BIR Ruling [DA-234-04]

March 26, 2004 BIR RULING [DA-234-04] Manila Central University Caloocan City Attention: Ms. Mila Perez Acting Chief Accountant Gentlemen : This refers to your letter dated June 10, 2003 requesting for a ruling on value-added tax imposed on private educational institutions; how you can benefit from the input tax you paid for purchases of goods and services related to educational activities of the university; and guidelines to determine which are related to educational activities and which are not. In reply, please be informed as follows: 1) Private educational institutions, whether stock or non-stock, shall pay a tax of 10% on their taxable income except interest income from currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements; and royalties, derived from sources within the Philippines, which shall be subject to a tax of 20%. Provided, that if the gross income from unrelated trade, business, or other activity exceeds 50% of the total gross income derived by any educational institution from all sources, the entire taxable income of the educational institution shall be subject to a tax of 32% (then 35%). The term, "unrelated trade, business, or other activity" means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function. Moreover, a private educational institution is any "private school" maintained and administered by private individuals or groups issued a permit to operate by the Department of Education in accordance with existing laws and regulations ( BIR Ruling No. 247-92 dated September 7, 1992 ). 2) The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution [ Apostolic Perfect vs. City Treasurer of Baguio , 71 Phil. 547 (1941)]. The Supreme Court (in the case of Abra Valley College, Inc. vs. Aquino , L-39086, June 15, 1988) interpreted the phrase "exclusively used for educational purposes" to extend to "facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes". Thus, the High Court stated in the said case that while the use of the second floor of the main building for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose-educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purposes of education. 3) Gross receipts from the operations of private educational institutions accredited as such by the Department of Education or by the Commission on Higher Education are exempt from the 10% VAT pursuant to Sec. 109(m) of the 1997 Tax Code. However, this exemption does not extend to its other activities involving sale of goods and services ( BIR Ruling No. DA-40-02 dated March 7, 2002 ). Likewise, 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 the value-added tax and customs duties, provided the guidelines provided under Department Order No. 137-87 in addition to the usual import requirements are observed ( BIR Ruling No. 248-88 dated June 6, 1988 988 and BIR Ruling No. 130-90 dated July 4, 1990 ). However, the sale of school supplies by the said institution and the purchase of materials for repairs of its building are subject to the 10% VAT imposed under Section 106 of the same Code. Such tax payment may legitimately be passed on to customers like educational institutions ( BIR Ruling No. 248-88 dated June 6, 1988 ). Other possible sources of income of educational institutions include tuition and miscellaneous fees, fees for the use of school computers and such other fees collected from the students which are incidental and in connection with the student-school relationship. Exemption from payment of income tax from these may be justified under paragraph 3, Section 4, Article XIV of the 1987 Constitution. 4) The input tax which is the VAT shifted or presumed to have been shifted or (passed on) by a VAT-registered person (seller) to another VAT-registered person (purchaser i.e. educational institution) is creditable against ( i.e. , deductible from) the latter's output tax. In other words the output tax of a seller becomes the input tax of the purchaser who are both VAT-registered persons. Input taxes of educational institutions may arise from: i. purchases from other VAT-registered persons (Sec. 110, Tax Code of 1997); ii. importation of goods (Sec. 110, Tax Code of 1997); and iii. purchases of goods or supply of services which are otherwise exempt from VAT but the seller issued a VAT invoice or receipt therefor (Sec. 109, TC). A seller of exempt goods and services cannot charge VAT on his output. Unlike a seller of zero-rated goods or services, he is not entitled to a refund (or issuance of a tax credit certificate) for the indirect (input) tax shifted to him by his supplier. Such input tax becomes part of the operating expense (e.g., supplies) or acquisition cost of capital goods which may entitle the non-VAT buyer thereof to higher income tax deductions. To illustrate: The sale of books to you by a bookstore is an exempt transaction. No VAT can be charged by the bookstore. Hence, no input tax for the university. In the same manner, if you resell the same books to the students, no VAT can be charged by you. Rendering consultancy services is not substantially related to the exercise or performance by an educational institution of its educational purpose or function. It is a supply of services subject to the 10% VAT which you may passed on to your clients. The sale of building materials by a hardware is a taxable transaction subject to 10% VAT. The output tax shifted to you by the hardware becomes an input tax to the university. On the other hand, educational services rendered by the school is an exempt transaction. No VAT can be charged by the school. Hence, any VAT shifted to you by your suppliers ( i.e. , for the use of venue and equipment) is chargeable to operating expense deductible from the university's income tax. In case you import educational materials and equipment, you shall pay the VAT upon importation from a non-VAT seller in a foreign country. By the very nature of the tax, the VAT on importation may be considered as having been shifted by the importer to himself and becomes an input tax which is creditable to avoid double taxation of the original value of the imported goods. However, deductions for input taxes from output taxes must be supported by a VAT invoice or receipt which must be issued in the name of the person to whom the service was rendered ( BIR Ruling No. 81-99 dated June 22, 1999 ). Note that input tax for a particular purchase transaction can be claimed once only upon consummation of the sale of goods and based on the entire gross selling price whether the sale is paid in cash, on credit or in installment. This is to avoid double credit of input taxes for the same transaction. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group