Taxes and churches

RENDER unto Caesar the things that are Caesar’s, and unto God the things that are God’s.

The issue of taxation is not foreign to religion. Jesus, himself was presented with the delicate question of whether Jews should or should not pay taxes to Roman authorities. His answer satisfied the pharisees, but perplexed tax scholars to this day.

The tax reform programs launched at the start of President Duterte’s administration have also reignited the debate on whether religious institutions should remain exempt from income taxation.

The tax exemption of religious institution is based on the principle of separation of Church and State. The 1987 Constitution specifically stated that the separation of Church and State shall be inviolable.

Since the power to tax is also the power to destroy, the State must stray away from taxing religion to minimize the possibility of flexing the State’s power over religious institutions.

Yet, proponents of taxing the Church argue that granting tax exemptions to religious organizations actually violate the separation of Church and State. They argue that tax exemption is an indirect subsidy of the government which violates the proscription of the Constitution against public money or property being appropriated even indirectly to religious institutions.

Some jurisdictions do not even grant tax exemptions to religious organizations. For example, in Singapore or Germany, religious organizations are given income tax exemptions because they register as charitable organizations and not because of their religious nature.

In the US, religious organizations are tax exempt subject to the strict condition that it does not participate or intervene in “any political campaign on behalf of ( or in opposition to) any candidate for public office.” Unfortunately, we do not impose such requirement here in the Philippines. It may be a better policy to adopt the same condition to further maintain the separation of Church and State.

The income tax exemption of religious organizations is not constitutionally mandated. The Constitution only grants real property tax exemption to religious institutions particularly on assets actually, directly, and exclusively used for religious purposes.

The income tax exemption of religious organizations is granted under Section 30 of the Tax Code. Note that the income tax exemption does not cover income from activities conducted for profit regardless of where the proceeds are used. Hence, rental income and income from deposits and investments, for example, derived by a Church, are taxable regardless of the fact that such income is used to finance a soup kitchen or build shelters for the homeless.

Removing the income tax exemption of Churches, however, will probably not substantially increase the BIR collections. I assume that a bulk of the receipts of religious organization come from donations of its members which are exempt from donor’s tax under the Tax Code anyway.

Another exemption which benefits religious organizations is the exemption from income tax of educational institutions operated by religious organizations. The tax exemption is granted by the Constitution on all revenues and assets of nonstock, non- profit educational institutions used actually, directly, and exclusively for educational purposes.

Hence in the case of De La Salle University, Inc., the Supreme Court held as exempt from income tax the rental earnings from restaurants/ canteens and bookstores operating within the campus. The Supreme Court explained that the tax exemption was expected to benefit the students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of nonstock, non- profit educational institutions.

The issue of taxing the Church has always been a prickly issue for any jurisdiction. It dates back to Medieval times when the Church and State are one. It is ironic that in modern times, the exact opposite principle of separation of the church and state is the main basis for the tax exemption granted to the Church.

If we look at the income tax exemption of religious organizations, the exemption is very limited and does not include any activity which is pursued for profit.

Among the tax exemptions of the Church, the more substantial exemption might be the real property tax exemption it enjoys for properties “actually, directly and exclusively” used for religious purposes. Note that real property tax is a tax imposed annually and is collected merely by owning the property. Considering that religious organizations have prime properties all over the Philippines, this may yield substantial tax for local governments who are bereft of local sources of funds. Unfortunately, I found no public information on the total property holdings of religious organizations in the Philippines that may approximate the possible tax take of the local governments. Suffice it to say, that the properties owned are usually prime lots, located in the “poblacions” where property values are at its highest. However, removing this exemption will need a constitutional amendment and not just a simple legislation.

The debate on taxing religious organizations will definitely yield strong supporters and opponents. It can be a polarizing issue in a very religious country such as the Philippines. The principle of separation of Church and State remains an important tenet in our society. As was held by the US Supreme Court in the case of Walz v. Tax Commission of the City of New York, tax exemption allows the least State interference on the affairs of the Church. On this basis, I believe it is the more preferred.