BIR Ruling No. 220-13

June 17, 2013 BIR RULING NO. 220-13 1997 Tax Code, Section 30 (H); BIR Ruling No. 217-2011; BIR Ruling No. 259-2011 College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. Milagros Bldg. Gatuslao St. Bacolod City Attention: Ms. Lucila M. Gomez Managing Director Gentlemen : This refers to your letter dated September 14, 2012 requesting on behalf of College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc . 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. It is represented that College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. , with Taxpayer's Identification No. (TIN) 007-996-325-000, 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 Registration No. CN201103360 and with SEC Certificate of Incorporation dated February 28, 2011; and that the purposes, among others, for which it was incorporated are the following: 1. To establish and operate an educational institution which shall provide basic education (Pre-school, Elementary and High School), ladderized non-degree technical vocational program, including short term course/s and other baccalaureate or degree courses; 2. To provide general courses of study including correspondence courses; to conduct institutes, lectureship training schools, or home classes; to provide for the holding and giving of lectures, exhibitions, public meeting and conferences calculated directly and indirectly to advance education; to secure, print and publish books and courses of study of the corporation; and to grant diploma, titles and degrees as may be authorized by the government; TECIaH 3. To establish and maintain dormitories for the students and employees; and 4. To purchase, build, lease, construct or otherwise acquire such land, building, and offices as may be necessary or useful to carry out the purposes of this corporation. In reply, please be informed that this Office cannot as yet issue the requested certificate of tax exemption because College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. has to prove by actual operation for at least three (3) years that it is really an organization/association exempt from income tax under Section 30 (H) of the Tax Code of 1997, as amended. (BIR Ruling No. 217-2011 dated July 6, 2011) College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. can file the necessary annual information return instead of an income tax return on or before the 15th day of the fourth month of the preceding accounting period following the start of its operation as an exempt organization as required under Section 24 of Revenue Regulations No. 2-40 dated February 10, 1940 (Collector vs. Sinco, G.R. L-9276 dated October 23, 1956) . Based on such information return, we shall conduct the necessary investigation on the activities undertaken during the period. The letter of exemption shall thereafter be issued depending upon the result of our investigation. However, College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from currency bank deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7-1/2% final withholding tax pursuant to Section 27 (D) (1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in its By-laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. (BIR Ruling No. 217-2011 dated July 6, 2011) LibLex Pursuant to Section 27 (B) of the NIRC and the Supreme Court Decision in G.R. Nos. 195909 and 195960 dated 26 September 2012, entitled " Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. ", 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. "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. Conversely, private non-profit educational institutions whose 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. It should be understood that as a non-stock, non-profit corporation educational institution, College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. shall be constituted as withholding agent of the government if it acts as an employer and its employee receives compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98, as amended. Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 (H) of the Tax Code of 1997 covers only income taxes for which it is directly liable. cDAITS Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. 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. Accordingly, if College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT. (BIR Ruling No. 259-2011 dated July 27, 2011) Likewise, revenue from contributions, and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code. (BIR Ruling No. 259-2011 dated July 27, 2011) Finally, for purposes of securing a permanent exemption after the three (3)-year period, College of Arts and Sciences of Asia and the Pacific, Bacolod City, Inc. is required to submit the following documents pursuant to Revenue Memorandum Circular No. 14-2001: AEcIaH 1) Certified true copy of the Certificate of Registration with the SEC; 2) 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. 3) Certified true copy of the By-Laws; 4) Certified true copy of the Annual Information Returns and Financial Statements for the last three (3) years of operation; 5) Certified true copy of the DepEd's Recognition; 6) Sworn Affidavit of Non-Forum Shopping; and 7) BIR Certificate of Registration. 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