BIR Ruling No. 164-14

May 30, 2014 BIR RULING NO. 164-14 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; BIR Ruling No. 159-11 San Isidro College of Malaybalay Bukidnon, Inc. Impalambong Barangay 10 Malaybalay City, Bukidnon 8700 Attention: Rev. Fr. Virgilio H. Delfin, CPA President Gentlemen : This refers to your letter dated August 8, 2012 requesting for tax exemption privileges enjoyed by non-stock, non-profit educational institutions pursuant to Section 30 (H) of the Tax Code of 1997, as amended. Documents submitted disclose that SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, INC. with Taxpayer's Identification No. 002-918-213-0000 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. 52922; that it is recognized by the government and permitted to operate the following: Department of Education Government Recognition No. 551 Preschool Course (Nursery/Kindergarten I & II) Government Recognition No. 140 s. 1997 Elementary Course (Grades I-VI) Government Recognition No. 289 s. 1995 Complete Academic Secondary Course with Vocational Subjects (Day) Government Recognition No. GR-008- Two-Year Small Business Management TVED s. 1994 Commission on Higher Education (CHED) Government Recognition No. 006 s. 2012 Bachelor of Science Nursing Government Recognition No. 028 s. 2010 BS in Midwifery Government Recognition No. 012 s. 2009 Diploma in Midwifery Government Recognition No. 002 s. 2010 Associate in Arts in Theology Government Recognition No. 022 s. 1995 Bachelor of Science in Accountancy (BS Accountancy) Government Recognition No. 035 s. 2009 Bachelor of Science in Business Administration Government Recognition No. 024 s. 1995 Bachelor of Science in Secretarial Administration (BSSA) Government Recognition No. 189 s. 1969 Four Year of the Education Course leading to the degree of Bachelor of Science in Education (B.S.E.) Government Recognition No. 029 s. 1995 Bachelor of Elementary Education (BEED) Government Recognition No. 023 s. 1995 Two-Year Computer Secretarial Course Government Recognition No. 41 s. 1974 Two-year Collegiate Secretarial Course with a Diploma in Secretarial Science (D.S.S.) Government Recognition No. 183 s. 1969 Fourth Year of the Liberal Arts Course leading to the degree of Bachelor of Arts (A.B.) Government Recognition No. 135 s. 1968 Fourth Year of the Collegiate Commercial Course (B.S.C.) and purposes for which it was incorporated are the following: ADaEIH 1) To give a sound, complete and general education in the high school and collegiate levels to children and youth in the Republic of the Philippines and to promote their intellectual and moral development; 2) To offer Post Secondary or Technical Vocational courses to cater to the greater majority of the individual; and 3) To offer complement courses in post-graduate level to enhance and equip those who already finished their collegiate courses and need further intellectual and practical skills in their respective fields. In support of its request, SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, INC. has completely submitted on March 18, 2013 the following documents: 1) Letter application for tax exemption; 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 members of the Board of Trustees shall not receive any compensation and shall serve "gratis-et-amore"; 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 copies of the Annual Income Tax Returns and Financial Statements for the last three (3) years of operation; ASEIDH 6) Certified true copies of the Department of Education and CHED Government Permits; and 7) 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: 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 dated 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 NIRC. However, if their gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of their total gross income derived from all sources shall be subject to the regular corporate income tax rate prescribed under Section 27 (A) of the NIRC. (Section 27 (B) of the NIRC and Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 and 195960 dated 26 September 2012) ECSaAc Unrelated trade, business or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or its primary purpose or function. (Section 27 [B], Tax Code of 1997) From the foregoing, and since SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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. 169 dated May 25, 2011) However, SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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, SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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 Five Hundred Thousand Pesos (P1,500,000.00) 1 which tax payment may legitimately be passed on to buyers of such goods and services. (BIR Ruling No. 170-11 dated May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011) Hence, as long as SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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 dated 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. EacHCD 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 dated 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: (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; (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 SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, INC. as ancillary activities and the same are located within its premises. ATSIED In addition, gifts, donations, and other contributions received by SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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 SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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. SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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, SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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, SAN ISIDRO COLLEGE OF MALAYBALAY BUKIDNON, 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 Philippine Computer College, Inc. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 170-11 dated May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011) SEcADa 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 filing of a subsequent application for Tax Exemption/Revalidation provided under the same requirements and procedures provided under Revenue Memorandum Order (RMO) No. 20-2013. 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 Bureau of Internal Revenue Footnotes 1. P1,919,500.00 starting January 1, 2012.