BIR Ruling No. 314-11

August 22, 2011 BIR RULING NO. 314-11 Section 4 (3), Article XIV, 1987 Constitution; Sections 27 (D) (1), 30 (H); 57; 101 (A) (3); 105; 109 (H), 235; 236 (B); 237 of the 1997 Tax Code Department Order No. 149-95; RMC 76-2003; BIR Ruling No. 237-87; BIR Ruling No. 248-88; BIR Ruling No. S30-27-2003; BIR Ruling No. DA-043-2004; BIR Ruling NSNP-(S30H-001) 007-09; BIR Ruling NSNP-(S30H-136) 811-09 Tagum City Institute of Technology Foundation, Inc. Elpidio M. Gazmen Cmpd., Gazmen Rd., Tagum City Attention: Mr. Deo S. Casintahan President Gentlemen : This refers to your letter dated December 8, 2006, as indorsed by the Chief, Legal Division, Revenue Region No. 19, Davao City on September 12, 2007, and received by the Law Division on April 11, 2008, requesting in effect, for tax exemption enjoyed by non-stock, non-profit educational institutions pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 (H) of the Tax Code of the Philippines, as amended. It is represented that Tagum City Institute of Technology Foundation, Inc. (TCITFI) with Taxpayer's Identification No. 006-410-608-000, 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. CN200630691 dated November 29, 2006; that it is recognized by the government and permitted by the Technical Education and Skills Development Authority (TESDA) in accordance with Region XI Certificates of TVET Program Registration WTR Nos. 0711032279, 0711022052, 0811022053, 0811022050, 0711022277 and 0711022278 to operate programs in Automotive Servicing NC II, Front Office Services NC II, Tour Guiding Services NC II, Food & Beverage Services NC II, PC Operations NC II and Computer Hardware Servicing NC II, respectively; and that the purposes for which it was incorporated are the following: 1. To provide a technical and vocational school that will cater to the needs of the community, as well as to extend livelihood programs among the young entrepreneurs; 2. To maintain an equally effective and advanced academic and co-curricular standards, which shall enhance a systematic and well developed career guidance of the students; 3. To establish a continuing network of programs with government and non-government sectors in order to propel progress for the purpose of obtaining readily available sources of income for the student after they shall have completed their studies; 4. Promote and strengthen the quality of technical education and skills development progress to attain information and competitiveness; EDHTAI 5. Focus technical education and skills development on meeting the changing demands for quality mid-level manpower; 6. Inculcate desirable values through the development of moral character with emphasis on work ethic, self-discipline, self-reliance and nationalism; 7. To establish competency-assessment center accredited by TESDA which shall serve as a venue for competency-assessment to its own students or other students/examines from other schools/colleges/industries and government agencies in accordance with TESDA methodology and to collect assessment fee prescribed by TESDA (as amended on October 29, 2009); and 8. To provide Technical Vocational Education and Training-related program/courses (TVET) to the community (as amended on October 29, 2009). In support of its request, TCITFI has submitted on September 22, 2010 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) 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 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. 4) Certified true copy of the By-Laws; 5) Certified true copy of the Annual Information Return and Financial Statements for the last three (3) years of operation; 6) Certified true copy of the TESDA recognition certificates; 7) Sworn Affidavit of Non-Forum Shopping; 8) BIR Certificate of Registration; and 9) Other pertinent documents. 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." IcHEaA 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. 248-88 dated June 6, 1988) From the foregoing, and since TCITFI 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. 237-87 dated August 11, 1987) However, TCITFI 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, TCITFI's gross receipts from operations as a non-stock, non-profit educational institution are exempt from value-added tax (VAT) pursuant to Section 109 (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 (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) which tax payment may legitimately be passed on to buyers of such goods and services. (BIR Ruling No. S30-27-2003 dated November 21, 2003) Hence, as long as TCITFI 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. DA-043-2004 dated February 4, 2004) 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 NSNP-(S30H-136) 811-09 dated December 22, 2009) IaAEHD 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 TCITFI as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by TCITFI 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 TCITFI 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. TCITFI 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, TCITFI 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. IDESTH Moreover, TCITFI 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 TCITFI to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. NSNP-(S30H-001) 007-09 dated January 8, 2009) 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