BIR Ruling No. 026-13

January 21, 2013 BIR RULING NO. 026-13 Section 4 (3), Article XIV, 1987 Constitution; Sections 27 (D) (1), 30 (H); 57; 101 (A) (3); 105; 109 (H), 235; 236 (B); 237 of the 1997 Tax Code; Department Order No. 149-95; RMC 76-2003; BIR Ruling No. 444-2011; BIR Ruling No. 242-2011; BIR Ruling No. 222-2011 Saint Francis Learning Center Foundation, Inc. (For Indigenous People of Zambales, Philippines) Nibangon, Mangan-Vaca Subic, Zambales Attention: Sis. Mary Francis B. Borje, SFIC School Coordinator Gentlemen : This refers to your letter dated September 9, 2011 requesting for a certificate of tax exemption enjoyed by non-stock, non-profit educational institutions pursuant to Section 30 (H) of the Tax Code of the Philippines, as amended. ASEcHI Documents submitted show that Saint Francis Learning Center Foundation, Inc. (For Indigenous People of Zambales, Philippines or SFLCFI for brevity) with Tax Identification No. 212-909-673-000 is an entity registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. A1998-12942. It is recognized by the government and permitted by the Department of Education, Culture and Sports (now DepEd) Region III to operate Elementary Course (Grades I-VI) in accordance with Government Recognition No. E-066, S. 2001 and that the primary purpose for which such association was incorporated are: 1. To help in the development of the indigenous people (the Aeta) of Zambales. 2. To provide formal education for the children of the indigenous people of Zambales. 3. To provide Literacy Numeracy training for adult and indigenous people. 4. To train the indigenous people for leadership and livelihood skills. 5. To preserve and enrich the indigenous people's culture and traditions. 6. To develop and integrated socio-economic, cultural, spiritual and social values program for the indigenous people of Zambales. In support of your request, SFLCFI has completely submitted on June 26, 2011 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) Certified true copy of the Articles of Incorporation which includes the following provisions: a That the corporation is non-stock, non-profit; ECSHID b. That the primary purpose for which it was created is one of those enumerated under Sec. 30 of the Tax Code of 1997, as amended; c. That no part of the net income shall inure to the benefit of any of its members; d. That the trustees do not receive any compensation; and e. In case of dissolution, assets of the corporation shall be transferred to similar institution of the congregation or to the government. 4) Certified true copy of the By-Laws; 5) Certified true copies of the Annual Income Tax Returns and Financial Statements for the last three (3) years of operation; 6) Certified true copy of DECS-Region III Government Recognition; 7) BIR Certificate of Registration; and 8) Other pertinent documents. In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz. : "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." Likewise, Section 30 (H) of the 1997 Tax Code, as amended, provides, viz. : "Sec. 30. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (H) A non-stock and non-profit educational institutions; . . . ." A non-stock, non-profit educational institution 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. The exemption contemplated herein refers to internal revenue taxes 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. 242-2011 dated July 26, 2011) CAaDSI From the foregoing, and since SFLCFI is a non-stock and non-profit educational institution as contemplated under the said provisions, it is exempt from the payment of taxes and duties on all its revenues and assets used actually, directly and exclusively for educational purposes. However, SFLCFI shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88) Likewise, SFLCFI's gross receipts from educational services as a non-stock, non-profit educational institution are exempt from value-added tax (VAT) pursuant to Section 109 (1) (H) of the 1997 Tax Code, as amended. However, other activities involving sale of goods and services not in connection with its primary purposes are subject to the 12% VAT imposed under Sections 106 and 108 of the Tax Code of 1997, as amended, or 3% percentage tax imposed under Section 116 in relation to Section 109 (1) (V) of the same Code, as amended by Revenue Regulations No. 16-2011, if the gross sales or receipts from such sale of goods and services do not exceed One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00) which tax payment may legitimately be passed on to buyers of such goods and services. Hence, as long as SFLCFI will not engage in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, it will remain exempt from VAT on educational services it rendered as a non-stock, non-profit educational institutions. (BIR Ruling No. 222-2011 dated July 12, 2011) Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. ECTIcS Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. 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 its purpose as an educational institution, are 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 their depository banks 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 Tax Code of 1997; (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). Moreover, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by SFLCFI as ancillary activities and the same are located within its premises. (BIR Ruling No. 105-2011 dated April 7, 2011) In addition, gifts, donations, and other contributions received by SFLCFI as an education institution, are exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the Tax Code of 1997, as amended, subject to the condition that not more than 30% of said gift shall be used for administration purposes. CIcTAE Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of SFLCFI as a donee institution with the Philippine Council for NGO Certification (PCNC). Organizations seeking certification shall file with the PCNC Secretariat a letter of intent to apply for certification and submit the necessary documents. If the applicant NGO has met the minimum criteria for certification, the Board gives a 3-year or 5-year certification to the organization and informs this Office which then issues to said organization a certification of Donee Institution Status. SFLCFI is advised to contact The Secretariat, Philippine Council for NGO Certification (PCNC), tel. nos. 782-1568; 715-9594; 715-2756 or telefax 715-2783. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, SFLCFI is constituted as withholding agent for the government required to withhold the tax on compensation income of its employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997, as amended. Moreover, SFLCFI is also subject to the payment of the annual registration fee of PhP500.00 as prescribed in Section 236 (B) of the Tax Code of 1997, as amended. It is also required under Section 6 (C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered. (RMC No. 76-2003) Under Section 235 of the Tax Code of 1997, as amended, any provision of existing general or special law to the contrary notwithstanding, the Revenue District Officer shall conduct an audit of annual information return filed, the books of accounts and other pertinent records of SFLCFI to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 444-2011 dated November 11, 2011) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. aCcHEI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue