BIR Ruling No. 093-10

October 6, 2010 BIR RULING NO. 093-10 Section 4 (3), Article XIV, 1987 Constitution; Tax Code, Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H); RR No. 2; VAT Ruling No. 119-90; BIR Ruling No. S30-047-01; BIR Ruling No. S30-27-2003; BIR Ruling No. DA-043-2004 La Union Christian Comprehensive College, Inc. Monte del Rosario Compound, Benteng, Rosario, La Union Attention: Ms. Micheline B. Rabara Gentlemen : This refers to your letter dated April 14, 2008 received by this Office on August 20, 2009 via 1st Indorsement dated August 26, 2008 from Revenue District Office No. 3-San Fernando, La Union, requesting on behalf of La Union Christian Comprehensive College, Inc. for tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 (H) of the Tax Code of the Philippines, as amended. It is represented that La Union Christian Comprehensive College, Inc. with Taxpayer's Identification No. 006-556-113-000, is a non-stock, non-profit corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CN200729106 dated June 25, 2007; that it is recognized by the government and permitted by the Technical Education and Skills Development Authority (TESDA) to offer the following TVET Registered courses on August 14, 2007: a) "Food and Beverage (NC II)" under Certificate of TVET Program Registration with WTR No. 0701032119; b) "Commercial Cooking" under Certificate of TVET Program Registration with WTR No. 0701032118; c) "Housekeeping (NC II)" under Certificate of TVET Program Registration with WTR No. 0701032120; d) "Front Office Services (NC II)" under Certificate of TVET Program Registration with WTR No. 0701032121; e) "PC Operations (NC II)" under Certificate of TVET Program Registration with WTR No. 0701032122; CSDcTH f) "Security Services (NC I)" under Certificate of TVET Program Registration with WTR No. 0701032123; g) "Security Services (NC II)" under Certificate of TVET Program Registration with WTR No. 0701032124. and that the purposes for which it was incorporated are the following: "1. To establish and operate a institution of learning for both sexes and to provide instruction therein in arts, sciences and other studies as prescribed by the government, for elementary, high school, collegiate institutions and to offer such special, vocational, and technical courses as conditions may demand from time to time. 2. To establish and operate an institution that would offer degree course along hotel and restaurant but not limited to Bachelor of Science in Hotel and Restaurant and Bachelor of Science in Tourism and other degree courses. 3. To establish and operate an institution that would offer pre-elementary, elementary and secondary education." In support of its request, La Union Christian Comprehensive College, Inc. has completely submitted 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; 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 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 or to the government. 4) Certified true copy of the By-Laws; DaEATc 5) Annual Information Return and Financial Statements for 2008 & 2009; 6) Certified true copies of the TESDA registration certificates; 7) Affidavit of Non-Forum Shopping; and 8) BIR Certificate of Registration. In reply, please be informed that this Office cannot as yet issue the requested ruling/certificate of tax exemption because La Union Christian Comprehensive College, Inc. has to prove by actual operation for at least three (3) years that it is really an educational institution exempt from income tax under Section 30 (H) of the Tax Code of 1997, as amended. La Union Christian Comprehensive College, Inc. can file the necessary annual information return instead of an income tax return on or before the 15th day of the fourth month of the preceding accounting period following the start of its operation as an exempt organization as required under Section 24 of Revenue Regulations No. 2-40 dated February 10, 1940 (Collector vs. Sinco, G.R. L-9276 dated October 23, 1956) .Based on such information return, we shall conduct the necessary investigation on the activities undertaken during the period. The letter of exemption shall thereafter be issued depending upon the result of our investigation. However, La Union Christian Comprehensive College, Inc. is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from currency bank deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7-1/2% final withholding tax pursuant to Section 27 (D) (1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in its By-laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. It should be understood that as a non-stock, non-profit corporation educational institution, La Union Christian Comprehensive College, Inc. shall be constituted as withholding agent of the government if it acts as an employer and its employee receives compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. S30-047-01 dated June 5, 2001) CAcIES Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. 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. Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests),or government entity. 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. Accordingly, if La Union Christian Comprehensive College, Inc. is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT. (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004) Likewise, revenue from contributions, and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code. (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004) Finally, for purposes of securing a permanent exemption after the three (3)-year period, La Union Christian Comprehensive College, Inc. is required to submit the following documents pursuant to Revenue Memorandum Circular No. 14-2001: 1) Certified true copy of the Certificate of Registration with the SEC; 2) Certified true copy of the 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 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 its members; TAIESD 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 or to the government. 3) Certified true copy of the By-Laws; 4) Certified true copy of the Annual Information Returns and Financial Statements for the last three (3) years of operation; 5) Certified true copy of the DECS, or CHED, or TESDA recognition, as the case may be ; 6) Sworn Affidavit of Non-Forum Shopping; and 7) BIR Certificate of Registration. 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