BIR Ruling No. 405-12

June 15, 2012 BIR RULING NO. 405-12 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 St. Paul College of Ilocos Sur, Inc. 2727 Bantay, Ilocos Sur Attention: Sister Maria Nora Loreno, SPC VP-Finance Services Gentlemen : This refers to your letter dated August 26, 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 ST. PAUL COLLEGE OF ILOCOS SUR, INC. (formerly Rosary College of Vigan, Inc.) with Taxpayer's Identification Number (TIN) 000-564-784, 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. PW1196 dated January 11, 1911; that the purposes for which the School is formed are: (1) "to establish and maintain a Catholic school as an institution of learning dedicated to the spiritual, academic, technological, technical, sociological and economic needs of the Philippines as well as contribute to the advancement of the socio-economic and cultural development of the country"; (2) "to promote the philosophy of a Catholic Paulinian education whether general or vocational by providing an integrated, complete and general education according to the all-round developmental needs of the students"; and (3) "to provide courses of study in the pre-school, primary, secondary, collegiate, technical, vocational levels for which the usual certificates and/or diplomas may be awarded and the appropriate honors conferred."; and that it is granted the following government permits from the Department of Education (DepEd): DIESHT 1) Government Recognition (R-1) No. PE-025, s. 2002 dated November 29, 2002 for the Pre-Elementary Course effective as of School Year 2002-2003; 2) Government Recognition (R-1) No. E-007, s. 2002 dated February 5, 2002 for the Elementary Course effective as of School Year 2001-2002; and 3) Government Recognition (R-1) No. SE-002, s. 2006 dated April 24, 2006 for the Special Science High School Curriculum effective as of School Year 2005-2006. In support of its request, ST. PAUL COLLEGE OF ILOCOS SUR, INC. has completely submitted on April 25, 2012 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 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; b) "This corporation, a non-stock and non-profit, is not organized, nor shall it be operated, for pecuniary gain or profit, and it does not contemplate the distribution of gains, profits, or dividends to its members and is organized solely for non-profit purposes. The property, assets, profits and net income of this corporation are irrevocably dedicated to educational purposes, and no part of the profits or net income of this corporation shall ever inure to the benefit of any director, officer, or member or to the benefit of any person, whomsoever, but that all its income, properties, real or personal shall be used and expended in carrying out into effect the aims and objectives of this school or of corporations devoted exclusively for religious, charitable, scientific, or educational purposes as the Board of Trustees may determine." cCaEDA c) "In the event of dissolution of the corporation, its remaining assets, after payment of its liabilities, shall belong to, or be disposed of in accordance with the wishes of, The Philippine Province of the Congregation of the Sisters of St. Paul of Chartres." 3) Certified true copy of the Amended By-Laws; 4) Certified true copy of SEC 2012 General Information Sheet; 5) Certified true copies of BIR Certificate of Registration; 6) Certified true copies of the 2008, 2009 and 2010 Annual Information Returns and Financial Statements; and 7) Certified true copies of 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. TCAHES From the foregoing, and since ST. PAUL COLLEGE OF ILOCOS SUR, 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, ST. PAUL COLLEGE OF ILOCOS SUR, 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, ST. PAUL COLLEGE OF ILOCOS SUR, 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 ST. PAUL COLLEGE OF ILOCOS SUR, 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. SDcITH 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 ST. PAUL COLLEGE OF ILOCOS SUR, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by ST. PAUL COLLEGE OF ILOCOS SUR, 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. SDHAEC Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of ST. PAUL COLLEGE OF ILOCOS SUR, 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. ST. PAUL COLLEGE OF ILOCOS SUR, 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, ST. PAUL COLLEGE OF ILOCOS SUR, 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, ST. PAUL COLLEGE OF ILOCOS SUR, 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 ST. PAUL COLLEGE OF ILOCOS SUR, 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. cACDaH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue