BIR Ruling No. 184-14

June 10, 2014 BIR RULING NO. 184-14 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 Divine Word College of Laoag, Inc. Barangay 13, General Segundo Avenue, Laoag City, Ilocos Norte Attention: Fr. Romeo S. Fajardo, SVD Vice President for Finance Gentlemen : This refers to your letter dated December 23, 2013, relative to your request for the issuance of a Certificate of Tax Exemption on behalf of DIVINE WORD COLLEGE OF LAOAG, 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 DIVINE WORD COLLEGE OF LAOAG, INC.,with BIR Taxpayer's Identification No. (TIN) 001-703-178-000 and with Certificate of Registration No. OCN4RC0000607255, dated June 29, 1994, is a non-stock, non-profit educational institution 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. 4157, dated January 18, 1949; that among the purposes for which it was incorporated are the following, to wit: 1) To establish, conduct and maintain a Catholic school or schools in the Municipality of Laoag, Province of Ilocos Norte where students may obtain, upon such terms as maybe determined a broad, general and liberal education thoroughly and systematically administered, aimed at developing moral character, personal discipline, civic consciousness, vocational and technical efficiency through technical and vocational courses that may be hereinafter approved and authorized by the Technical Education and Skills Development Authority (TESDA) and to fit and prepare students morally, mentally and physically for better citizenship; cSIACD 2) To educate and train students in the arts, sciences and letters and to prepare them for successful work in the sciences, arts, and in industrial, vocational and professional pursuits; 3) To promote the principles of true higher education, virtues, religion and morality; 4) To acquire, own, improve and maintain real estate and interests therein, together with such buildings, fixtures and equipment that maybe necessary or desirable; 5) To borrow money and to secure the payment of the same by mortgage or lien upon its real estate and other property; 6) And generally do all and everything lawful and proper which may be necessary or expedient for the accomplishment of any purposes or the attainment of any of the objects in furtherance of any of the powers herein set forth; and 7) To become an assessment center duly accredited by the TESDA, for its students, graduates and for other people who graduated with any technical/vocational courses. that it was permitted and granted the following Government Recognitions by the Department of Education (DepEd) to operate the following Basic Education Curricula, to wit: Course Gov't Recognition Effectivity Pre-Elementary Course No. PE-012, s. 2007 School Year 2007-2008 Basic Education No. E-019, s. 2009 School Year 2009-2010 Curriculum (BEC) Grades I-VI Basic Education No. SE-018, s. 2002 School Year 2002-2003 Curriculum (First Year- Fourth Year) that it was further permitted and granted Government Recognitions by the Commission on Higher Education (CHED) to offer the following higher education programs, viz. : HEASa Program Government Recognition Doctor of Philosophy major in G.R. No. 060, s. 1998 Development Education, Development Management Master of Arts in Education major in G.R. No. 101, s. 1996 General Education, Special Education, Childhood Education, Values Development Master in Business Administration G.R. No. 178, s. 1977 BS-Nutrition and Dietetics SP No. 002, s. 2013 BS-Hotel & Restaurant Management G.R. No. 004, s. 2008 BS-Tourism Management G.R. No. 005, s. 2008 BS-Electrical Engineering G.R. No. 008, s. 2006 BS-Computer Engineering G.R. No. 014, s. 2007 BS-Civil Engineering G.R. No. 026, s. 1991 BS-Information Technology G.R. No. 031, s. 2004 BS-Information Systems G.R. No. 032, s. 2004 Bachelor in Secondary Education major G.R. No. 037, s. 1951 in Science, Mathematics, Filipino, English, History, Values Education, Physical Education, Health & Music Bachelor of Arts major in General G.R. No. 038, s. 1951 Science, English, Mass Communication, Political Science, Legal Management, Economics Bachelor of Science in Business G.R. No. 039, s. 1951 Administration major in Management, Accounting, Operations Management, Marketing Management, Financial Management, Human Resource Development Management Bachelor in Elementary Education major G.R. No. 037, s. 1951 in General Science, Mathematics, Filipino, English, History, Values Education, Physical Education, Health & Music, Pre-school Bachelor of Science in Nursing G.R. No. 003, s. 2007 BS-Electronics Engineering G.R. No. 013, s. 2007 BS-Computer Science G.R. No. 180, s. 1999 Bachelor of Science in Architecture G.R. No. 210, s. 1999 Bachelor of Science in Office G.R. No. C-013, s. 1993 Administration Bachelor of Science in Accountancy G.R. No. C-015, s. 1990 that it was also issued and granted Special Permit No. 001, Series of 2013 by the Commission on Higher Education as basis to graduate students under the program, Bachelor of Science in Biology for the School year 2013-2014 only; and, lastly, it was granted by the Technical Education and Skills Development Authority (TESDA) to operate the following courses/programs, to wit: Courses/Programs TVET Program Registration No. Housekeeping NC II WTR 0701012017 Food & Beverage Services NC II WTR 0701012016 Front Office Services NC II WTR 0701012015 Programming NC IV WTR 0701014014 Computer Hardware Servicing NC II WTR 0701012013 Bartending NC II WTR 0701012019 Baking/Pastry Production NC II WTR 0701012018 In support of its request, DIVINE WORD COLLEGE OF LAOAG, INC. has completely submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the educational institution's Certificate of Incorporation with the SEC; 3) SEC original copy of the Amended Articles of Incorporation of DIVINE WORD COLLEGE OF LAOAG, INC. which specifically includes and clearly states the following provisions verbatim: 1) That it is non-stock and non-profit educational institution; ECSHAD 2) That the primary purpose for which it was created is to operate as a non-stock and non-profit educational institution, as stated under Section 30 of the NIRC of 1997, as amended; 3) That no part of the educational institution's net income shall inure to the benefit of any of its members or private individual; 4) That the trustees of the educational institution do not receive any compensation, salary or remuneration; and 5) In case of dissolution, assets of the educational institution shall be transferred to a similar institution or to the government. 4) See certified true copy of the educational institution's amended By-laws; 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) sources and disposition of income; 6) BIR certified true copies of the Annual Income Tax Returns or Annual Information Returns and Financial Statements of DIVINE WORD COLLEGE OF LAOAG, INC. for the years 2011-2013; 7) BIR certified true copy of the Certification issued by the Revenue District Officer of Revenue District Office (RDO) No. 1, Laoag City, that DIVINE WORD COLLEGE OF LAOAG, INC. is a bona fide registered taxpayer of Revenue District Office No. 1 and that it was further certified that it does not have any pending tax liability on file as of March 12, 2014; 8) Certification under oath by the Treasurer of the educational institution that the trustees do not receive any compensation, salaries or any emoluments from the institution; 9) Original copy of the Statement under Oath by the Executive Officer of the educational institution as to its modus operandi; 10) 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; ASTDCH 11) Certified true copies of the Government Recognitions issued by the Department of Education (DepEd) and Commission on Higher Education (CHED),Regional Office No. I, City of San Fernando, La Union; 12) Certified true copies of the Certificates of TVET Program Registration issued by the Technical Education and Skills Development Authority (TESDA),Region I; 13) BIR certified true copy of its Certificate of Registration; 14) Affidavit of Non-Forum Shopping; 15) Certified true copy of the Revised Curriculum in Master in Business Administration (MBA) in lieu of Government Recognition No. 178, s. 1977 as proof that it is permitted to offer the above-mentioned course; and 16) Certified true copy of the Revised Curriculum in Office Administration in lieu of Government Recognition No. C-013, s. 1993 as proof that it is permitted to offer the aforementioned course. 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) SDcITH 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 DIVINE WORD COLLEGE OF LAOAG, 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, DIVINE WORD COLLEGE OF LAOAG, 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, DIVINE WORD COLLEGE OF LAOAG, 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) AacDHE Hence, as long as DIVINE WORD COLLEGE OF LAOAG, 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) DHCSTa 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 DIVINE WORD COLLEGE OF LAOAG, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by DIVINE WORD COLLEGE OF LAOAG, 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 DIVINE WORD COLLEGE OF LAOAG, 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. DIVINE WORD COLLEGE OF LAOAG, 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, DIVINE WORD COLLEGE OF LAOAG, 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, DIVINE WORD COLLEGE OF LAOAG, 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 DIVINE WORD COLLEGE OF LAOAG, 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) CHcTIA 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