BIR Ruling No. 104-15

April 14, 2015 BIR RULING NO. 104-15 Section 4 (3), Article XIV, 1987 Constitution; Sections 27 (A), (B), (D) (1), 30 (H); 57; 101 (A) (3); 105; 109 (H), 235; 236 (B); 237 of the 1997 Tax Code, as amended; Department Order No. 137-87, as amended by Department Order No. 92-88; Department Order No. 149-95; RMC No. 76-2003; BIR Ruling No. 459-13; BIR Ruling No. 455-13; BIR Ruling No. 438-13; BIR Ruling No. 059-13; BIR Ruling No. 548-12 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati City 1226 Attention: Mark Anthony P. Tamayo Partner, Tax & Customs Services Gentlemen : This refers to your letter dated December 17, 2013, requesting for a certificate of tax exemption enjoyed by non-stock, non-profit educational institutions pursuant to Article XIV, Section 4 par. (3) of the Constitution and Section 30 (H) of the Tax Code of 1997, as amended. It is represented that Brent International School Manila , Inc. , with Taxpayer's Identification No. 004-985-203-000, 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 SEC Registration No. A1996-10715 dated January 28, 1997; that it is recognized by the government and permitted by the Department of Education (DepEd) in accordance with Government Recognition No. 254, s. 2014 for the Lower School (Nursery-Grade 5) and Middle School (Grade 6-8) and Upper School (Grade 9-12) effective as of School Year 2014-2015; and that the purpose for which it was incorporated is: To establish a school of international character giving instructions to children and/or dependents of foreign diplomatic personnel, other expatriates, other foreign temporary residents and Filipinos in a number specified in the guidelines issued by the Department of Education, Culture and Sports, on June 22, 1988, pursuant to Presidential Decree 2022, irrespective of nationality and creed, in arts, sciences and other studies embraced in kindergarten, primary, intermediate and high school course of instruction; to provide online form of instruction and allied programs and services through the internet; and offer short to medium terms of educational camps to its students. ETIcHa In support of its request, Brent International School Manila, Inc . has submitted the following documents: 1. Original copy of application letter for Tax Exemption; 2. Certified true copy of the Certificate of Incorporation with the Securities and Exchange Commission (SEC); 3. Certified true copy of the amended Articles of Incorporation issued by the SEC which include the following: 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 income which the Corporation may obtain as an incident to its operation shall be distributed as dividends to its members, trustees or officers nor inure to the benefit of any private individual; d. That none of the members of the Board of Trustees shall receive any remuneration or compensation in cash or in kind for their services rendered as such members of the Board of Trustees; and cEITCA e. In the event of dissolution of the corporation, all of its assets and properties shall be turned over to the Episcopal Church of the Philippines. 4. Certified true copy of the amended By-Laws; 5. Original copy of Certification under Oath by its Corporate Secretary as to: (i) all previous amendments/changes in the Articles of Incorporation and By-Laws, (ii) manner of activities, and (iii) the sources and disposition of income of the subject corporation or association; 6. Certified true copy of the Certificate of Registration with the BIR; 7. Original copy of the Certification under Oath by the Treasurer certifying that the members and officers of the Board of Trustees of the Corporation do not receive any compensation, remuneration, salaries or any emoluments for services/acts rendered by them as members of the board; 8. Original copy of the Certification issued by the Revenue District Officer, RDO No. 57, Bian, Laguna, that the corporation has no outstanding tax liability; 9. Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation for the last three (3) years; 10. Original copy of a statement under Oath by the Headmaster as to its modus operandi ; 11. Certified true copy of Government (DepEd,) Recognition Certificates; 12. Original copy of Certificate of Good Standing issued by DepEd; and 13. Original copy of Certification under oath by its Treasurer as to the utilization of annual revenues and assets. 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. : SDTIaE "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. 459-13 dated December 6, 2013) Private non-profit educational institutions whose gross income from unrelated trade, business or other activity does not exceed fifty percent (50%) of their total gross income derived from all sources, shall pay a tax of ten percent (10%) on their taxable income, except those covered by Section 27 (D) of the Tax Code. However, if their gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources then the entire taxable income shall be subject to the regular corporate income tax rate prescribed under Section 27 (A) of the Tax Code." (Section 27 [B] of the Tax Code of 1997, as amended; Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 and 195960 dated 26 September 2012) Unrelated trade, business or other activity means any trade, business or activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function. (Section 27 [B], Tax Code of 1997) From the foregoing, and since Brent International School Manila, 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. 459-13 dated December 6, 2013) However, Brent International School Manila, 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, Brent International School Manila, 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 (1) (H) of the 1997 Tax Code, as amended. AECcTS 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 (1) (V) of the same Code if the gross sales or receipts from such sale of goods and services do not exceed One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00) which tax payment may legitimately be passed on to buyers of such goods and services. (BIR Ruling No. 455-13 dated November 27, 2013) Hence, as long as Brent International School Manila, 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. 438-13 dated November 21, 2013) 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 No. 059-13 February 11, 2013) 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; CaATDE (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). 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 Brent International School Manila, Inc . as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by Brent International School Manila, 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 Brent International School Manila, 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. Brent International School Manila, Inc . is advised to contact The Secretariat, Philippine Council for NGO Certification (PCNC), tel. nos. 782-1568, 715-9594, 715-2756 or telefax 715-2783. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, Brent International School Manila, 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. caEIDA Moreover, Brent International School Manila, 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 Brent International School Manila, Inc . to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 548-12 dated August 31, 2012) Please note that this tax exemption ruling shall be valid for a period of three (3) years from the date of issue, unless sooner revoked or cancelled. The tax exemption ruling may be renewed upon filing of a subsequent application for Tax Exemption/Revalidation with the same requirements and procedures provided under Revenue Memorandum Order (RMO) No. 20-2013. Failure to renew the Tax Exemption Ruling shall be deemed a revocation thereof upon the expiration of the three (3)-year period. The new Tax Exemption Ruling shall be valid for another period of three (3) years, unless sooner revoked or cancelled. 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