BIR Ruling No. 476-12

July 30, 2012 BIR RULING NO. 476-12 Section 4 (3), Article XIV, 1987 Constitution; Tax Code, Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H); BIR Ruling No. 168-11; BIR Ruling No. 155-11; and BIR Ruling No. 152-11 Saint Adelaide School Philippines, Inc. Don Matias, Burgos Pangasinan Attention: Adelaida G. Carvajal Principal Gentlemen : This refers to your letter dated 25 July 2011 requesting on behalf of Saint Adelaide School Philippines, 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 the Philippines, as amended. It is represented that Saint Adelaide School Philippines, Inc. with Taxpayer's Identification No. 406-777-110-000 , 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 Registration No. CN201027207 dated February 15, 2012 ; that it is recognized by the government and permitted by the Department of Education (DepEd)Region I in accordance with Government Permit (R-I) No. PE-089 s. 2011 for the Pre-Elementary Course for School Year 2012-2013 only, Department of Education (DepEd) Region I in accordance with Government Permit (R-I) No. PE-090 s. 2011 for the Basic Education Curriculum (BEC) (Grade I-VI) for School Year 2012-2013 only, Department of Education (DepEd) Region I in accordance with Government Permit (R-I) No. SE-022 s. 2012 for the 2010 Secondary Education Curriculum (First Year-Third Year) Basic Education Curriculum (Fourth Year) for School Year 2012-2013 and that the purpose for which it was incorporated is as follows: "To establish and conduct a school that will provide pre-elementary, elementary and secondary courses: to receive and administer funds for educational purposes and all for the public welfare and for no other purposes, and that end to take and hold, by bequest, devices, gift, loan, purchase or lease, either absolutely or in trust for such objects and purposes or any of them, any property, real, personal, or mixed, without limitation, if any as may be imposed by law; to sell, convey or dispose of any such property and invest and re-invest the principal and income of this institution for any of the aforementioned objects and purposes, without limitations, if any as may be contained in the instrument under which such property is received or other limitation imposed by law; to receive any property, real, personal, or mixed, in trust, under the terms of any will, deed or trust, or other trust instrument for the foregoing purposes or any of them (but for no other purposes), and in administering the same to carry out the directions and exercise the powers contained in the trust instrument under which the property is received, including the expenditures of the principal, as well as the income, for one or more of such purposes, if authorized or directed in the trust instrument under which it is received. IATSHE In general, to do such acts and things as may be suitable for the attainment of any or more of the purposes herein enumerated, and to exercise and possess rights and privileges necessary or incidental to the purposes for which the school is organized or to the activities in which it is engaged, particularly in advancing education and in promoting the welfare of deserving students. To borrow or raise money necessary to meet the financial requirements of its business by the issuance of bonds, promissory notes and other evidences of indebtedness, and to secure the repayment thereof by mortgage, pledge, deed of trust or lieu upon the properties of the corporation of to issue pursuant to law shares of its capital stock, debentures and other evidences of indebtedness in payment for properties acquired by the corporation or for money borrowed in the prosecution of its lawful business." In reply, please be informed that this Office cannot as yet issue the requested ruling/certificate of tax exemption because Saint Adelaide School Philippines, Inc . has to prove by actual operation for at least three (3) years that it is really an organization/association exempt from income tax under Section 30 (H) of the Tax Code of 1997, as amended. Saint Adelaide School Philippines, Inc . can file the necessary annual information return instead of an income tax return on or before the 15th day of the fourth month of the preceding accounting period following the start of its operation as an exempt organization as required under Section 24 of Revenue Regulations No. 2-40 dated February 10, 1940 (Collector vs. Sinco, G.R. L-9276 dated October 23, 1956) . Based on such information return, we shall conduct the necessary investigation on the activities undertaken during the period. The letter of exemption shall thereafter be issued depending upon the result of our investigation. HEacAS However, Saint Adelaide School Philippines, Inc . is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from currency bark deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7-1/2% final withholding tax pursuant to Section 27 (D) (1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in its By-laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. It should be understood that as a non-stock, non-profit corporation educational institution, Saint Adelaide School Philippines, Inc . shall be constituted as withholding agent of the government if it acts as an employer and its employee receives compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 168-11 dated May 25, 2011). Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. HIAEcT 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. Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. 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. Accordingly, if Saint Adelaide School Philippines, Inc . is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. 155-11 dated May 17, 2011). CHDTIS Likewise, revenue from contributions, and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code (BIR Ruling No. 152 dated May 17, 2011). Finally, for purposes of securing a permanent exemption after the three (3)-year period, Saint Adelaide School Philippines, Inc . is required to submit the following documents pursuant to Revenue Memorandum Circular No. 14-2001: 1) Certified true copy of the Certificate of Registration with the SEC; 2) Certified true copy of the 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. aHSAIT 3) Certified true copy of the By-Laws; 4) Certified true copy of the Annual Information Returns and Financial Statements for the last three (3) years of operation; 5) Certified true copy of the DECS, recognition, as ; 6) Sworn Affidavit of Non-Forum Shopping; and 7) BIR Certificate of Registration. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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