BIR Ruling No. 238-13

July 5, 2013 BIR RULING NO. 238-13 Section 4 (3), Article XIV of the 1987 Constitution; Section 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H) of the Tax Code of 1997, as amended; BIR Ruling No. 217-2011; BIR Ruling No. 259-2011 Reapers Baptist Learning Center, Inc. Lanao, Virac, Catanduanes Attention: Rev. Sergio B. Balois Pastor/President Gentlemen : This refers to your application dated 11 August 2011 requesting for the issuance of a certificate of tax exemption enjoyed by a non-stock, non-profit educational institution under Section 30 (H) of the Tax Code of 1997, as amended. It is represented that REAPERS BAPTIST LEARNING CENTER, INC. with Taxpayer's Identification Number (TIN) 005-479-184-000, 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 Company Registration No. CN200315608 dated 23 July 2003; that the purposes for which the School is established are: 1) "To provide a Bible Foundation for pre-school/elementary education in accordance with Baptist belief and practices; 2) "To assist our members or non-members to educate the people and to assist the parents in the education of their children; 3) "To develop the child in all areas of his/her personality, spiritual, mental, physical and emotional that his/her fullest potential"; and 4) "To help the child develop a strong faith in God through knowing Jesus Christ as personal Savior which give a sense of security, and positive self-image." and that it was granted by the Department of Education (DepEd) permit to operate Preschool since the school year 2004-2005 and was issued Government Permit (R-V) No. 111, s. 2012 dated 06 August 2012 to operate Preschool for the School Year 2012 to 2013. ETHaDC In support of its request, REAPERS BAPTIST LEARNING CENTER, INC. has submitted the following documents: 1) Letter application for tax exemption; 2) Copy of the SEC Certificate of Incorporation; 3) Certified true copy of the SEC Amended Articles of Incorporation which includes the following provisions: a) That the corporation is a non-stock, non-profit; b) That the primary purpose for which it was created is to establish an educational n and conduct an educational institution under Section 30 (H) of the Tax Code of 1997, as amended; c) That no part of the net income shall not n inure to the benefit of any of its members; d) That the trustees do not receive any compensation; and e) That in case of dissolution, the assets of the organization shall be transferred to Reapers Baptist Church, similar organization or to the government of the Philippines. 4) Certified true copy of the SEC By-laws; 5) Certified true copy of the SEC 2011 General Information Sheet; 6) Certified true copies of the 2008, 2009 and 2010 Annual Income Tax Returns with attaching Financial Statements; 7) Certified true copies of DepEd Government Permit (R-V) No. 111, s. 2012 dated 06 August 2012; and 8) Original DepEd Certification dated 07 September 2012. In reply, please be informed that this Office cannot as yet issue the requested certificate of tax exemption because although REAPERS BAPTIST LEARNING CENTER, INC. was incorporated in 2003, its business operation for taxable years 2008, 2009 and 2010 generated income from tuition fees only in taxable year 2008, while of taxable years 2009 and 2010, the organization's sole revenue came from interest income; it 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) SHADcT REAPERS BAPTIST LEARNING CENTER, 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, REAPERS BAPTIST LEARNING CENTER, 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) 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, REAPERS BAPTIST LEARNING CENTER, 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. IHAcCS 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. 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 REAPERS BAPTIST LEARNING CENTER, 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) TAaIDH Finally, for purposes of securing a permanent exemption after the three (3)-year period, REAPERS BAPTIST LEARNING CENTER, INC. is required to submit the following documents pursuant to Revenue Memorandum Circular No. 14-2001: 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 n Note from the Publisher: Copied verbatim from the official copy. n Note from the Publisher: Copied verbatim from the official copy.