BIR Ruling No. 116-15

April 17, 2015 BIR RULING NO. 116-15 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 Sta. Teresa College, Inc. Kapitan Ponso Street, Poblacion 2, Bauan, Batangas Attention: Rev. Fr. Carlo Magno C. Ilagan President Gentlemen : This refers to your letter dated September 16, 2013, as indorsed by the Regional Director of Revenue Region No. 9, San Pablo City, relative to your request for the issuance of a Certificate of Tax Exemption on behalf of STA. TERESA COLLEGE, INC. 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 STA. TERESA COLLEGE, INC., with BIR Certificate of Registration No. OCN1RC0000644542, dated September 5, 2005 and with Taxpayer's Identification No. (TIN) 000-935-618-000, is a non-stock, non-profit corporation duly organized and existing under the laws of the Republic of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under SEC Company Registration No. AN094-003350, dated September 5, 1994; that among the purposes for which it was incorporated are the following, to wit: 1) To establish and maintain as complete and adequate as possible a system of education, giving first and foremost religious value formation, academic, phychosexual, social, vocational and total formation of the students to carry out faithfully the mission and commitments of Catholic education and the educational objectives provided for in the Constitution of the Philippines and the Education Act of 1982. Provided, that the registration of the Articles shall not be construed to operate the school. Provided, further that the establishment, operation, administration and management of said school shall be subject to the existing laws, rules and regulations, policies and standards of the Ministry of Education, Culture and Sports which shall be complied with before said school may be allowed to operate. Provided, finally, that said compliance shall be evidenced by a certificate to be issued by the Ministry of Education, Culture and Sports; 2) Incidental to the principle purpose stated above, to hold and/or acquire real properties as the necessities of the corporation may require; 3) To foster the welfare and on-going development of the educational community, namely, school administrators, teachers and other school personnel, students and parents; 4) To establish and maintain linkages and membership with government, civic and religious agencies and organizations for on-going self-renewal and growth; 5) To establish and operate store and canteen to cater to the school supplies, uniforms and food needs of students; 6) To engage in fund-raising projects in order to augment the funds for the improvement of the building and facilities necessary for quality education and salaries of teachers and other school personnel and other needs; and 7) To borrow money, secure loans and/or mortgage properties to supplement its funds. that it was permitted and granted the following Government Recognitions by the Department of Education (DepEd) to offer and operate the following courses, to wit: Government Recognition Number Date Issued Degree/Program 169, series of 1953 March 18, 1953 Kindergarten Course 170, series of 1953 March 18, 1953 Complete Elementary Course (Day) 18, series of 1954 June 4, 1954 Complete Academic Secondary Course with Vocational Subjects (Day) and that it was further permitted and granted Government Recognitions by the Commission on Higher Education (CHED), Regional Office IV-A, CALABARZON, to offer and operate the following courses to wit: Government Recognition No. Date Issued Degree/Program 047 series of 2004 May 12, 2004 Bachelor of Science in Information Technology (BSIT) 083 series of 2004 June 7, 2004 Bachelor of Science in Office Administration (BSOA) 063 series of 2008 July 16, 2008 Bachelor of Science in Business Administration (BSBA-majors in Financial Management, Human Resource Management) 063 series of 2011 May 23, 2011 Bachelor of Science in Tourism Management 064 series of 2011 May 23, 2011 Bachelor of Science in Hotel and Restaurant Management (BSHRM) 078 series of 2012 July 2, 2012 Bachelor of Science in Psychology In support of its request, STA. TERESA COLLEGE, INC. has completely submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of its Certificate of Incorporation with the SEC; 3) SEC certified true copy of its Articles of Incorporation which specifically includes and clearly states the following provisions verbatim: 1) That it is non-stock and non-profit corporation or association; (Section 7) 2) It does not contemplate the distribution of its surplus income at the end of every school year to its members, but shall be plowed back into the operations of the school and no part of its surplus or net income shall inure to the benefit of any member, trustee or officer; and 3) That upon liquidation or dissolution of the school for any cause, whatever net assets remaining after liquidation of its liabilities shall be conveyed, transferred to the Archdiocese of Lipa, or to another domestic non-stock corporate engaged in activities substantially similar to those of the dissolved corporation, or to a domestic corporate to be later organized in accordance with Philippine law. 4) SEC certified true copy of the educational institution's Amended By-laws which clearly and specifically states that: 1) All members of the Board of Trustees shall not receive any compensation for their service as such, except as reimbursement for travel and actual expenses incurred while performing duties related to the business of the corporation. (Section 6, Article IV) 5) Original copy of the Certification under Oath by an Executive Officer of the educational institution as to: (I) all previous amendments or 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 educational institution's Certificate of Registration; 7) Original copy of the Certification under Oath by the Treasurer of the educational institution that it has not paid any income, compensation, salaries or any emoluments to any of its Trustees, Officers and other Executive Officers in their capacity as such, as provided for in Section 6, Article of its Code of By-Laws; 8) Original copy of the Certification issued by the Assistant Revenue District Officer of Revenue District Office (RDO) No. 58, Batangas City, that STA. TERESA COLLEGE, INC. has no pending audit/investigation and/or tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings or a judicial appeal, dated June 25, 2014; 9) BIR certified true copies of the educational institution's Annual Income Tax Returns and Financial Statements for the years 2011-2013; 10) Original copy of the Statement under Oath by the Executive Officer of the educational institution as to its modus operandi ; 11) Original copy of the Certificate of Utilization of Annual Revenues and Assets by the Treasurer or his equivalent of the educational institution in accordance with the guidelines set forth in Section 1.3 of Department of Finance (DOF) Order No. 137-87; 12) Certified true copies of the Government Recognitions issued by the Department of Education (DepEd) and Commission on Higher Education (CHED); 13) Verification and 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 STA. TERESA COLLEGE, 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, STA. TERESA COLLEGE, 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, STA. TERESA COLLEGE, 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 STA. TERESA COLLEGE, 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 STA. TERESA COLLEGE, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by STA. TERESA COLLEGE, 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 STA. TERESA COLLEGE, 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. STA. TERESA COLLEGE, 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, STA. TERESA COLLEGE, 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, STA. TERESA COLLEGE, 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 STA. TERESA COLLEGE, 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