BIR Ruling No. 192-15

June 10, 2015 BIR RULING NO. 192-15 Section 4 (3), Article XIV, 1987 Constitution; Sections 27 (A), (B), (D) (1); 30 (H); 57; 101 (A) (3); 105; 109 (H), (G); 235; 236 (B); 237 of the 1997 Tax Code, as amended; Department Order No. 137-87, as amended by Department Order No. 92-88; Department Order No. 149-95; RMC No. 76-2003 Wesleyan University-Philippines Mabini Extension, Maharlika Highway, Cabanatuan City, Nueva Ecija 3100 Attention: Mr. Pacifico B. Aniag President Gentlemen : This refers to your letter dated November 26, 2013, requesting in behalf of WESLEYAN UNIVERSITY-PHILIPPINES for a certificate of tax exemption enjoyed by non-stock, non-profit educational institutions pursuant to Paragraph 3, Section 4, Article XIV of the 1987 Constitution and Section 30 (H) of the Tax Code of 1997, as amended. Documents submitted disclose that WESLEYAN UNIVERSITY-PHILIPPINES, with Taxpayer's Identification No. 000-544-355-000, is a non-stock, non-profit educational institution duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 3597 dated April 28, 1948; that it is recognized by the government and permitted by the Department of Education (DepEd) in accordance with Government Recognition Nos. 24, s. 1972 for the Kindergarten Course effective July 3, 1972, E-003, s. 2010 for its Elementary Course (Grades I-VI), 456, s. 1948 for its complete academic Secondary Course dated effective July 1, 1948, and by the Commission on Higher Education (CHED) to offer the following courses in accordance with Government Recognition Nos. herein enumerated: to wit: 1. G.R. No. 021, s. 2011 for the Diploma in Midwifery; 2. G.R. No. 244, s. 1960 One Year Graduate Course in Liberal Arts leading to the degree of Master of Arts (M.A.); 3. G.R. No. 168, s. 1975 for Post-Graduate Course in Education leading to the degree of Doctor of Education (Ed. D.); 4. G.R. No. HER-010, s. 2004 for Bachelor of Science in Criminology; 5. G.R. No. HER-031, s. 2005 for Bachelor of Science in Hotel and Restaurant Management; 6. G.R. No. VT-007, s. 1987 for Basic Computer System, Cobol Programming, Assembler Programming; 7. G.R. No. 169, s. 1975 for Four-Year Course in Social Work leading to the degree of Bachelor of Science in Social Work (B.S.S.W.); 8. G.R. No. 122, s. 1985 for Graduate Course in Business Administration leading to the degree of Master in Business Administration (M.B.A.); 9. G.R. No. 580, s. 1950 for Four-Year General Liberal Arts Course; 10. G.R. No. T-028, s. 1993 for Four Year Bachelor of Science in Accountancy (BS Accountancy); 11. G.R. No. 353, s. 1963 for Four-Year Collegiate Commercial Course leading to the degree of Bachelor of Science in Commerce; CAIHTE 12. G.R. No. 174, s. 1977 for Five-Year Nursing Course leading to the degree of Bachelor of Science in Nursing (B.S.N.); 13. G.R. No. 153, s. 1978 for First to Third Year of the B.S. Foods and Nutrition Course; 14. G.R. No. 098, s. 1985 for Five-Year Course in Electronics and Communications Engineering leading to the degree of Bachelor of Science in Electronics and Communications Engineering (B.S.E.C.E.); 15. G.R. No. 127, s. 1999 for Bachelor of Science in Computer Engineering; 16. G.R. No. HER-043, s. 1997 for Four-Year Bachelor of Science in Computer Science Course (B.S. Comp. Sci.); 17. G.R. No. GP-103, s. 2010 for First and Second Year Levels of the Bachelor of Science in Information Technology; 18. G.R. No. 089, s. 2012 for Third and Fourth Year Including First and Second Year Levels of the Bachelor of Science in Physical Therapy Program; and 19. G.R. No. 059, s. 2012 for Bachelor of Science in Medical Laboratory Science (formerly: BS in Medical Technology). and that the purposes for which it was incorporated are the following: To establish, conduct, and maintain an institution of learning devoted to the cause of Christian education, to strengthen democratic institutions and to develop Christian character, and as incidental therein: a. To provide courses of study from kindergarten, elementary, to university grade, for professional or business life or on general culture and education; to establish classical, mathematical, or scientific, business, vocational, technical and general courses of study, and home classes; to provide for the holding and giving lectures, exhibitions, public meetings, convocations and conferences adapted directly or indirectly to advance the calling of education; to secure, print and publish books and courses of study suitable for use in connection with schools and courses of study for this corporation; and to grant certificates, diplomas, titles and degrees as may be authorized by the government; b. To establish and operate hospitals which will provide health services and serve as a base hospital for the benefit of the University's medical nursing and allied health education programs; c. To purchase, build, lease, construct or otherwise acquire such land buildings, dormitories and offices as may be necessary or useful to carry out the object, and purposes of this corporation; d. To employ and replace from time to time, administrative officers, instructors, professors and other teachers and employees, and prescribe and enforce rules and regulations for their conduct in the discharge of their duties as such; e. To prescribe and approve course and curricula of instructions in all departments of learning and morals which shall be taught in accordance with Christian principles; f. To admit students and prescribe and enforce requirements for their admission and rules and regulations for their conduct as such, to charge and collect tuitions, fees and other lawful dues; g. To do all such other things and transact generally all business as may be directly or indirectly incidental or conducive to the attainment of the above objects and which are permitted by laws of the Philippines unto corporations of like class and kinds. In support of its request, WESLEYAN UNIVERSITY-PHILIPPINES has submitted the following required documents: 1. Original copy of application letter for issuance of Tax Exemption Ruling; 2. Certified true copy of the Certificate of Incorporation with the Securities and Exchange Commission (SEC); 3. Certified true copy of the amended Articles of Incorporation issued by the SEC which include the following: DETACa a. That the corporation is non-stock, non-profit; b. That the primary purpose for which it was created is to operate an educational institution; c. That no part of the corporation or association's net income shall inure to the benefit of any private individual; d. That the trustees of the non-profit corporation or association do not receive any compensation or remuneration; e. In case of dissolution, assets of the organization shall be transferred to the Central Conference of the United Methodist Church. 4. Certified true copy of the By-Laws; 5. Original copy of Certification under Oath by its President 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 of the subject corporation or association; 6. Certified true copy of the Certificate of Registration with the BIR; 7. Original copy of the Certification under Oath by the Treasurer certifying that the Board of Trustees as well as its officers are not receiving any salary or compensation from WESLEYAN UNIVERSITY-PHILIPPINES and further certifying that the Administrative and Academic Officers are receiving their respective salaries as indicated in the Certification; 8. Original copy of the Certification issued by the Revenue District Officer, RDO No. 23B, South Nueva Ecija, that the corporation is not the 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 a judicial appeal; 9. Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation for the last three (3) years; 10. Original copy of a statement under Oath its as to its modus operandi ; 11. Certified true copy of Government (DepEd, CHED) Recognition Certificates; 12. Certifications of Good Standing/Operation issued by CHED and DepEd, respectively; and 13. Original copy of Certification under oath by its Treasurer as to the utilization of annual revenues and assets. 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. 459-13 dated December 6, 2013) 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. However, if their gross income from unrelated trade, business or other 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 corporate income tax rate prescribed under Section 27 (A) of the Tax Code." (Section 27 [B] of the Tax Code of 1997, as amended; Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 and 195960 dated 26 September 2012) aDSIHc 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], Tax Code of 1997) From the foregoing, and since WESLEYAN UNIVERSITY-PHILIPPINES 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. 459-13 dated December 6, 2013) However, WESLEYAN UNIVERSITY-PHILIPPINES 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) Documents submitted also disclose that WESLEYAN UNIVERSITY-PHILIPPINES also operates a hospital (Wesleyan University Philippines Cardiovascular and Medical Center [WUPCMC]) specializing in the treatment of cardiovascular diseases, in addition to its operation of an educational institution. This is further supported by an examination of its audited financial statements for taxable years 2011 and 2013. Notes to the financial statements show that WESLEYAN UNIVERSITY-PHILIPPINES derives revenues from the operation of the aforementioned medical center denominated as "hospital services" and which have been reported together with revenues from educational services, in an aggregate amount, as income exempt under Section 30 (H) of the Tax Code of 1997, as amended. WESLEYAN UNIVERSITY-PHILIPPINES' revenues derived from its operation of the medical center that accepts paying patients shall be subject to the 10% preferential rate under Section 27 (B) of the same Tax Code as there is no legal basis for it to be exempt from income tax under Section 30 (H). It does not fall within the contemplation of the tax exemption expressly granted to non-stock, non-profit educational institutions or the Constitutional exemption of the revenues and assets of non-stock, non-profit educational institutions which specifically requires to be "actually, directly and exclusively" used for educational purposes. Thus, income or revenues arising from hospital services shall be subject to income tax at the 10% preferential rate imposed under Section 27 (B) of the Tax Code of 1997, as amended. In the case of St. Luke's Medical Center, Inc. vs. Commissioner of Internal Revenue [G.R. Nos. 195909 & 195960, September 26, 2012] , the Supreme Court had the occasion to explain that: Section 27 (B) of the NIRC imposes 10% preferential tax rate on income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit . In the aforecited case, the Supreme Court ruled on the tax exemption of St. Luke's Medical Center which is incorporated as a non-stock, non-profit institution for charitable and social welfare purposes under Section 30 (E) and (G) of the Tax Code of 1997, to wit: ETHIDa St. Luke's fails to meet the requirements under Section 30 (E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27 (B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. xxx xxx xxx . . . St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. Moreover, in the same case, the Court clarified: The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted for profit." The question in Jesus Sacred Heart College involves an educational institution. However, it is applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock, non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed. Additionally, it is also noted that WESLEYAN UNIVERSITY-PHILIPPINES earns rental income from lease agreements to its tenants as reflected in its audited financial statements for taxable years 2011 to 2013. This income is considered an unrelated income described under Section 27 (B) of the Tax Code and should therefore be subject to the 30% corporate income tax rate imposed under Section 27 (A) of the same Code. The requirements for a tax exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress." The requirements for a tax exemption are strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the government. (St. Luke's Medical Center, Inc. vs. Commissioner of Internal Revenue, supra) 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 WESLEYAN UNIVERSITY-PHILIPPINES as ancillary activities and the same are located within its premises. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, WESLEYAN UNIVERSITY-PHILIPPINES 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. WESLEYAN UNIVERSITY-PHILIPPINES's gross receipts from operations as a non-stock, non-profit educational institution and hospital/medical center are exempt from value-added tax (VAT) pursuant to Section 109 (1) (H) and 109 (G), respectively, of the 1997 Tax Code, as amended. cSEDTC 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. 455-13 dated November 27, 2013) In as much as WESLEYAN UNIVERSITY-PHILIPPINES is also leasing commercial spaces to tenants, the same is subject to 12% VAT impose under Section 108 of the Tax Code of 1997 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 or lease of goods and services do not exceed One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00). 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. 059-13 February 11, 2013) In addition, gifts, donations, and other contributions received by WESLEYAN UNIVERSITY-PHILIPPINES 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 WESLEYAN UNIVERSITY-PHILIPPINES 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. WESLEYAN UNIVERSITY-PHILIPPINES is advised to contact the Secretariat, Philippine Council for NGO Certification (PCNC), tel. nos. 782-1568, 715-9594, 715-2756 or telefax 715-2783. Moreover, WESLEYAN UNIVERSITY-PHILIPPINES 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 WESLEYAN UNIVERSITY-PHILIPPINES to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 548-12 dated August 31, 2012) SDAaTC 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 Revenue Memorandum Order (RMO) No. 20-2013, otherwise, the exemption shall be deemed a revocation upon the 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 ascertained 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