BIR Ruling No. 413-14

October 21, 2014 BIR RULING NO. 413-14 Section 4 (3), Article XIV, 1987 Constitution; Tax Code, Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (1) (H); BIR Ruling No. 170-11; BIR Ruling No. 169-11; and BIR Ruling No. 159-11 Hermano (San) Miguel Febres Cordero Medical Education Foundation (De La Salle-Health Sciences Institute),Inc. Dasmarias City, Cavite Attention: Br. Agustine L. Boquer FSC President Gentlemen : This refers to your letter dated August 9, 2012 requesting on behalf HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), INC. for tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 (H) of the Tax Code of 1997, as amended. It is represented that HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE),INC. with Taxpayer's Identification No. 000-289-828-000, is 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 SEC Registration No. 140783; that it is recognized by the government and was issued by the Commission on Higher Education (CHED) with the following recognition: Government Recognition Course (GR) Number GR 052 s. 1998 Diploma in Midwifery GR 054 s. 1988 Bachelor of Science in Radiologic Technology GR 053 s. 1988 Bachelor of Science in Physical Therapy GR 512 s. 1988 Bachelor of Science in Nursing GR 26 s. 1988 Doctor in Medicine GR 124 s. 2012 Bachelor of Science in Occupational Therapy The primary purposes for which it was incorporated is: SHTaID 1) To provide the institutional medium capable of undertaking or financing programs dedicated to the establishment, maintenance, operation and management of education al facility primarily in the field of medical and physical sciences, providing also therein instructions in the primary, intermediate, high schools and collegiate levels; as well as post graduate medical and other special courses as the Board of Trustees may determine; 2) To organized, conduct and carry on the operation of health science, educational institutions such as Medicine, Dentistry, Nursing, Midwifery, Pharmacy, Physical Medicine and other health and medical sciences. These institution will be operated in accordance with the accepted methods and practices employed by health science educational institutions in the Philippines and abroad; 3) To promote for the scientific development of the said institution of, medicine and other allied health science for its hospitals, clinics, dispensaries and other affiliations and for the implication of its work in the interest of public and private health; 4) To conduct applied researches and development activities and studies to the end that it will bring about a constructive re-orientation and refinement of community needs and values, more particularly in the field of medical science; to assists in the community development projects pursued by the government as well as those undertaken by other private organizations, foundations and entities now in existence and hereinafter organized; 5) To function and operate in private science and research foundation in line and in compliance with the policies and objective enumerated by the government creating the National Science Development Board. 6) To provide financial support, within the Philippines and abroad for the studies of selected student and for the attendance at scientific influences by qualified and competent scholars; to promote support and finance publication of reports prepared under the auspices of the Foundation, to organize, staff, and finance projects which may be established in pursuit of the purpose of the Foundation. HATICc 7) To receive and/or give grants, gifts, legacies, donations, contributions endowments and financial aids or loans from any source whatsoever, and to make use of them in operating enterprises, activities and business as may be necessary to carry out the objectives; 8) To establish, maintain and operate medical research centers, technological, vocational and manpower development schools, libraries, laboratories, and other similar institutions or centers offering formal and practical courses in science or technology which would be of value for community development; 9) To establish scholarship and professional chairs in the social, medical and physical sciences, in order that the widest array of talent may be developed and made available to the country's under privileged; The Corporation is hereby constituted as a member of De La Salle Philippines, Inc. As such member of De La Salle Philippines, Inc.,the Corporation shall enjoy and exercise autonomy in the administration of its affairs within the context of the purposes, objectives and Mission Vision Statement stated and articulated in the articles of incorporation and by laws of De la Salle Philippines, Inc. as the primary implementor of the directives set by the De la Salle Brothers and the Philippine La Sallian Family through the General Chapter, the Philippine District Chapter and the Philippine Lasallian Family Convocation and the policies, guidelines and directions laid down by the National Mission Council of the De la Salle Philippine, Inc. In support of its request, HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE),INC. has completely submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; IDTSaC 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 one of those enumerated under Sec. 30 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 corporation shall be transferred to similar institution or to the government. 4) Certified true copy of the By-Laws; 5) Certified true copies of the Annual Income Tax Returns and Financial Statements for the last three (3) years of operation; 6) Certified true copy of the CHED Certification of Recognition; 7) BIR Certificate of Registration; and 8) Affidavit of Non-Forum Shopping. 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; ...." DTCAES 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. 169-11, May 25, 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 of 1997. However, if their gross income from unrelated trade, business or 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 income tax rate prescribed under Section 27 (A) of the Tax Code of 1997. (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] of the Tax Code of 1997) From the foregoing, and HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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. 159-11, May 19, 2011) However, HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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 HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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. TAaEIc 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 Five Hundred Pesos (P1,919,500.00) which tax payment may legitimately be passed on to buyers of such goods and services. (BIR Ruling No. 169-11, May 25, 2011) Hence, as long as HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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, May 25, 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. 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, May 25, 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; EHaDIC (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 HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE),INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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 HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE),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. HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE),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, HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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. ESacHC Moreover, HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), 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 HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE-HEALTH SCIENCES INSTITUTE), INC. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 169-11, May 25, 2011) Please note that this tax exemption 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 subsequent application for Tax Exemption/Revalidation provided under Revenue Memorandum Order (RMO) No. 20-2013, otherwise, the exemption shall be deemed a revocation upon 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