BIR Ruling No. 082-11

March 15, 2011 BIR RULING NO. 082-11 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. 017-05; 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 Victory Christian Schoolhouse of Makilala, Inc. Molave St., Poblacion, Makilala, Cotabato Attention: Pastor Dennis M. Tangub President Gentlemen : This refers to your letter dated request letter via 1st Indorsement dated February 29, 2008 from Revenue District Office No. 108-Kidapawan City, requesting income tax exemption of VICTORY CHRISTIAN SCHOOLHOUSE OF MAKILALA, INC. under Section 30 of the 1997 Tax Code, as amended. aIEDAC Documents submitted disclose that VICTORY CHRISTIAN SCHOOLHOUSE OF MAKILALA, INC. ("VCSM, Inc.") with Taxpayer Identification No. 006-225-165-000, is a non-stock, non-profit educational institution registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. CN200626407 dated March 8, 2006; that it was granted government recognition by the Department of Education (DepEd),Koronadal City under the following Government Recognitions: 1. Government Recognition (R-XII) No. 046 S. 2009 dated February 9, 2009 to operate the Elementary Course; and 2. Government Recognition (R-XII) No. 035 S. 2007 dated December 17, 2007 to operate the Pre-School that the primary purposes for which it was incorporated are as follows: "To own, manage, operate and establish a Private school for Nursery, kindergarten and elementary school education, and will endeavor to operate for each students in the upgrading of spiritual health and temperance principles; To educate the students for responsible citizenship by teaching them of worthy home membership, vocational skills, civic education, worthy of leisure, ethical maturity; To purchase, own, hold, acquire or otherwise accept such property, real or personal, as may be necessary, convenient or appropriate for any of the purposes herein expressed and to borrow money and to acquire the same by mortgages, pledge or otherwise in such amount as the corporation require in the furtherance of its purpose." that the institution derives fund to sustain its operations from tuition and other fees, contributions and donations; and that in support of its request, the following documents were completely submitted on July 21, 2010: 1) SEC Registration; 2) Certified copies of its Articles of Incorporation and By-laws; 3) Copies of its Certificates of Government Recognition; 4) Certified true copies of the Audited Financial Statements for the years 2007, 2008 and 2009; 5) Affidavit of Non-forum Shopping; and 6) Copy of BIR Certificate of Registration. ISCHET 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 VCSM, 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, VCSM, 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) . Likewise, VCSM, 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) EAcTDH Hence, as long as VCSM, 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) . AECcTS Moreover, revenues derived from assets used in the operation of cafeterias/canteens, and bookstores exclusively for its students are exempt from taxation provided they are owned and operated by VCSM, Inc. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by VCSM, 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 VCSM, 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. VCSM, 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. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, VCSM, Inc. is constituted as withholding agent for the government required to withhold 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, VCSM, 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 VCSM, 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) DTEAHI 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue