildings with a dual purpose – as residence for priests/nuns and as school, since this is no longer ‘exclusive use’ should also be taxed.
The presence of a chapel in a convent does not make the convent a religious building; it is just an ordinary residence with a chapel. It is similar to a chapel in a mall – the mall remains a commercial building.
Schools and Hospitals
There is a constitutional provision covering non-stock, non-profit schools. This is found in Article 14, Section 4.
“(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, or exclusively for educational purposes shall be exempt from tax and duties…”
“(4) Subject to conditions prescribed by laws all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.”
Under this provision, all income raised by a non-stock, non-profit school should be used for educational purposes. Withdrawals from school funds for use by congregations should be prohibited. If they did this, the school should be stripped of its tax free status; or the congregation should be charged with (technical) theft of the school’s assets.
You would then say: “the school could simply pay the nuns/religious who have school-related functions, and they could donate this to their congregation. True. Actually, this is what they should do. But the salaries of these nuns/religious should be comparable that of to the other teachers or administrative staff in the school. Paying them higher salaries would constitute a ‘withdrawal’ of profits by the congregation, which should not be allowed for a non-profit, non-stock educational institution.
Note that ‘non-profit, non-stock’ covers also schools that are run by private foundations. It would not be right for the head of the foundation running a school to build his residence on school premises, and then get paid a very high salary. So, why should a church congregation be any different?
Then, there is the case of hospitals. Are hospitals included in the term ‘charitable institution’? For me, charitable institutions would include orphanages, battered women shelters and the like; but hospitals are at best a border line case. There should be clear guidelines made by the Department of Finance to define when a hospital can be classified as a charitable institution. Perhaps it should require that the majority of its patients are poor and that they pay below market-based hospital fees.
It should not be the case that any religious group could simply put up a hospital, run it in a regular manner, collect high fees from patients, and then claim to be a ‘charitable institution’ exempt from real estate and income taxes.
But in the Philippines today, church run institutions often get away with not paying taxes. Mostly, this is due to the church’s political clout; most politicians are afraid of going after the church for back taxes. And there is also the bias in favor of the church by judges. In a recent case filed by the Cebu City government against Perpetual Succour Hospital (run by religious nuns), the city wanted to collect taxes on the pharmacy and real estate leasing operations done by the hospital, because these are not covered by the tax exempt status of the hospital. But the Regional Trial Court ruled that the accounts for these activities are not separate from that of the hospital, and thus no tax could be collected. Actually, if we were to follow the Constitution, it should be the other way around: since the hospital is no longer exclusively used for ‘charitable purposes’, it should be taxed as a whole.
The government, through the Department of Finance, could and should implement the law when it comes to the income and assets of religious institutions. The church should not be allowed a creative interpretation of the tax laws to make themselves tax-exempt. This is especially so when they operate as non-profit and non-stock institutions. There may be some laws that need to be amended, but mostly it is just a question of political will. If the Department of Finance decides to go after the church for back taxes, they will have the Constitution and most of the laws on their side.
I believe it is high time that the government fully collect the taxes due from dioceses, congregations and the like. We should not continue with the myth that the church as a whole is tax exempt. This is effectively tax evasion by the church, and in the present framework of pushing for full tax compliance by everyone, the church should not be an exception. Otherwise, that will be the same as condoning corruption (in this case, tax evasion), and we don’t want that to happen. Or do we?