Far Eastern University

December 27, 2007 BIR RULING [DA-682-07] RMC 76-03 & Sec. 27 (B), 101(A) (3) & 101 (B) (2) Far Eastern University Nicanor Reyes St. Manila Attention: Ms. Estelita C. Aguirre Dean, Institute of Accounts, Business and Finance Gentlemen : This refers to your letters dated August 7, 8 and 9, 2007 requesting for a ruling on the following: 1) Whether non-stock, non-profit educational institutions are exempt from keeping books of accounts and payment of the annual registration fee; 2) Whether proprietary educational institutions owned and operated by private individuals (not by corporations) are covered by the special rate of 10% under Section 27 (B), or the 5% to 32% rate under Section 24 (A) of the Tax Code; and 3) Whether donations to proprietary educational institutions which are owned by private individuals are exempt from donor's tax, just like non-stock, non-profit educational institutions. In reply, please be informed as follows: 1. Requirement to Keep Books of Accounts Section 232 in relation to Section 235 of the Tax Code of 1997 should be construed with reference to previous legislation. Then Section 324 (now Section 235) of the Tax Code on preservation of books of accounts and other accounting records was amended by Presidential Decree (P.D.) No. 1457. Section 235 provides "SEC. 235. Preservation of Books of Accounts and Other Accounting Records . All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers: Provided, That for income tax purposes, such examination and inspection shall be made only once in a taxable year, except in the following cases: DCcHIS (a) Fraud, irregularity or mistakes as determined by the Commissioners; (b) The taxpayer requests reinvestigation; (c) Verification of compliance with withholding tax laws and regulations; (d) Verification of capital gains tax liabilities; and (e) In the exercise of the Commissioner's power under Section 5 (B) to obtain information from other persons in which case, another or separate examination and inspection may be made. Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer's office or place of business or in the office of the Bureau of Internal Revenue. All corporations, partnerships or persons that retire from business shall, within ten (10) days from the date of retirement or within such period of time as may be allowed by the Commissioner in special cases, submit their books of accounts, including the subsidiary books and other accounting records to the Commissioner or any of his deputies for examination, after which they shall be returned. Corporations and partnerships contemplating dissolution must notify the Commissioner and shall not be dissolved until cleared of any tax liability. Any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the Bureau of Internal Revenue for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liability, if any. " This requirement to keep books of accounts was reiterated in Revenue Memorandum Circular (RMC) No. 76-2003 which clarifies the tax exemptions of non-stock, non-profit corporations under Section 30 of the Tax Code of 1997, as amended and non-stock, non-profit educational institutions under Section 4 (3) of Article XIV of the 1987 Philippine Constitution, viz .: ". . . in order to monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997." In view of the foregoing, non-stock, non-profit educational institutions are required to keep books of accounts pursuant to Sections 232 and 235 of the Tax Code of 1997, as amended in relation to DOF Order No. 137-87, as amended. BIR Ruling No. 159-98 dated November 11, 1998 has become ineffective in respect to the non-requirement of keeping books of accounts by non-stock, non-profit educational institutions. Payment of Annual Registration Fee RMC No. 76-2003, specifically provides that non-stock, non-profit educational institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in Section 235 (B) of the Tax Code of 1997, as amended. As such, BIR Ruling No. 159-98 issued on November 11, 1998 by then Commissioner Beethoven L. Rualo has been rendered ineffective insofar as it exempts non-stock, non-profit educational institutions from the payment of annual registration fee. 2. Section 27 (B) of the Tax Code of 1997, as amended reads: "(B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, 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 or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. " TacESD Thus, a non-profit educational corporation organized and operated for educational purposes and owned and operated by private individuals is subject to the 10% special rate of income tax provided for under Section 27 (B) of the Tax Code, as amended, on its income from sources other than from tuition, matriculation, laboratory, library, athletic, graduation fees of similar nature essential to, or necessarily connected with the educational purposes of an institution. (Jesus Sacred Heart College vs. Collector of Internal Revenue , 95 Phil. 16). Accordingly, a proprietary educational institution is subject to income tax at the rate of 10% on its income from sources other than those essential to, or necessarily connected with its educational purposes. However, if the gross income from sources other than those essential to, or necessarily connected with its educational purposes exceed 50% of the total gross income derived by such educational institution from all sources, its entire taxable income shall be subject to the tax prescribed in Section 27 (A) [then Section 24 (A)] of the Tax Code of 1997, as amended. (BIR Ruling No. DA-244-2004 dated May 7, 2004) 3. Exemption from Donor's Tax Section 4 (3) of Article XIV of the 1987 Philippine Constitution provides, viz .: "Sec. 4(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. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. " In relation, Section 4 (4) of Article XIV of the Constitution provides that " (s)ubject to conditions prescribed by law , all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. . ." In line with this mandate, Section 25 of Batas Pambansa Blg. 232, as amended by RA No. 7798, otherwise known as the "Education Act of 1982" provides that taxes shall not be due on donations to educational corporations. However, Section 101 of the National Internal Revenue Code provides "SEC. 101. Exemption of Certain Gifts . The following gifts or donations shall be exempt from the tax provided for this Chapter: (A) In the Case of Gifts made by a Resident. (1) . . . (2) . . . (3) Gifts in favor of an educational . . . corporation, institution . . .: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a 'non-profit educational . . . corporation, institution, . . .' is a school, college or university . . ., incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. DSAacC (B) In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines. xxx xxx xxx (2) Gifts in favor of an educational . . . corporation, institution . . .: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes." It can be gleaned from the foregoing that donations by non-residents to a proprietary educational institution that complies with the conditions set forth in Section 101 (A) (3) of the Tax Code i.e., must be non-stock, pays no dividends, trustees do not receive compensation, etc., are exempt from donor's tax. On the other hand, no such conditions are attached in the case of donations by non-residents who are not citizens of the Philippines to educational institutions. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service