BIR Ruling No. 260-14

July 1, 2014 BIR RULING NO. 260-14 Section 4 (3), Article XIV of the 1987 Constitution; Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H) of the Tax Code of 1997, as amended; BIR Ruling No. 170-11; BIR Ruling No. 169-11; BIR Ruling No. 159-11 Follosco Morallos & Herce 25th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City 1227 Attention: Rachel P. Follosco Cielito May T. Velasquez Gentlemen : This refers to your letter dated 25 March 2013 requesting on behalf of your client, UNIVERSITY OF SAN JOSE-RECOLETOS, 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 UNIVERSITY OF SAN JOSE-RECOLETOS, INC. with Taxpayer Identification Number (TIN) 000-312-434-000, 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. C199600667 dated 20 December 1996; that among the purposes for which the UNIVERSITY OF SAN JOSE-RECOLETOS, INC. is formed are: (1) "To provide, support and maintain a Catholic Educational Institution which, with proper facilities, personnel and means, can offer students and scholars alike not only Quality Christian Community Oriented Education but also a satisfying and ennobling experience in learning and growing in arts, sciences and professions for which the usual diplomas may be awarded and degrees, certificates and honors conferred"; ITSCED (2) "To search for, discover, investigate and disseminate truth in all its aspects and dimensions for the harmonious development and enrichment of human resources and for the progressive betterment of the economic and social aspects of life in the country"; (3) "To encourage and conduct research and studies which are indispensable means for the attainment of true knowledge and for the promotion of human values and national culture"; (4) "To establish, operate and conduct branches or divisions of the University of San Jose-Recoletos in City of Cebu and elsewhere"; (5) "To provide support, financial or otherwise, for the maintenance of educational institutions that offer Catholic Education or Christian Community-Oriented Education, as well as grant scholarships to deserving students desiring to attend/attending such educational institutions, including but not limited to seminaries organized or operated by Superior de la Corporation Filipino de Padres Agustinos Recoletos Incorparada";and (6) "To design, offer and implement technical, and/or vocational education and training in accordance with the local, national, and/or international manpower requirements, and as well as to conduct competency assessment." and that UNIVERSITY OF SAN JOSE-RECOLETOS, INC. is recognized by the government and permitted by the Commission on Higher Education (CHED) and Department of Education (DepEd) to operate and offer Preschool, Elementary and Secondary Education Courses and was issued the following certifications: 1) DepED Certification dated 30 January 2014 certifying that "on the basis of the records available on file in this Office, UNIVERSITY OF SAN JOSE-RECOLETOS is a private educational institution with campuses located at Basak, Cebu City and Balamban, Cebu offering Preschool, Elementary and Secondary Education Courses" and that "the school is currently operating with Good Standing and has been granted Government Recognition in Preschool, Elementary and Secondary Education Courses ..." ;and TCacIE 2) CHED Certification dated 28 January 2014 certifying that "based on records, University of San Jose-Recoletos, Inc.,Magallanes St.,Cebu City, is operating higher education programs as a non-stock educational corporation." In support of its request, UNIVERSITY OF SAN JOSE-RECOLETOS, INC. has completely submitted the following documents, to wit: 1) Letter application for tax exemption; 2) Certified true 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 and conduct an educational institution under Section 30 (H) of the Tax Code of 1997, as amended; c) "That the affairs of the Corporation shall be governed by a Board of Trustees of the Corporation composed of five (5) elected members who shall serve without compensation other than reasonable reimbursement for actual and/or necessary expenses incurred by any member on official business as authorized by a formal resolution of the Board" ; d) That "no dividend or pecuniary profit shall ever be declared or paid to any member or trustee and that fees, monies, charges, contributions or donations collected or received shall be spent for such activities as may be necessary to enable the corporation to carry out the purposes for which it was formed" ; e) "That if for any cause or reason, the Corporation should cease or be unable to exercise its corporate purposes and functions, or its corporate existence be terminated for any cause, then all its assets and properties, real or personal, tangible or intangible, shall be assigned to the Superior de la Corporation Filipina de Padres Agustinos Recoletos Incorporada, subject however to the payment and settlement of any liabilities the corporation may have at the time of such termination or cessation of corporate existence and/or functions." HAICTD 4) Certified true copy of SEC By-laws which includes the following provision: a) That "Trustees shall not receive any compensation for their services other than reasonable honoraria and/or reasonable expenses" 5) Certified true copy of the SEC 2012 General Information Sheet; 6) Certified true copy of BIR Certificate of Registration; 7) Certified true copies of the 2010, 2011, 2012 and 2013 Annual Income Tax Returns with attaching Audited Financial Statements; 8) Certified true copies of DepEd Government Recognitions; 9) Original DepED Certifications dated 30 January 2014 and 17 September 2013; and 10) Original CHED Certifications dated 28 January 2014 and 13 January 2005. 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: CHcTIA 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) 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 UNIVERSITY OF SAN JOSE-RECOLETOS, 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, UNIVERSITY OF SAN JOSE-RECOLETOS, 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) CHcESa Likewise, UNIVERSITY OF SAN JOSE-RECOLETOS, INC.'s 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 UNIVERSITY OF SAN JOSE-RECOLETOS, 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. CIHTac 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) THIcCA 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 UNIVERSITY OF SAN JOSE-RECOLETOS, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by UNIVERSITY OF SAN JOSE-RECOLETOS, 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 UNIVERSITY OF SAN JOSE-RECOLETOS, 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. UNIVERSITY OF SAN JOSE-RECOLETOS, 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, UNIVERSITY OF SAN JOSE-RECOLETOS, 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, UNIVERSITY OF SAN JOSE-RECOLETOS, 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) HSaCcE 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 UNIVERSITY OF SAN JOSE-RECOLETOS, 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) 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 revoked 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 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 Footnotes 1. P1,919,500.00 starting January 1, 2012.