Special tax rate for Microfinance NGOs

The BIR has issued Revenue Regulations (RR) No. 3-2017 to implement the tax provisions of Republic Act (RA) No. 10693, otherwise known as the “Microfinance NGO Act.” In 2015, RA 10693 was signed into law to pursue poverty alleviation programs by encouraging underprivileged Filipinos to undertake entrepreneurial ventures that provide income security to their families. It aims to encourage non-government microfinance institutions to work with the government to pursue community development and improvement in the socioeconomic welfare of marginalized sectors through financially inclusive and pro-poor financial and credit policies and mechanisms, such as microfinance and its allied services.

WHAT IS MICROFINANCE?

Microfinance is a viable and sustainable provision of a broad range of financial services to poor and low-income individuals (i.e., those below the low-income threshold, which is defined by the National Economic and Development Authority (NEDA) as twice the official national poverty threshold), that are engaged in livelihood and microenterprise activities. It uses non-traditional and innovative methods and approaches, namely: the extension of small loans, simplified loan application procedures, group character loans, collateral-free arrangements, cash flow-based lending, alternative loan repayments, minimum requirements for capital build-up (CBU)/minimum balance retention, and small denominated savers’ instruments aimed to improve the borrower’s asset base and expand their access to capital and savings.

WHAT ARE THE REQUIREMENTS TO BECOME A MICROFINANCE NGO?

A Microfinance Non-governmental Organization (Microfinance NGO) must be accredited by the Microfinance NGO Regulatory Council as evidenced by a duly issued Certificate of Accreditation or deemed accredited as evidenced by a duly issued Certificate of No Derogatory Information from the Securities and Exchange Commission (SEC). It must have a minimum capital contribution of P1,000,000 and its corporate and trade name must include the word “microfinance.” Further, its Articles of Incorporation and By-Laws must specifically state that:

• It is a non-stock, non-profit corporation with the primary purposes of implementing a microenterprise development strategy and providing microfinance programs.

• Upon dissolution, the net assets shall be distributed to another nongovernmental organization with similar purposes, or to the State for public purposes, or as may be determined by a competent court of justice.

• No part of the property or income shall inure to the benefit of any member, officer, organizer or any individual.

The trustees shall not receive any compensation or remuneration, except for a reasonable per diem. Further, the level of administrative expenses shall not exceed 30% of the total expenses for the taxable year.

The Microfinance NGO Regulatory Council may also request other requirements which it may deem necessary.

WHAT ACTIVITIES MAY BE UNDERTAKEN BY MICROFINANCE NGOS?

Microfinance NGOs shall continuously provide “microcredit” or the extension of microfinance loans to its poor and low-income clients, and at least any of the following services: i. Financial literacy programs; or ii. CBU or microsavings, which refers to the program of a Microfinance NGO to collect relatively small amounts of money from their clients for purposes of maintaining a compensating balance or the proportion of the total loan of a microfinance client. The same can be used by the Microfinance NGO to offset against the clients’ outstanding balance in case of default.

A Microfinance NGO may also undertake other programs and services such as agricultural microfinance, housing microfinance, microinsurance, electronic payment system such as mobile or any innovative digital platforms or channels, money transfer and other related remittance services, development opportunities such as leadership training and entrepreneurial skills enhancement, and other relevant and/or innovative programs, products and services that address social welfare purposes and which are not contrary to existing laws and regulations (e.g., programs involving health, education, Disaster Risk Reduction and Management, and Persons with Disabilities assistance).

HOW ARE MICROFINANCE NGOS TAXED?

Duly accredited or deemed accredited Microfinance NGOs are entitled to a 2% tax based on their gross receipts from microfinance operations in lieu of all national taxes (note that they remain to be subject to local taxes). The 2% special tax rate is accorded only to Microfinance NGOs whose primary purpose is microfinance and only on their microfinance operations catering to the poor and low-income individuals.

Gross receipts from microfinance operations refer to the interest income, penalties, surcharges, commissions and discounts, service and general fees, and other charges actually or constructively received without any deduction of any kind or nature, related to lending activities and insurance commission, which are bundled and form an integral part of the qualified lending activities of the Microfinance NGOs.

All other income of Microfinance NGOs, which are not generated from lending activities and insurance commissions, shall be subject to all the normally applicable taxes. Such other income includes interest income on loans extended to non-qualified borrowers; commission fees and other charges on the provision of electronic payment systems, money transfer and other related remittance services; and all other income not related to microfinance operations.

MICROFINANCE COULD LEVEL THE PLAYING FIELD FOR BUSINESS START-UPS.

While there are several loans and other financing products available through commercial banks, they may not be practical sources for raising capital funds especially for nascent entrepreneurs from the low-income bracket. Institutional credit facilities are known for their stringent loan approval policies that subject borrowers to stiff credit investigation, high interest rates, and meticulous documentation.

The issuance of RR 3- 2017, which provides specific guidelines for entitlement and coverage of the special tax rate, could result in more interested parties for accreditation as Microfinance NGOs, a development that would certainly be welcomed by small entrepreneurs. More significantly, it opens vast opportunities for the underprivileged through capital build-up — when used productively, may serve as a springboard out of poverty.

The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from this article.