BIR Ruling No. 142-14

May 23, 2014 BIR RULING NO. 142-14 Section 4 (3), Article XIV, 1987 Constitution; Tax Code, Sections 27 (D) (1); 30 (H); 101 (A) (3); 105; 109 (H); BIR Ruling No. 170-11; BIR Ruling No. 169-11; and BIR Ruling No. 159-11 Zamboanga Polytechnic School, Inc. KP Building, Nunez Street, Zamboanga City, Philippines Attention: Sheila Therese L. Pulvera President Madame : This refers to your letter dated October 10, 2011 requesting on behalf of Zamboanga Polytechnic School, Inc. for tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 (H) of the Tax Code of the Philippines, as amended. It is represented that Zamboanga Polytechnic School, Inc. with Taxpayer's Identification No. 000-584-897-000, 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 Company Registration No. DS-00343; that it is recognized by the government and permitted by the Technical Education and Skills Development Authority (TESDA) in accordance with: Certificate of TVET Program Program Registration No. WTR No. 07090402112 Computer Hardware Servicing (National Certificate Level II 356 hours) WTR No. 07090402117 Housekeeping (National Certificate Level II 436 hours) WTR No. 07090402116 Food & Beverage Services (National Certificate Level II 336 hours) WTR No. 07090402114 Front Office Services (National Certificate Level II 436 hours) WTR No. 07090402115 Bartending (National Certificate Level II 286 hours) WTR No. 07090403119 Consumer Electronics Servicing (National Certificate Level III 176 hours) WTR No. 07090403118 Consumer Electronics Servicing (National Certificate Level II 438 hours) WTR No. 11090403055 2D Animation (NCIII 840 hours) The purposes for which it was incorporated are the following: ADcEST 1. To establish and operate a private educational institution offering courses such as Electronics Engineering Management, Maritime, Science, Technical and Vocational as may be allowed by the law; 2. To operate engineering shops, fabricators and water transportation, restaurant and stores that can provide actual training to deserving students; 3. To acquire or hold by purchase, exchange or lease, or otherwise own real estates, buildings equipment, transportation units and other facilities necessary for the conduct of the business of the corporation; 4. To construct buildings on lands acquired, held or owned by purchase, exchange, lease or by donation to serve as offices and classrooms of the corporation; 5. To receive gifts, donations and contributions in form of financial aids and assistance from various sources subject to existing laws and to utilize these resources in some other undertakings that shall help improve the corporation; 6. To invest any portion of its funds and other resources in the purchase and acquisition of shares of stock or bonds of other corporations provided that the income derived therefrom shall be solely for the benefit of the corporation and not for the member or officers thereof; 7. To loan or borrow money and other wise contract indebtedness, secure credit accommodations as may be necessary with any person or entity, and to acquire loans from the government through any of its lending institutions, for the purposes of the corporation; 8. To do and perform any act and deed not contrary to law, and to exercise any other powers which may be necessary, convenient and appropriate to accomplish and achieve the purposes of the corporation. In support of its request, Zamboanga Polytechnic School, Inc. has completely submitted on 28 January 2013 the following documents: 1) Letter application for tax exemption; TSEHcA 2) Certified true copy of the Certificate of Registration with the SEC; 3) 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 of 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. 4) Certified true copy of the By-Laws; 5) Certified true copy of the Annual Information Return and Financial Statements for the last three (3) years of operation; 6) Certified true copies of the TESDA Program Registration; 7) Sworn Affidavit of Non-Forum Shopping; and 8) BIR Certificate of Registration. 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: ETDHaC 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. 169-11, May 25, 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%) of 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. (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 Zamboanga Polytechnic School, 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, Zamboanga Polytechnic School, 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, Zamboanga Polytechnic School, 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 (H) of the 1997 Tax Code, as amended. EHTSCD 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 (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. 169-11, May 25, 2011) Hence, as long as Zamboanga Polytechnic School, 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) 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) 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; CaDSHE (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 Zamboanga Polytechnic School, Inc. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by Zamboanga Polytechnic School, 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 Zamboanga Polytechnic School, 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. Zamboanga Polytechnic 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. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, Zamboanga Polytechnic School, 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. DAHSaT Moreover, Zamboanga Polytechnic School, 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 Zamboanga Polytechnic School, 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) Please note that this tax exemption 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 subsequent application for Tax Exemption/Revalidation provided under Revenue Memorandum Order (RMO) No. 20-2013, otherwise, the exemption shall be deemed revoked upon expiration of its validity period. 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 Bureau of Internal Revenue