BIR Ruling No. 325-14

August 13, 2014 BIR RULING NO. 325-14 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 N.E. Dominican Academy, Inc. Narra Extension, Bitas, Cabanatuan City Nueva Ecija 3100 Attention: Dr. Guillermo V. Domingo School Director/Principal Gentlemen : This refers to your letter dated 16 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 the N.E. DOMINICAN ACADEMY, INC.,formerly Nueva Ecija Dominican Academy, Inc.,with Taxpayer Identification Number (TIN) 213-701-4941, 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. A200111526 dated 06 August 2001; that the purposes for which the School is established are: 1) "To establish and operate an educational institution or learning center which shall provide courses of study in Pre-Elementary/Elementary/Secondary Education subject to the laws of the Philippines"; 2) "To receive tuition and miscellaneous fees, accept donations, endowments, grants, legacies and instruments/devices conformably with existing applicable statutes"; 3) "To continue to promote the objectives of elementary education, but shifting in emphasis from the mastery of basic tools of learning, expression and understanding to the use an extension of the tools for further exploring and acquiring intellectual, social, moral and physical concept, ideals, attitudes and skills in order to develop the whole human being";and 4) "To discover and enhance, in addition, the different aptitudes and interests of the individual students so as to equip him skills for productive endeavor and thus, prepare him for work in the real and/or further former studies in higher education". that N.E. DOMINICAN ACADEMY, INC. was granted Government Recognition No. S-007, s. 2009 dated 12 March 2009 for the Complete Secondary Course (First to Fourth Year High School);that the Department of Education (DepEd) issued the following certifications: 1) "N.E. DOMINICAN ACADEMY, INC.,Bitas, Cabanatuan City has been issued Government Recognition No. E-063 s. 2003 for the Grades I-VI of the Elementary Course effective SY 2003-2004" based on Certification dated 19 September 2011; HEDSCc 2) "N.E. DOMINICAN ACADEMY, INC.,Bitas Cabanatuan City with GOVERNMENT RECOGNITION No. S.007 S. 2009 have a good standing in the Division of Cabanatuan in the Private School offering Pre-elementary up to High School Course" based on Certification dated 06 August 2012; and 3) "N.E. DOMINICAN ACADEMY, INC.,Bitas Cabanatuan City with GOVERNMENT RECOGNITION No. S.007 S. 2009 and having Good Standing in the Private School operating since 2001 in Cabanatuan City under the supervision of hereunder Education Supervision I, in-charge of Private Schools" based on Certification dated 06 August 2012. In support of its request, N.E. DOMINICAN ACADEMY, INC. has completely 12 November 2012 submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Amended Articles of Incorporation which includes the following provisions: a) That it is "a non-stock and non-profit association"; b) "That no part of the income which the corporation may obtain as an incident to its operation shall be distributed as dividends to its members, trustees or officers"; c) "That the Trustees shall not receive any compensation for their services as such";and d) "In case of dissolution, assets of the corporation/institution shall be transferred to similar institution or to the government". 3) Certified true copy of the Amended By-Laws; 4) Certified true copies of 2009, 2010 and 2011 SEC General Information Sheet; 5) Certified true copy of BIR Certificate of Registration; 6) Certified true copies of the 2009, 2010 and 2011 Annual Information Returns and Audited Financial Statements; and 7) Original DepEd Certification dated September 19, 2011 together with copy of Government Recognition No. E-063 s. 2003 and certified copy of Government Recognition No. S.007 S. 2009; 8) Original DepEd Endorsement dated August 6, 2012 together with Certification of Good Standing dated August 6, 2012; and 9) Original letter dated November 8, 2012 together with DepEd Endorsement dated November 7, 2012. 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: ACSaHc 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 then the entire taxable income 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 N.E. DOMINICAN ACADEMY, 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, N.E. DOMINICAN ACADEMY, 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) . Likewise, N.E. DOMINICAN ACADEMY, 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. Hence, as long as N.E. DOMINICAN ACADEMY, 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. 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. aTcESI 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. 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 N.E. DOMINICAN ACADEMY, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by N.E. DOMINICAN ACADEMY, 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 N.E. DOMINICAN ACADEMY, 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. N.E. DOMINICAN ACADEMY, 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, N.E. DOMINICAN ACADEMY, 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. SAHEIc Moreover, N.E. DOMINICAN ACADEMY, 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) 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 N.E. DOMINICAN ACADEMY, INC. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. 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 Bureau of Internal Revenue Footnotes 1. P1,919,500.00 starting January 1, 2012.