BIR Ruling No. 411-15

December 14, 2015 BIR RULING NO. 411-15 Section 4 (3), Article XIV 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 Jimenez Bello Valdez Caluya & Fernandez (JG Law) SOL Building 112 Amorsolo Street, Legaspi Village, 1229 Makati City Attention: Atty. Maria Cecilia A. Fuentes; Atty. Anthony B. Uson Gentlemen : This refers to your letter dated December 19, 2013 requesting, on behalf of your client, ASIAN INSTITUTE OF MANAGEMENT, INC., for the revalidation of its tax exemption enjoyed by a non-stock and non-profit educational institution under Section 30 (H) of the Tax Code of the Philippines, as amended. AScHCD It is represented that ASIAN INSTITUTE OF MANAGEMENT, INC., with Taxpayer's Identification No. 000-436-390-000, is registered as 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 Company Registration No. 35963 dated August 5, 1968; that the primary purpose for which this corporation is formed is to establish an educational institution of international character and dimension primarily for students of the international community such as, but not limited to, expatriates, foreign temporary residents and children and dependents of foreign diplomatic personnel; to foster among students, irrespective of nationality and creed, high quality management education on the graduate level uniquely designed to meet the needs and opportunities of Asia and the rest of the world as recognized under Presidential Decree No. 639 and as envisioned in the exception contained in the second sentence of the third paragraph of Section 4 (2), Article XIV of the 1987 Constitution; to promote and encourage the advancement of industrial and management sciences in the Philippines and scientific researches directed toward benefiting the public, through the organization, establishment and maintenance of a progressive institute of learning of high academic standards; to foster, promote, and encourage the study and improvement of industrial, technological and management sciences and scientific research based on programs and activities that deal and in with problem areas of genuine concern to the industrial and business communities, particularly as related to management sciences, including but not limited to computer sciences, operations research, industrial engineering sciences, industrial and management accounting and other industrial and management sciences; to improve and develop the overall quality of professional management in the Philippines and in other neighboring countries in order to provide the academically trained men and women to occupy top management positions in the business and industrial sectors; and to achieve the promotion of industrial and management sciences through financial support, scholarships, donations and other forms of financial aid and assistance out of the funds of the institute ; that the Commission on Higher Education (CHED) has issued a Certification (Cert. No. 13-11-511, Series of 2013) that it is a special higher education institution offering the following degree programs recognized under Presidential Decree No. 639 dated January 21, 1975: Master in Business Administration, Majors in Finance, Marketing and Entrepreneurship Master in Management Master in Development Management Executive Master in Business Administration Master in Entrepreneurship and that effective August 23, 2010, CHED conferred the "Autonomous Status" to ASIAN INSTITUTE OF MANAGEMENT, INC. In support of its request, ASIAN INSTITUTE OF MANAGEMENT, INC. has completely submitted the following general documentary requirements: 1) Letter application for tax exemption; 2) SEC Certified true copies of the following: a. Certificate of Registration; b. Articles of Incorporation which includes the following provisions: i. That the corporation is non-stock, non-profit; ii. 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; iii. That no part of the corporation's net income earned, or asset acquired, by the Institute in the performance of its primary or secondary purpose shall belong to or inure to the benefit of any member, organizer, officer or any specific person or entity, shall inure to the benefit of any private individual; iv. That none of the members of the Board of Trustees shall receive any compensation or remuneration for their services as members of the Board of Trustees; and v. That in the event of the dissolution of the institute, its remaining assets, after the payment of its liabilities, shall be disposed of and turned over to another non-governmental organization (NGO) or foundation duly accredited by the appropriate government regulatory or accrediting agency and organized for purposes similar to the purposes of the Institute as stated under this Articles of Incorporation; or to the State for public purpose, to the Republic of the Philippines or any of its agencies or instrumentalities or political subdivisions, or distributed by a court of competent jurisdiction to another accredited NGO to be used in such manner as, in judgment of said court, shall be necessary to accomplish the general purpose for which the Institution was organized; or otherwise disposed of and turned over in accordance with existing laws and regulations. c. By-Laws. 3) Certification under Oath by an executive officer as to: (i) all previous amendments/changes in the Articles of Incorporation and By-Laws, (ii) manner of activities, and (iii) the sources and disposition of income; 4) Certified true copy of BIR Certificate of Registration; 5) Original copy of the Certification under Oath by the Treasurer of the corporation that it does not provide compensation, allowances and fringe benefits to the members of its Board of Trustees; AcICHD 6) Original Copy of the Certification issued by the RDO where the corporation is registered that the association is not the subject of any pending investigation, on-going audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; 7) Certified true copies of the Income Tax Returns and Financial Statements for the last three (3) years of operation; and 8) Statement under Oath by an executive officer of its modus operandi . In addition, ASIAN INSTITUTE OF MANAGEMENT, INC. being a non-stock and non-profit educational institution, it also submitted the following documents: 1) Certified true copy of the certificate of recognition as a special higher education institution with an autonomous status issued by the CHED; and 2) Original copy of Certificate of utilization of annual revenues and assets by the Treasurer. 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. (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 Tax Code. However, if their gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the 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 Tax Code." (Section 27 [B] of the Tax Code of 1997, as amended; Commissioner of Internal Revenue v. 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 activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function. (Section 27 [B], Tax Code of 1997) From the foregoing, and since ASIAN INSTITUTE OF MANAGEMENT, 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, ASIAN INSTITUTE OF MANAGEMENT, 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, ASIAN INSTITUTE OF MANAGEMENT, 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. 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 Nine Hundred Nineteen Thousand and 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 ASIAN INSTITUTE OF MANAGEMENT, 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) TAIaHE 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 service 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 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 foreign currency deposit system imposed by Section 27 (D) (1) of the Tax Code of 1997; (b) Certification of actual utilization of 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 ASIAN INSTITUTE OF MANAGEMENT, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations and other contributions received by ASIAN INSTITUTE OF MANAGEMENT, 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 gifts 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 ASIAN INSTITUTE OF MANAGEMENT, 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. ASIAN INSTITUTE OF MANAGEMENT, 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, ASIAN INSTITUTE OF MANAGEMENT, 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, ASIAN INSTITUTE OF MANAGEMENT, 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 ASIAN INSTITUTE OF MANAGEMENT, 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 with the same requirements and procedures provided under Revenue Memorandum Order (RMO) No. 20-2013. Failure to renew the Tax Exemption Ruling shall be deemed revocation thereof upon the expiration of the three (3)-year period. The new Tax Exemption Ruling shall be valid for another period of three (3) years, unless sooner revoked or cancelled. 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. cDHAES Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue