BIR Ruling No. 412-14

October 21, 2014 BIR RULING NO. 412-14 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 Virgen Milagrosa University Foundation, Inc. Martin P. Posadas Avenue San Carlos City, Pangasinan 2420 Attention: Ma. Lilia P. Juan, MD, FPCHA President Gentlemen : This refers to your letter dated 29 September 2012 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 VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC.,with Taxpayer Identification Number (TIN) 004-005-307-000, 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. 64215; that among the purposes for which the School is formed are: 1) "To establish, operate and manage a university which shall offer and conduct various types and level of education such as pre-elementary education, elementary, high school, courses in college, post-graduate studies, as well as vocational and technical courses. It shall also establish a special school for the deaf, blind and other handicapped"; 2) "To assist professional students in medicine and related field with tutorship, guidance, experience, and moral assistance; giving them the opportunity to further their training, gain clinical experience and to enable them to establish themselves in their profession"; EIDATc 3) "To establish and operate medical care and hospitalization services on a research, development or actual operating scale, and to contract with physicians for the provision of said medical service, with druggists and pharmacies for the provision of drugs and medicine, with any other agencies for the provision of other related services"; 4) "To support, promote, and finance scholarship to indigent but deserving children from the primary grades to university level, as recommended by the Board of Trustees of the foundation, until they shall have finished their chosen course, and with a view of advancing and disseminating scientific knowledge and learning"; 5) "To support, promote, and finance medical research projects and experiments, where it should be adjudged that a greater good will result thereby as may be determined and approved by the board of Trustees";and 6) "To become an Assessment Center for Technical Vocational Programs under TESDA (Technical Education and Skills Development Authority) and to be a Research Center for Secondary (under Department of Education) and Tertiary and Post-Graduate Programs under CHED (Commission on Higher Education)". that the Department of Education (DepEd) issued Certification of Operation dated 7 May 2014 certifying that VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC. is currently operating as a private educational institution and was issued corresponding Certificates of Government Recognitions as follows: Course Government Recognition No. Effectivity VM Child Learning Center No. EE-Re-30 s. 1985 June 17, 1985 VM Special Science High School No. SE-001 s. 1989 June 27, 1989 VM Saint Dominic High School No. 62 s. 1973 June 7, 1973 San Luis High School No. 252 s. 1965 August 1965 that the Technical Education and Skills Development Authority (TESDA) likewise issued Certification dated 25 November 2013 certifying that VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC. is of good standing in terms of meeting all the Program Registration requirements of TESDA with the following programs: Consumer Electronics Servicing NC II Food and Beverage Services NC II Biomedical Equipment Servicing NC II Commercial Cooking NC II Animal Production NC II Tour Guiding Services NC II Healthcare Services NC II Housekeeping NC II Bartending NC II Front Office Services NC II and that based on Certification dated 7 May 2014, the Commission on Higher Education (CHED) certified that VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC. is authorized to offer the following higher education programs: Program Authority Doctor of Philosophy majors in Business GR No. C-005, s. 1993 Administration, Development Education, Science Education Master in Arts in Nursing GR No. 026, s. 2008 Master in Business Administration GR No. 006, s. 1993 Master in Public Administration GR No. C-036, s. 1996 Master in Public Health GR No. C-023, s. 1992 Master of Science in Biology GR No. C-023, s. 1992 Master of Science in Management Engineering GR No. C-060, s. 1996 Master of Science in Teaching majors in Guidance GR No. C-006, s. 1993 and Counseling, Language, Elementary Mathematics, PEHM, Science and Technology, Secondary Mathematics Bachelor of Library and Information Science GR No. 004, s. 2013 Bachelor of Medical Laboratory Science GR No. 066, s. 1982 Bachelor of Arts majors in English, Political Science GR No. 116, s. 1978 Bachelor of Elementary Education with Specialization GR No. C-023, s. 1992 in Pre-School Education, Special Education Bachelor of Laws GR No. C-023, s. 1998 Bachelor of Science in Biology GR No. 044, s. 1981 Bachelor of Science in Psychology GR No. 116, s. 1978 Bachelor of Secondary Education majors in Biological GR No. C-023, s. 1992 Sciences, English, MAPE, Mathematics, Science, Values Education Bachelor of Science in Accountancy GR No. 008, s. 2010 Bachelor of Science in Business Administration GR No. 117, s. 1985 majors in Economics, Banking and Finance, Entrepreneurship, Management, Management Accounting, Marketing Bachelor of Science in Civil Engineering GR No. 017, s. 1984 Bachelor of Science in Computer Science GR No. 113, s. 1997 Bachelor of Science in Electrical Engineering GR No. 019, s. 1984 Bachelor of Science in Electronics Engineering GR No. 067, s. 1988 Bachelor of Science in Hotel and Restaurant Management GR No. 003, s. 2011 Bachelor of Science in Mechanical Engineering GR No. 018, s. 1984 Bachelor of Science in Nursing GR No. 005, s. 1984 Bachelor of Science in Office Management GR No. HE-RC-21, s. 1985 Bachelor of Science in Pharmacy GR No. 024, s. 1983 Bachelor of Science in Physical Therapy GR No. 017, s. 1980 Doctor of Dental Medicine GR No. 059, s. 1981 Doctor of Medicine GR No. 018, s. 1980 Doctor of Veterinary Medicine GR No. 004, s. 1989 Bachelor of Science in Radiologic Therapy GR No. 022, s. 2011 Associate in Computer Science GR No. 037, s. 1995 Associate in Computer Secretarial GR No. HE-RE-21, s. 1985 Associate in Computer Technology GR No. 037, s. 1995 Associate in Radiologic Technology GR No. 072, s. 1979 Diploma in Midwifery GR No. 272, s. 1960 Associate in Business Administration GR No. 117, s. 1985 Junior Secretarial GR No. 147, s. 1997 Pre-Dental Course GR No. 51, s. 1979 In support of its request, VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC. submitted the following documents: cDICaS 1) Letter application for tax exemption; 2) Copy of Bureau of Immigration Certificate of Accreditation No. RBR-00-054 dated May 18, 2001; 3) Copy of Memorandum of Agreement dated May 17, 2011; 4) Original Securities and Exchange Commission (SEC) Certificate of Corporate Filing/Information dated January 14, 2014; 5) 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 "this foundation, a non-stock and non-profit, is not organized, nor shall be operated, for pecuniary gain or profit, and it does not contemplate the distribution of gains, profits or dividends to its members but is organized solely for non-profit purposes. The property assets, profits and net income of this foundation are irrevocably dedicated to educational purposes, and no part of the profit or net income of this foundation 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, property, real or personal shall be used and expended in carrying out into effect the aims and objectives of this school or of foundations devotedly exclusively for religious, charitable, scientific or educational purposes as this Board of Trustees may determine"; c) "That in the event of dissolution of the foundation, 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 Charities, or any other non-stock, non-profit foundation, entity or foundation as this foundation may decide to do". 6) Certified true copy of the Amended By-Laws; 7) Certified true copy of 2013 SEC General Information Sheet; 8) Certified true copy of BIR Certificate of Registration; 9) Certified true copies of the 2013, 2012 and 2011 Annual Information Returns and Audited Financial Statements; 10) Copy of TESDA Certification dated 25 November 2013 together with certificates of program registration; 11) Copy of CHED Certification dated 7 May 2014 together with certificates of government recognitions; CAaSED 12) Original DepEd Certificate of Recognition dated 7 May 2014 together with certificates of government recognitions; and 13) Copy of BIR Ruling ENPS-005-96 dated March 12, 1996. 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 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 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) TcCDIS 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 VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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, VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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, VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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. (BIR Ruling No. 170-11 dated May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011) Hence, as long as VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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) 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. EScHDA 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 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 VIRGEN MILAGROSA UNIVERSITY FOUNDATION, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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. ACcISa Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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. VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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, VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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, VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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 VIRGEN MILAGROSA UNIVERSITY FOUNDATION, 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 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 of Internal Revenue Footnotes 1. P1,919,500.00 starting January 1, 2012.