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All Jurisprudence based

0 tracked cards Commercial and Taxation Laws

Lumina Foundation, a non-stock charitable educational organization duly registered in the Philippines, operates two lines of activity: (i) Exempt activity — a scholarship program and tutoring services for underprivileged students; 60% of its receipts come from this exempt activity; (ii) For-profit subsidiary — Lumina Data Analytics, Inc., a wholly owned subsidiary that provides data-analytics and business-intelligence services to external clients; 40% of total receipts come from the subsidiary. The Bureau of Internal Revenue has issued a preliminary position that the subsidiary's income is unrelated business income. (a) Is the subsidiary income exempt, given the Foundation's exempt purposes? (b) Can Lumina Foundation maintain its tax-exempt status if it continues to operate the subsidiary? (c) What steps should Lumina Foundation take to preserve its exemption for the exempt activities while addressing the subsidiary's income?

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The BIR's preliminary position on unrelated business income is binding and cannot be challenged, so the Foundation must treat the subsidiary as non-exempt. The subsidiary income is not exempt; however, Lumina Foundation can maintain its tax-exempt status if the subsidiary is reorganized as a separate taxable entity with independent governance, arms-length transactions, and the Foundation implements steps to keep the exempt activities as the primary purpose, including separate books and a ruling request. The subsidiary income is not exempt, and the Foundation cannot maintain its tax-exempt status if it keeps the subsidiary. The Foundation should seek a BIR ruling confirming that the subsidiary's income remains not part of the exempt receipts and implement changes if necessary.

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