You can only ask to stop spreading religion AFTER they have spread it. You can't pre-empt them when you see their missionary or prophet entering your territory.
I haven't always been denounced if I refuse, but most of the time I do get denounced if I refuse.
In my last game Byz was a really good friend of mine. She asked me to denounce another friend, so I refused. She did not denounce me (yay!) and no red modifiers appeared.
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