BIR Ruling No. 106-10

October 14, 2010 BIR RULING NO. 106-10 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 St. Joseph's School of Toril, Inc. Purok 3, Upper Lubugan, Alambre, Toril, Davao City Attention: Sr. Myrna I. Piera, SFIC Principal Gentlemen : This refers to your letter dated received by this Office on December 10, 2009 via 1st Indorsement dated December 4, 2009 from Revenue Region No. 19-Davao City, requesting tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution. cHITCS It is represented that St. Joseph's School of Toril, Inc. with Taxpayer's Identification No. 006-843-023-000, 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. CN200731415 dated October 25, 2007; that it is recognized by the government and permitted by the Department of Education, Culture and Sports (DECS) in accordance with Government Permit (R-XI) No. 027, s. 2009 dated February 11, 2009, to operate "Preschool, Grades I-II Renewal; Grades III-IV New"; and that the purposes for which it was incorporated are the following: "1. To organize, establish, maintain and operate a Catholic, Franciscan institution of learning for the instruction, education and formation of the youth and adults. Emphasis shall be given to faith maturation and witnessing to Gospel values, moral character, social conscience, cultural development, responsive and responsible citizenship, productivity and self-reliance, scientific research, life-long learning and the promotion of justice, peace and integrity of creation. To this end the institution shall operate a school offering nursery, pre-elementary, elementary, secondary education, and special education for the differently able. Education offerings shall take into consideration emerging and alternative learning systems in basic education and for the differently-able, out-of-school youth, and adult learners. 2. To establish affiliation/linkages with recognized educational institutions in the Philippines, in Asia, and in other countries and with other institutions and organizations concerned with education and formation of the citizenry of varying ages and cultures. 3. To organize, operate, manage and maintain dormitories, foundations, stores, printing and publishing establishments, laboratories and otherwise, engage in any enterprise or such things connected with the growth and development of the school or which may be directly or indirectly, incidental to the attainment of the above purposes or any of them respectively." In reply, please be informed that this Office cannot as yet issue the requested ruling/certificate of tax exemption because St. Joseph's School of Toril, Inc. has to prove by actual operation for at least three (3) years that it is really an organization/association exempt from income tax under Section 30 (H) of the Tax Code of 1997, as amended. ASHECD St. Joseph's School of Toril, 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, St. Joseph's School of Toril, 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, St. Joseph's School of Toril, 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) 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. CcaDHT 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 St. Joseph's School of Toril, 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 Nos. 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, St. Joseph's School of Toril, Inc. is required to submit the following documents pursuant to Revenue Memorandum Circular No. 14-2001: EHSTcC 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; 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 ascertained that the facts are different, then this ruling shall be considered null and void. EASCDH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue