BIR Ruling [DA-036-04]

January 28, 2004 BIR RULING [DA-036-04] 60 (B) DA-265-7-22-96 University of the Philippines Provident Fund, Inc. Rm. 310, College of Business Administration U.P. Diliman, Quezon City Attention: Ms. Lina J. Valcarcel Executive Director Gentlemen : This refers to your undated letter received by this Office on September 12, 2003, requesting for a ruling on the following issues: 1. Is it possible for the UP Provident Fund to distribute cash dividends to its active members without losing its tax exemption privilege? 2. Is it possible to get a refund for VAT paid from the BIR? If so, how does one go about it? Is it possible to register as a non-VAT institution so that one may just present the certificate and be exempted from the payment of VAT? It is represented that the UP Provident Fund was incorporated in 1997; that it is a non-stock, non-profit pension fund for UP employees; that as a pension, fund, it enjoys income tax exemption as well as tax exemption for the benefit of its retiring members; that it has come to your knowledge that some pension/provident funds distribute cash dividends to their members; that the UP Provident Fund as well as other religious, non-stock, non-profit corporation are non-VAT or exempt from charging VAT and presumably from VAT on purchases for which VAT is automatically included in the price. In reply, please be informed that the income of the UP Provident Fund, being a non-stock, non-profit pension fund for UP employees is exempt from income tax under Section 60(B) of the Tax Code of 1997. Likewise, the benefits thereof to be received by its members upon retirement shall be exempt from income tax. Thus it can distribute cash dividends to its active members without losing its tax exemption privilege, having a distinct and separate personality from its officers and members. Moreover, the income or earnings from investments of the Fund., e.g., dividends so distributed, are taxable to the employees members to the extent of the entire amount thereof, in the year so distributed, if the distribution is effected before their retirement from the company provided that the income distributed shall not be diminished by the employee's personal contribution. (BIR Ruling DA-265-7-22-96) However, the exemption of UP Provident Fund extends only to income taxation. Section 105 of the 1997 Tax Code provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services and the same forms part of the price. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Thus, UP Provident Fund can no longer apply for a refund of the VAT on its purchases. Moreover, services rendered by UP Provident Fund is not subject to VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. EHSIcT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group