BIR Ruling No. 107-15

April 14, 2015 BIR RULING NO. 107-15 Section 4 (3), Article XIV, 1987 Philippine Constitution; Sections 109 (1) (H), 101 (A) (3), 27 (D) (1), 30 (H), 105, Tax Code of 1997, as amended; BIR Ruling No. 170-2011; BIR Ruling No. 169-2011; BIR Ruling No. 159-2011 Center for Excellence in Special Education (Stepping Stone) Foundation, Inc. (Formerly: Development Center for the Handicapped Foundation, Inc.) 7419 Bernardino Street, Guadalupe Viejo, Makati City Attention: Segismundo M. Gonzalez President Gentlemen : This refers to your letter dated November 8, 2013 which was received by this Office on December 23, 2013, relative to your request on behalf of the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC. ( Formerly: Development Center for the Handicapped Foundation, Inc .) for the issuance of a Certificate of Tax Exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 (H) of the National Internal Revenue Code (NIRC) of 1997, as amended. It is represented that the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC. with BIR Registration No. OCN9RC0000274957, dated January 1, 1997 and with Taxpayer's Identification No. (TIN) 000-449-617-000, is a non-stock, non-profit corporation duly organized and existing under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company Registration No. 138834, dated March 9, 1987; that it was granted Government Recognition No. SP-0001, Series s. 1990 to operate a Complete Elementary Course for Special Children, on February 5, 1989 by the Department of Education Culture and Sports-National Capital Region (DECS-NCR); and that the purposes for which it was incorporated are the following, to wit: 1) To promote and encourage the socio-economic advancement and physical and mental rehabilitation of learning disabled and physically handicapped children by establishing facilities for their education and acquisition of productive skills and trades and by assisting them in the profitable employment of such skills and trades; 2) To establish care centers and other facilities for the purpose of providing medical services and nutritional assistance to handicapped children; 3) To organize, conduct and carry on any activity which is necessary for or incidental to the purpose of the Foundation and to exercise such power of perform all activities prescribed by the requisite majority of the Board of Trustees; 4) To organize fund raising activities for the educational assistance of the handicapped, indigent students and/or children who wish to attend proper schooling through sponsorship programs, scholarship matching grants, donations and other activities that will generate sources of funds for educational assistance of the mentally and physically challenged children; and 5) To operate a Pre-Vocational (Interest-based Program) Training Center which will offer skilled courses at such other place or places within the Republic of the Philippines as the Board of Trustees may from time to time determine or as the purpose of the Foundation may require. In support of its request, the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC., has completely submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Incorporation with the SEC; 3) SEC certified true copy of the Articles of Incorporation which includes the following provisions: 1) That the corporation is non-stock, non-profit ; 2) 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 ; 3) That no part of its property or income shall inure to the benefit of any member, trustee, officer, or any private individual, corporation, or association except as may be necessary to compensate reasonably staff members and consultants for actual and substantial services rendered in furtherance of the purpose of the Foundation; and 4) Upon its dissolution, the remaining assets of the Foundation shall be disposed of and turned to any foundation dedicated to charitable pursuits of its choice or to the Republic of the Philippines or any of its agencies, instrumentalities or political subdivisions . 4) SEC certified true copy of the By-Laws which include the following provision: 1) No member of the Board of Trustees shall receive any compensation of whatever nature from the Foundation (Article IV, Section 10) . 5) Original copy of the Certification under Oath by an Executive Officer of the Foundation 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; 6) BIR certified true copy of the Foundation's Certificate of Registration; 7) Original copy of the Certification under Oath by the Treasurer of the Foundation certifying therein that no member of the Board of Trustees shall receive any compensation of whatever nature from the Foundation; 8) BIR certified true copies of the Annual Income Tax Returns and Financial Statements for the years 2011-2013; 9) Certification issued by the RDO of Revenue District Office No. 49, North Makati, certifying therein that abovementioned Foundation is not subject of any pending investigation, on-going audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings or judicial appeal; 10) Original copy of the Statement under Oath by an Executive Officer of the Foundation as to its Modus Operandi ; 11) Certified true copy of the Government Recognition No. SP-0001 Series s. 1990, issued by the Department of Education Culture and Sports-National Capital Region (DECS-NCR), dated February 5, 1989; 12) Original copy of the Certificate of Utilization of Annual Revenues and Assets executed under Oath by the Treasurer of the Foundation; and 13) Affidavit of Non-Forum Shopping. 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. 170-11 dated May 25, 2011 and BIR Ruling No. 159-11, May 19, 2011 ) 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 of 1997. However, if their gross income from unrelated trade, business or 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 income tax rate prescribed under Section 27 (A) of the Tax Code of 1997, as amended. ( Section 27 [B] of the Tax Code of 1997, as amended; Commissioner of Internal Revenue v. 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] of the Tax Code of 1997 ) From the foregoing, and since the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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. 159-11, May 19, 2011 ) However, CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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, CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC. 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. 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. 170-11, May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011 ) Hence, as long as the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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. 170-11, May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011 ) 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. 170-11, May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011 ) 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: 1) 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; 2) Certification of actual utilization of the said income; and 3) 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 the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by the CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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 CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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. CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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, CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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. Moreover, CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, 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 CENTER FOR EXCELLENCE IN SPECIAL EDUCATION (STEPPING STONE) FOUNDATION, INC. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. ( BIR Ruling No. 169-11, May 25, 2011 ) It is requested that a copy of this Letter of Exemption be attached to the aforementioned Annual Information Return. 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 the filing of a subsequent Application for Tax Exemption/Revalidation provided under Revenue Memorandum Order (RMO) No. 20-2013, dated July 22, 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 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