BIR Ruling No. 447-14

October 30, 2014 BIR RULING NO. 447-14 Section 4 (3), Article XIV, 1987 Philippine Constitution; Sections 109 (1) (H), 101 (A) (3), 27 (D) (1), 30 (H), 105, Tax Code of 1997, as amended; BIR Ruling No. 170-2011; BIR Ruling No. 169-2011; BIR Ruling No. 159-2011 Saint Emiliana Academy of Excellence, Inc. Angelo corner Francisco Streets, Don Pepe Subdivision, Balibago, Angeles City, Pampanga Attention: Ms. Edna S. Guevarra President Gentlemen : This refers to your letter dated October 24, 2013, as indorsed by the Assistant Regional Director of Revenue Region No. 4, San Fernando City, Pampanga, relative to your request for the revalidation of the Certificate of Tax Exemption of SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. 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 SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. with BIR Certificate of Registration No. OCN 4RC0000313090, dated March 6, 2007 and with Taxpayer's Identification No. (TIN) 006-653-825-000, is a non-stock, non-profit corporation duly organized and existing under the laws of the Republic of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company Registration No. CN200703246, dated March 6, 2007; and that among the purposes for which it was incorporated are the following, to wit: 1) To establish and operate in accordance with Section 30 of the Tax Code of 1997, an educational institution which shall provide courses of study in Pre-Elementary, Elementary and Secondary subject to the laws of the Philippines; 2) To endeavor that no part of the net income of the educational institution shall inure to the benefit of any member of the Board of Trustees; 3) To observe and maintain that the members of the Board of Trustees do not receive any compensation; 4) To constitute a system that will ensure that in case of dissolution, the assets of the corporation shall be transferred to a similar institution or to the Government; and 5) To receive tuitions and miscellaneous fees, accept donations, endowments, grants, legacies and instruments/devices conformably with existing applicable statutes. SCDaHc In support of its request, SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. has completely submitted the following documents: 1) Original copy of application letter for issuance of Tax Exemption Ruling; 2) Certified true copy of the educational institution's Certificate of Incorporation with the SEC; 3) SEC certified true copy of its Amended Articles of Incorporation which specifically includes and clearly states the following provisions verbatim: 1) That it is non-stock and non-profit corporation or association; 2) To establish and operate in accordance with Section 30 of the Tax Code of 1997, an educational institution which shall provide courses of study in Pre-Elementary, Elementary and Secondary subject to the laws of the Philippines; 3) To endeavor that no part of the net income of the educational institution shall inure to the benefit of any member of the Board of Trustees; 4) To observe and maintain that the members of the Board of Trustees do not receive any compensation; and 5) To constitute a system that will ensure that in case of dissolution, the assets of the corporation shall be transferred to similar institution or to the government. 4) SEC certified true copy of the educational institution's Amended By-Laws; 5) Original copy of the Certification under Oath by an Executive Officer of the educational institution that: (I) the Corporation has filed an Amended Articles of Incorporation, amending Article II (purposes thereof) with the Securities and Exchange Commission (SEC) and was duly approved on August 27, 2010; (II) the Corporation is primarily engaged in activities which accomplish its purposes as an educational institution, providing courses of study in Pre-Elementary, Elementary and High School, in accordance with existing laws and regulations prescribed by the Department of Education; and (III) the source of income of the Corporation is derived solely from the payments of tuition fees and that the income obtained as a result of its operation, are used actually, directly and exclusively in pursuance of its purposes as an educational institution; EHSIcT 6) BIR certified true copy of its Certificate of Registration; 7) Original copy of the Certification under Oath by the Treasurer of the educational institution certifying therein that no amount of income, compensation, salaries or any emoluments is being paid by the corporation to its trustees and officers; 8) BIR certified true copy of the Certification issued by the Revenue District Officer of Revenue District Office (RDO) No. 21-A, North Pampanga, dated June 10, 2014, certifying therein that SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. is a registered Corporation in the said District with TIN 006-653-825-000; is not the subject of any pending investigation, and on-going audit; it has no pending tax assessment, administrative protest; and no claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; 9) BIR certified true copies of the Annual Income Tax Returns and Financial Statements of the corporation for the years 2011-2013; 10) Original copy of the Statement under Oath by the Executive Officer of the educational institution as to its modus operandi; 11) Original copy of the Certificate of Utilization of Annual Revenues and Assets by the Treasurer or his equivalent of the Foundation in accordance with the guidelines set forth in Section 1.3 of Department of Finance (DOF) Order No. 137-87; 12) Certified true copies of the Government Recognition Nos. E-107, s. 2008 (Pre-Elementary),E-108, s. 2008 (Elementary Course, Grades I to VI) and S-109, s. 2008 (Secondary Course, First Year to Fourth Year),issued by the Department of Education (DepEd),Region III, City of San Fernando, Pampanga; AHaDSI 13) Certification issued by the OIC-Schools Division Superintendent, Division of City Schools, Region III, Angeles City, dated October 8, 2013, certifying therein that SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. is currently operating in good standing; and 14) Verification and 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; xxx xxx xxx 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, May 19, 2011) IDEHCa 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, as amended. (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 since SAINT EMILIANA ACADEMY OF EXCELLENCE, 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, SAINT EMILIANA ACADEMY OF EXCELLENCE, 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, SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. 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. CAcIES 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. 170-11, May 25, 2011 and BIR Ruling No. 159-11 dated May 19, 2011) Hence, as long as SAINT EMILIANA ACADEMY OF EXCELLENCE, 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 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. 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 and BIR Ruling No. 159-11 dated May 19, 2011) TEAcCD 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: 1) 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; 2) Certification of actual utilization of the said income; and 3) 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 SAINT EMILIANA ACADEMY OF EXCELLENCE, INC. as ancillary activities and the same are located within its premises. In addition, gifts, donations, and other contributions received by SAINT EMILIANA ACADEMY OF EXCELLENCE, 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. TcSaHC Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of SAINT EMILIANA ACADEMY OF EXCELLENCE, 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. SAINT EMILIANA ACADEMY OF EXCELLENCE, 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, SAINT EMILIANA ACADEMY OF EXCELLENCE, 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, SAINT EMILIANA ACADEMY OF EXCELLENCE, 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 SAINT EMILIANA ACADEMY OF EXCELLENCE, 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) It is requested that a copy of this Letter of Exemption be attached to the aforementioned Annual Information Return. CDHAcI 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 the filing of a subsequent Application for Tax Exemption/Revalidation provided under Revenue Memorandum Order (RMO) No. 20-2013, dated July 22, 2013. Failure to renew the Tax Exemption Ruling shall be deemed a 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue