BIR Ruling No. 073-11

March 14, 2011 BIR RULING NO. 073-11 Tax Code, Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H); BIR Ruling No. 237-87; BIR Ruling No. 248-88; BIR Ruling No. S30-27-2003; BIR Ruling No. DA-043-2004; BIR Ruling NSNP-(S30H-001) 007-09; BIR Ruling NSNP-(S30H-136) 811-09 School of the Holy Spirit of Quezon City, Inc. F. Sotto St., BF Homes Quezon City 1120 Attention: Sr. Maria Lourdes Mendiola, S.Sp.S. Treasurer Gentlemen : This refers to your letter dated September 15, 2010 requesting on behalf of SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. for tax exemption pursuant to Section 30 (H) of the Tax Code of the Philippines, as amended. It is represented that SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. with Taxpayer's Identification Number (TIN) 000-816-163, is a non-stock, non-profit educational institution duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. 82349 dated October 16, 1978; that it is recognized by the government and permitted by the Department of Education, Culture and Sports (DECS) in accordance with Government Recognition No. 42, s. 1981 dated October 15, 1981 to operate Nursery, Kindergarten and Grades I-VII of the Elementary Courses and Government Recognition No. S-001 s. 1983 to operate First to Fourth Year of the General Secondary Course; and that the purposes for which it was incorporated is "to establish and conduct an educational institution to impart to the youths, particularly girls and young women, sound and balanced formation and education of the intellect, in morals, in science and arts, anchored in, and in consonance with the tenets and teachings of the Roman Catholic Church; to establish, maintain and conduct pre-kindergarten, kindergarten, elementary, high school, pre-collegiate as well as collegiate courses and higher learning such as Liberal Arts, Fine and Applied Arts, Home Economics, Commerce, Business Administration, Secretarial, Education, Normal School, Conservatory of Music, Chemistry, Pharmacy, Philosophy, Law, Architecture, Engineering, Medicine and Nursing, including the establishment, maintenance and conducting of a hospital in connection with the medical and nursing school that the corporation may establish as circumstances and its resources may eventually permit and justify; and the conferring of certificates, diplomas and academic titles and degree in different branches of learning, as may be allowed by and in accordance with law." In support of its request, SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. has completely submitted on December 17, 2010 the following documents: 1) Letter application for tax exemption; AEDcIH 2) Certified true copy of the Certificate of Registration with the SEC; 3) Certified true copy of the Amended Articles of Incorporation which includes the following provisions: a) That the corporation is non-stock, non-profit; b) That the primary purpose for which it was created is to establish and conduct an educational institution under Section 30 (H) of the Tax Code of 1997, as amended; c) That no part of the net income shall inure to the benefit of any its members; and d) That the trustees do not receive any compensation. 4) Certified true copy of the Amended By-Laws which provides that in case of dissolution, assets of the corporation shall be transferred to similar institution or to the government; 5) Certified true copy of the Annual Information Return and Financial Statements for the last three (3) years of operation (FY April 2008, FY April 2009 and FY April 2010); 6) DEPED Certification for Nursery, Kindergarten & Grade I-VII of the Elementary courses; 7) Certified true copy of Government Recognition for the Secondary courses; and 8) Certified true copy of SEC 2010 General Information Sheet. 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 institution; . . . ." 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) From the foregoing, and since SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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. (BIR Ruling No. 237-87 dated August 11, 1987) However, SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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) . HITEaS Likewise, SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC.'s gross receipts from operations as a non-stock, non-profit educational institution are exempt from value-added tax (VAT) pursuant to Section 109 (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 (V) of the same Code if the gross sales or receipts from such sale of goods and services do not exceed One Million Five Hundred Thousand Pesos (P1,500,000.00) which tax payment may legitimately be passed on to buyers of such goods and services. (BIR Ruling No. S30-27-2003 dated November 21, 2003) Hence, as long as SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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. (BIR Ruling No. DA-043-2004 dated February 4, 2004) 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. 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. (BIR Ruling NSNP-(S30H-136) 811-09) 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) . TIAEac 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 SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. as an educational 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. Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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. SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. is advised to contact the Secretariat, Philippine Council for NGO Certification (PCNC), tel. nos. 7821-568; 7159-594; 7152-756 or telefax 7152-783. HEDCAS It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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, SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. 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 SCHOOL OF THE HOLY SPIRIT OF QUEZON CITY, INC. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. NSNP-(S30H-001) 007-09 dated January 8, 2009) 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. aCHDST Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue