Tax Liability of St. Paul College of Parañaque

May 14, 1990 BIR RULING NO. 080-90 24 000-00 080-90 Gentlemen : This refers to your letter dated April 28, 1989 stating that your client, St. Paul College of Paraaque, an educational private institution organized as a non-stock, non-profit institution, owns and operates a canteen/bookstore; that the net income from said activity was declared and included in its taxable net income filed during the fiscal year 1986-87; and that the canteen is located within the school campus and only candies, softdrinks and prepared foodstuffs are served for the students, faculty and other school personnel. Based on the foregoing representations, you now request in effect a ruling on the following queries: "1. May we know if the net income derived by said institution from the operation of the canteen be subjected to 10% instead of 35%, since said income is a school related activity. 2. May we know if said sale is subject to 4% Contractor's Tax for sales during fiscal year 1986-87." In reply, please be informed that under then Section 24(a) of the Tax Code private educational institutions, whether stock or non-stock, shall pay a tax of ten percent of their taxable net income from the operation of the school, related school activities, and on their passive investment income consisting of interest, dividends, royalties, and the like: Provided, however, that dividends received by a private educational institution, whether stock or non-stock, from a domestic corporation shall be subject to the inter-corporate dividends tax under subsection (c) of Section 24 of the Tax Code. On the other hand, beginning August 1, 1986, the effective date of Executive Order No. 37 insofar as corporations filing their income tax returns on a fiscal year basis are concerned; as in this case, private educational institutions, whether stock or non-stock, shall pay a tax of 10% on their taxable income except those covered by Section 24(e) of the Tax Code i.e., interest from deposits and yield or any monetary benefit from deposit substitutes and from trust fund and similar arrangements, and royalties which shall be subject to a 20% tax, capital gains tax from sales of shares of stock which shall be subject to the 10% tax if the net gain is not over P100,000.00 and 20% tax if over P100,000.00 in case the shares of stock sold are not traded through a local stock exchange and of 1% based on the gross selling price if the shares are listed and traded through a local stock exchange, income derived under the Expanded Foreign Currency Deposit System and intercorporate dividends which is no longer subject to tax. Provided, that if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by any educational institutions from all sources, the tax prescribed in paragraph (a) of the same Section 35% shall be imposed on the entire taxable income of the educational institution. For this purposes, 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 purposes or function. Moreover, as of February 2, 1987, the ratification date of the 1987 Constitution, 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 (Section 4(3), Art. XIV, 1987 Constitution). Such being the case, and since the term "fiscal year" means an accounting period for twelve months ending on the last day of any month other than December (Sec. 20(q), Tax Code), beginning January, 1986 until February 1, 1987 income derived by a private educational institution from the operation of its canteen/bookstore being within the purview of the phrase "related school activities" under then Section 24(a) of the Tax Code prior to its amendment by E.O. No. 37 without, however, being embraced by the term "unrelated trade, business or other activity under Section 24(b) of the Tax Code, as amended by E.O. No. 37, as in the instant case, is therefore, subject to the 10% income tax on the taxable net income derived from the operation of such canteen/bookstore and not to the regular corporate tax of 35%. However, beginning February 2, 1987, revenues derived from and assets used in the operation of canteen/bookstores by non-stock, non-profit private educational institutions shall likewise be exempt from taxes, provided, that such canteen/bookstore are located within the school premises and are owned and operated by the private educational institution concerned as ancillary activities. (Section 2.2, Finance Department Order No. 137-87, as amended) Furthermore, it cannot be held subject to the 4% contractor's tax imposed under then Section 170 of the Tax Code nor to the 4% caterer's tax imposed under Section 172(i) of the same Code on proprietors or operators of restaurants, refreshment parlors, and other eating place based on the foregoing facts. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner