BIR Ruling No. 064-10

September 15, 2010 BIR RULING NO. 064-10 Sections 27 (B), 30 (H); BIR Ruling No. 248-88; BIR Ruling No. DA-244-04; BIR Ruling No. 40-65 July 21, 2010 Saint Michael Montessori Children's House Legaspi & Capricho II Street Roxas City, Capiz Attention: Mr. Joemari N. Tan School Director Gentlemen : This refers to your letter dated March 9, 2009 requesting on behalf of Saint Michael Montessori Children's House for tax exemption pursuant to Section 30 of the Tax Code of the Philippines, as amended. cSHIaA It is represented that Saint Michael Montessori Children's House with Taxpayer's Identification No. 005-246-059-000, is a non stock corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission under Registration No. E199700471; that it is recognized by the government and permitted by Department of Education, Region VI-Western Visayas in accordance with Government Permit No. (R-VI) No. E-15, Series of 2008 issued on July 3, 2008 to operate Pre-Elementary (N, KI & II) Course and Government Permit (R-VI) No. E-16, Series of 2008 issued on July 3, 2008 to operate Elementary (I-V) Course; and that the purposes for which it was incorporated are the following: 1) To provide quality education to children of all ages; 2) To promote and protect the physical, moral spiritual, intellectual and social well being of children; and 3) To inculcate to children the value of patriotism and nationalism and to mold them as better citizen. 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, provide, 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 institution; . . . ." Furthermore, Section 3 of Department Order No. 92-88, amending Department Order No. 137-87 dated December 16, 1987 provides, viz. : "SEC. 3. Section 2 of the said Department Order is likewise amended to read as follows: "SEC. 2. Coverage of Exemption under Section 4 (3), Article XIV or the New Constitution The exemption herein contemplated refers to internal revenue taxes and duties, in appropriate cases, imposed by the national government and in CERTAIN CASES TO LOCAL TAXES IMPOSED BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL TAX CODE on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes." cAaDCE Thus, both under the Constitution and Sec. 30 (H) of the Tax Code of 1997 educational institutions to be exempt from tax must be non-stock and non-profit and that all revenues and assets must be used actually, directly and exclusively for educational purposes. (BIR Ruling No. DA-244-04 dated May 7, 2004) 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. 248-88 dated June 6, 1988). A perusal of your Articles of Incorporation however shows that you are not a "non-stock, non-profit" corporation but a "non-stock" corporation only. Therefore, the applicable provision in your case should be Section 27 (B) of the Tax Code of 1997 which read as follows: "Sec. 27. Rates of Income Tax on Domestic Corporation. xxx xxx xxx (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are non-profit 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." DcaSIH The mere fact that no cash or stock dividend is being declared by an educational institution organized as a stock corporation will not sustain the claim that the net income of the educational institution does not inure to the benefit of its stockholders . . . (T)he net profits of a corporation inure to the benefit of the stockholders not only by way of cash dividends but also thru the accumulation of profits as surplus or additional capital, or the investment thereof in additional assets. And it is for this reason that under the amendment to then Section 27 (e) (now Section 31) of the Tax Code, effected by Republic Act No. 82, a private educational institution organized as a stock corporation is subject to income tax on its net income for the year, although no dividends are declared for said year. ( CIR vs. University of the Visayas , L-13554, Oct. 30, 1964). Therefore, a private educational institution organized as stock corporation is subject to the corporate income tax imposed by then Section 24 (now Section 27) of the Tax Code. (BIR Ruling No. 40, s. 1965). Based on the foregoing, Saint Michael Montessori Children's House is a non-stock, but not a non-profit corporation organized and operated for education purposes, thus, Saint Michael Montessori Children's House is subject to the 10% preferential rate of income tax provided for under then Section 24 (now Section 27) of the Tax Code, as amended, on your taxable net income from operation of the school, related school activities (BIR Ruling No. 40-65). This however, does not include taxable income covered by Subsection (D) of Section 27 of the Tax Code. 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) of Section 27 of the Tax Code shall be imposed on the entire taxable income. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue