BIR Ruling No. 105-10

October 14, 2010 BIR RULING NO. 105-10 Sec. 4 (3), Article XIV, 1987 Constitution; NSNP(S30H-138)820-2009; NSNP(S30H-138)821-2009; DA-531-2006; DA-058-04; BIR RULING 258-88; BIR RULING NO. 378-87 Chevalier School, Inc. (formerly Sacred Heart Mission Seminary, Inc.) Mac Arthur Highway, Sto. Domingo, Angeles City Attention: Fr. Rolando Y. Cuasito, MSC Bursar Gentlemen : This refers to your letter dated December 9, 2009 requesting exemption from the payment of taxes, pursuant to the 1987 Constitution. TDSICH It is represented that Chevalier School, Inc. with TIN 000-750-240-000 is a non-stock, non-profit educational institution registered with the Securities and Exchange Commission under SEC Registration No. 22597 dated November 8, 1988; and that it submitted Government Recognition No. E-154 s. 2003 authority to operate Pre-elementary and Grades I-IV of the Elementary Courses effective December 12, 2003, Government Recognition No. 216 s. 1977 authority to operate Grade V-VI of the Elementary Course effective November 17, 1977, Government Recognition No. 26 s. 1971 authority to operate Complete Secondary Course dated June 17, 1971. In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz. : "(3) 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. . . ." The exemption under Section 4 (3), Article XIV of the 1987 Constitution refers to internal revenue taxes and customs duties, in appropriate cases, 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). As a non-stock, non-profit educational institution, it 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. It is, however, subject to internal revenue taxes on income from trade or business or other activity the conduct of which is not related to the exercise or performance of its educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Accordingly, revenues derived from and assets used in the operations of cafeterias/canteens, dormitories, bookstores are exempt from taxation provided they are owned and operated by the school as ancillary activities and the same are located within the school premises (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88; BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. ENPS-012-98 dated November 25, 1998; and BIR Ruling No. ENPS-006-99 dated May 17, 1999). Accordingly, if the cafeteria/canteen is being leased, income from the operation thereof is subject to income tax. 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 the educational purpose of the 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: ESTaHC a) Certification from its depository bank 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 1997 Tax Code; 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; ENPS-012-98 dated November 25, 1998; and BIR Ruling No. 46-00 dated September 26, 2000) In the case of investments in shares of stock, since the conduct of said activity is not related to the performance of its purpose as an educational institution, the gains derived from the sale, exchange or disposition thereof is subject to the capital gains tax imposed under Section 27 (D) of the Tax Code of 1997 (BIR Ruling No. 130-90 dated July 4, 1990). As a non-stock, non-profit educational institution, it is also exempt from payment of the 20% final tax on interest earnings derived from treasury bonds, treasury bills and other bank notes which also form part of its assets used for educational purposes (BIR Ruling No. DA-13-02 dated January 30, 2002). Likewise, its gross receipts from operations as a non-stock, non-profit educational institution are exempt from the 12% VAT pursuant to Section 109 (H) of the Tax Code of 1997, as amended by RA 9337. However, this exemption does not extend to its other activities involving sale of goods and services which are subject to the 12% VAT imposed under Section 106 of the same Code. Hence, as long as it engages in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, it is subject to VAT (BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. DA-40-02 dated March 7, 2002; and BIR Ruling No. S30-27-2003 dated November 21, 2003). Section 116 of the Tax Code of 1997, as amended by Section 13 of RA 9337 subjects to the 3% percentage tax "any person whose sales or receipts are exempt under Section 109 (V) of this Code from the payment of value-added tax and who is not a VAT-registered person . . . ." The 12% VAT or the 3% percentage tax, whichever is applicable, is a tax on the business transaction or activity and is an indirect tax which the seller may pass on or shift to the customer who ultimately bears or assumes the burden of the tax. Accordingly, its sale of goods or services is subject to either the 12% VAT or 3% percentage tax if such gross sales or receipts from sale of goods and services do not exceed P1,500,000.00, which tax payment may legitimately be passed on to its customers i.e. , students. IEAaST On the other hand, its purchases i.e. , materials for repairs of school building are subject to the 12% VAT imposed under Section 106 of the Tax Code of 1997, as amended. Such tax payment may legitimately be passed on to customers like non-stock, non-profit educational institutions (BIR Ruling No. 248-88 dated June 6, 1988). Finally, its importation of books, films, slides and other educational materials and equipment such as computers to be actually, directly and exclusively used for educational purposes shall be exempt from VAT and customs duties, provided the guidelines under Department Order No. 137-87 in addition to the usual import requirements are observed (BIR Ruling No. 248-88 dated June 6, 1988 and BIR Ruling No. 130-90 dated July 4, 1990). In addition, Section 101 (A) (3) of the Tax Code of 1997, as amended, provides that the following gifts or donations made by a resident, among others, shall be exempt from donor's tax: "(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation." [emphasis provided] The educational institution, as in this case, Chevalier School, Inc. should comply with the limitation under Section 101, Tax Code that "a maximum of thirty percent (30%) of the educational organization's income and revenue may be used for administrative purposes". Finally, all of the Chevalier School, Inc.'s income shall be devoted to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. In BIR Ruling No. DA-058-2004 dated February 9, 2004, this Office had the occasion to rule that a proposed donation to a foundation, pending accreditation with the Philippine Council for NGO Certification ("PCNC"), is exempt from payment of donor's tax, as follows: "This refers to your letter dated March 10, 2000 and May 17, 2001 stating that a donor has come out willing to donate a real property to the Merkaba Foundation, Inc. for the purpose of putting up a retreat house and another donor is about to donate a real property to the Redemptoris Mater Missionary Seminary, Archdiocese of Manila, Inc. for the purpose of putting up a seminary; that pending the issuance of the Certificate of Tax Exemption and Accreditation with the Philippine Council for NGO Certification, you now request if Merkaba Foundation, Inc. and Redemptoris Mater Missionary Seminary, Archdiocese of Manila, Inc. can accept the donations of real properties without having to pay income tax and donor's tax, as well as entitling the donors to a tax deduction; and that you agreed that these taxes will have to be paid if the application for tax exemption and registration as a donee institution will be disapproved. aEcTDI In reply thereto, please be informed that pursuant to Section 101(A)(3) of the Tax Code of 1997, the proposed donations to JAPRL are exempt from the payment of donor's tax, subject to the condition that not more than 30% of said gift shall be used by the donee for administration purposes. Likewise, in BIR Ruling No. DA-531-2006 dated September 4, 2006, this Office also ruled that the donation to a foundation, prior to accreditation by the PCNC, was exempt from payment of donor's tax, as follows: "This refers to your letter dated July 31, 2006 requesting exemption from the payment of donor's tax on the donation of two (2) parcels of land from the Estate of Lilia L. San Agustin to Doa Lilia L. San Agustin Foundation, Inc. It appears that the Estate of Doa Lilia L. San Agustin is the registered owner of two (2) parcels of land situated in the Municipality of Calapan, Province of Oriental Mindoro, consisting an area of 49,495 and 457 square meters covered by Transfer Certificate of Title Nos. T-67200 and T-58584, respectively, issued by the Register of Deeds for the Province of Mindoro Oriental; that Doa Lilia L. San Agustin Foundation, Inc. is a non-stock, non-profit charitable corporation duly registered with the Securities and Exchange Commission under SEC Registration No. CN200610071 dated June 27, 2006; that Doa Lilia L. San Agustin Foundation, Inc. undertakes to solely put the above described properties with all the buildings and improvements thereon to productive charitable, religious and civic use for the benefit of the beneficiaries of its charitable projects and shall not use the said properties for other use other than for the attainment and furtherance of its purposes as stated in its Article of Incorporation; that the Estate of Doa Lilia L. San Agustin cannot avail of deduction for purposes of computing taxable income under Revenue Regulations No. 13-98 because the said Foundation is not yet qualified to apply for accreditation not having been in operation for at least one (1) year as required under the policy/Rules and Procedures of the Philippine Council for NGO Certification (PCNC); and that it may, however, qualify for exemption from payment of donor's tax." (BIR Ruling No. DA-531-2006 dated September 4, 2006) Donations to donee institutions are tax-deductible and/or exempt from donor's tax (Section 34 (H) and Section 101 of the Philippine Tax Code). In other words, aside from being exempt from donor's tax, local donors, whether individual or corporate, can deduct the amount they have donated from their taxable income derived from trade or business as computed without the benefit of the deduction. Donations to some donee institutions, however, are subject to limited deductibility: 10% for individual donors and 5% for corporate donors. Thus, tax incentives such as those mentioned above encourage local donations and, especially in these times of dwindling financial resources from abroad, complement PCNC's aim to strengthen private sector participation in our country's social development. Organizations seeking certification shall file with the PCNC Secretariat a letter of intent to apply for certification and submit the necessary documents. If the organization is qualified for evaluation, it undergoes the evaluation process which includes site visits by an evaluation team. A recommendation based on the results of the evaluation is then submitted to the Board. 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 the Bureau of Internal Revenue (BIR) which then issues to the organization a certification of DONEE INSTITUTION STATUS. AIcECS Premises being considered although the Chevalier School, Inc. is not yet accredited with the PCNC, this Office opines that gifts, donations and other contributions made to the Philippine Institute of Quezon City, Inc. are exempt from 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 by Chevalier School, Inc. for administration purposes. However, the donors cannot avail of deduction for purposes of computing taxable income under Revenue Regulations No. 13-98. The Chevalier School, 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. 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, or that the requirements herein stated are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue