BIR Ruling [DA-103-05]

March 31, 2005 BIR RULING [DA-103-05] Sections 27 (D), 106, 109 (z) & 116 BIR Ruling No. DA-40-02 St. Chamuel Institute of Technology Marikina Cainta Inc. Block 2 Lot 27 Part 1 Sumama II Nipindan, Taguig City Attention: Ms. Katherine C. Baccay Treasurer Gentlemen : This refers to your letter dated May 3, 2004 requesting for a ruling exempting you from payment of taxes. It is represented that St. Chamuel Institute of Technology Marikina Cainta Inc. (St. Chamuel Marikina) is a non-stock, nonprofit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A200106303 dated May 4, 2001; that its primary purposes are: "To establish and operate an educational institution or learning center which shall provide courses of study in technical subject to the laws of the Philippines. To receive tuitions and miscellaneous fees, accept donations, endowments, grants, legacies and instruments/devices conformably with existing applicable statutes." and that it has a pending application for government recognition with the Technical Education and Skills Development Authority (TESDA). In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz : "(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. . . " The exemption under Section 4(3), Article XIV of the 1987 Constitution refers to internal revenue taxes and customs duties, in appropriate cases, imposed by the national government on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes (BIR Ruling No. 248-88 dated June 6, 1988). PROVIDED that St. Chamuel-Marikina submits a copy of its Government Recognition, financial statements and annual information returns for taxable years 2002 and 2004, it is exempt from tax on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational purposes. It is, however, subject to internal revenue taxes on income from trade or business or other activity the conduct of which is not related to the exercise or performance of its educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Accordingly, revenues derived from and assets used in the operations of cafeterias/canteens, dormitories, bookstores are exempt from taxation provided they are owned and operated by St. Chamuel-Marikina as ancillary activities and the same are located within the school premises (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88; BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. ENPS-012-98 dated November 25, 1998; and BIR Ruling No. ENPS-006-99 dated May 17, 1999). Accordingly, if the cafeteria/canteen is being leased, income from the operation, thereof is subject to income tax. Under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of the educational purpose of the institution is exempt from the 20% final tax and 7-1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997 subject to compliance with the conditions that as a tax-exempt educational institution it shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: a) Certification from its depository bank as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7-1/2% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the 1997 Tax Code; b) Certification of actual utilization of the said income; and c) Board Resolution by the school administration on proposed projects, (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before, the 15th day of the fourth month following the end of its taxable year (Sec. 4, Finance Department Order No. 137-87; ENPS-012-98 dated November 25, 1998; and BIR Ruling No. 46-00 dated September 26, 2000) In the case of investments in shares of stock, the conduct of said activity is not related to the performance of its purpose as an educational institution, the gains derived from the sale, exchange or disposition thereof is subject to the capital gains tax imposed under Section 27(D) of the 1997 Tax Code (BIR Ruling No. 130-90 dated July 4, 1990). As a non-stock, non-profit educational institution, St. Chamuel-Marikina is also exempt from payment of the 20% final tax on interest earnings derived from time, deposit accounts (BIR Ruling No. 46-00 dated September 26, 2000), treasury bonds, treasury bills and other bank notes which also form part of its assets used for educational purposes (BIR Ruling No. DA-13-02 dated January 30, 2002). However, this exemption does not extend to its other activities involving sale of goods and services which are subject to the 10% VAT imposed under Section 106 of the same Code. Hence, as long as it engages in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, it is subject to VAT (BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. DA-40-02 dated March 7, 2002; and BIR Ruling No. S30-27-2003 dated November 21, 2003). Section 116 of the Tax Code of 1997 subjects to the 3% percentage tax "any person whose sales or receipts are exempt under Section 109(z) of this Code from the payment of value-added tax and who is not a VAT-registered person . . ." The 10% VAT or the 3% percentage tax, whichever is applicable, is a tax on the business transaction or activity and is an indirect tax which the seller may pass-on or shift to the customer who ultimately bears or assumes the burden of the tax. Accordingly, its sale of goods or services is subject to either the 10% VAT or 3% percentage tax if such gross sales or receipts from sale of goods and services do not exceed P550,000.00, which tax payment may legitimately be passed on to its customers i.e., students (BIR Ruling No. 248-88 dated June 6, 1988). On the other hand, its purchases i.e., materials for repairs of school building are subject to the 10% VAT imposed under Section 106 of the Tax Code of 1997. Such tax payment may legitimately be passed on to customers like non-stock, non-profit educational institutions (BIR Ruling No. 248-88 dated June 6, 1988). DHSEcI Finally, its importation of books, films, slides and other educational materials and equipment such as computers to be actually, directly and exclusively used for educational purposes shall be exempt from VAT and customs duties, provided the guidelines under Department Order No. 137-87 in addition to the usual import requirements are observed (BIR Ruling No. 248-88 dated June 6, 1988 and BIR Ruling No. 130-90 dated July 4, 1990). 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, or that the requirements herein stated are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group