BIR Ruling No. 370-12

May 31, 2012 BIR RULING NO. 370-12 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. 170-2011; BIR Ruling No. 169-2011; BIR Ruling No. 159-2011; BIR Ruling No. 116-2011; BIR Ruling No. 073-2011 Franciscan College of the Immaculate Conception Baybay, Leyte, Inc. A. Bonifacio Street, Zone I, Marcelo Galenzoga Baybay City, Leyte Attention: Br. Pablo A. Cui, Jr.,OFM School Director Gentlemen : This refers to your application which was forwarded through 2nd Indorsement dated November 21, 2011 of Revenue Region No. 14, Candahug, Palo, Leyte, 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 FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, INC. with Taxpayer's Identification Number (TIN) 001-380-291, 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. 42743 dated November 25, 1970; that the purpose for which the School is formed is "to spread and educate the people to the teaching of Christ. The courses offered are: Pre-school (Nursery, Kindergarten),Elementary, Secondary, College, Post-graduate and Special Vocational Courses, of high academic standing which will emphasize cultural development, moral character, scientific research and the discipline and doctrines of the Roman Catholic Religion" ;and that it is granted the following government permits from the Department of Education (DepEd): 1) Re-issuance of Government Recognition No. 019 series of 2011 dated December 20, 2011 for the Pre-elementary Education Curriculum effective School Year 2012-2013; EAHDac 2) Re-issuance of Government Recognition No. 020 series of 2011 dated December 20, 2011 for the Elementary Education Curriculum effective School Year 2012-2013; and 3) Re-issuance of Government Recognition No. 017 series of 2011 dated December 20, 2011 for the Secondary Education Curriculum effective School Year 2012-2013. In support of its request, FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, INC. has completely submitted on February 7, 2012 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the SEC Certificate of Incorporation; 3) Certified true copy of the Amended 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 to establish 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 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 organization shall be transferred to Superior of the Franciscan Sisters, O.S.F.,Leyte Province, Philippines, Inc. DaTICE 4) Certified true copy of the Amended By-Laws; 5) Certified true copy of SEC 2011 General Information Sheet; 6) Certified true copies of BIR Certificate of Registration; 7) Certified true copies of the 2008, 2009 and 2010 Annual Information Returns and Financial Statements; and 8) Certified true copies of current government permits from the DepEd. 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: 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. cACEHI From the foregoing, and since FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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. However, FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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, FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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 (H) of the 1997 Tax Code, as amended. (BIR Ruling No. 159-2011 dated May 19, 2011) 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 Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00) which tax payment may legitimately be passed on to buyers of such goods and services. (Revenue Regulations No. 16-2011) Hence, as long as FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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. EcHIAC 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 FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, INC. as ancillary activities and the same are located within its premises. aETAHD In addition, gifts, donations, and other contributions received by FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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 FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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. FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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, FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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, FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, 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) TacSAE 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 FRANCISCAN COLLEGE OF THE IMMACULATE CONCEPTION BAYBAY, LEYTE, INC. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. 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