BIR Ruling No. 477-13

December 19, 2013 BIR RULING NO. 477-13 Section 4 (3), Article XIV, 1987 Constitution; Tax Code, Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H); BIR Ruling No. 170-11; BIR Ruling No. 169-11; BIR Ruling No. 159-11; BIR Ruling No. 168-11; BIR Ruling No. 155-11 Marlow Navigation Training Center, Inc. MNTC Building, 2120 Leon Guinto St. Malate, Manila Attention: Mr. Antonio M. Galvez, Jr. President Gentlemen : This refers to your letter dated May 16, 2012 requesting, on behalf of Marlow Navigation Training Center, Inc. for confirmation of its income tax exemption under Section 30 (H) of the 1997 Tax Code, as amended, and value-added tax (VAT) exemption under Section 109 (H) of the same Code. It is represented that Marlow Navigation Training Center, Inc. , with Taxpayer's Identification Number (TIN) 211-177-022-000, 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) bearing SEC Registration No. A200105654; that it is recognized by the government and permitted by the Technical Education and Skills Development Authority (TESDA)-NCR to offer the program in Ship's Cook with European Cuisine under the Certificate of TVET Program Registration NTR No. 0513020001 issued on September 30, 2005, which is still being offered to date but has expanded its scope under the training program "Commercial Cooking NV IV" with Certificate of Program Registration No. WTR 1013024028, approved on January 25, 2010; that other courses certified by TESDA are Shielded Metal Arc Welding (SMAW) NC II with Certificate of Program Registration No. WTR 201013022227 both approved on June 18, 2010; that other than TESDA accredited courses, it also offers the following training courses approved by the Maritime Training Council (MTC) namely, Marpol 73/78, Ship Simulator and Bridge Teamwork, Ratings Forming Part of Engineering Watch Course, Operational Use of Electronic Chart Display and Information System Course, Specialized Training in Oil Tankers Course, Specialized Training in Chemical Tankers Course, GOC for GMDSS Course with validity until May 20, 2013; Engine Room Simulator Course, Shore-Based Fire Fighting Course, Dangerous, Hazardous and Harmful Cargoes Course with validity until September 6, 2014; that it is accredited by the National Telecommunications Commission (NTC) to offer Short-Term Radio Communication Course and GOC for GMDSS (Revalidation-GOC for GMDSS-In-House Training) as evidenced by the Certification valid up to July 28, 2012; that its Ship Security Officer (SSO)-(In-House Training Provider) is accredited by the Maritime Industry Authority (MARINA); that it is also accredited by the Swedish Club Academy to offer Maritime Resource Management Course as evidenced by the Certificate of Authorization valid up to February 28, 2013; and that on March 8, 2010, SEC approved the amendment of its purpose, to wit: IaHSCc "TO PROVIDE IN-HOUSE TRAINING AND UPGRADING TO SEAFARERS JOINING VESSELS OF MARLOW NAVIGATION, LTD., OF LIMASSOL CYPRUS AND ITS AFFILIATED COMPANIES OR OTHER CLIENTS, AS WELL AS TO ENTER INTO TRAINING AGREEMENTS OR CONTRACTS WITH OTHER AGENCIES, ENTITIES OR ANY THIRD PARTY OR INDIVIDUAL IN RELATION TO OR CONNECTED WITH SEAMEN'S UPGRADING SKILLS AND SUCH OTHER SEAMEN'S TRAINING RELATED COURSES." In support of its request, Marlow Navigation Training Center, Inc. has completely submitted on May 28, 2012 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) 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; 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 a similar institution or to the government. 4) Certified true copy of the By-Laws; 5) Certified true copies of the Annual Income Tax Returns (ITRs) and Financial Statements for Taxable Years 2008, 2009 and 2010; 6) Certified true copies of the TESDA Certifications; 7) Certified true copy of the MTC Certificate of Accreditation; 8) Certified true copy of the NTC Certificate of Accreditation; 9) Certified true copy of the MARINA Certificate of Accreditation; 10) Certified true copy of the Swedish Club Academy Certificate of Authorization; and aETDIc 11) BIR Certificate of Registration. 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. 170-2011 dated 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. 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 vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 and 195960 dated September 26, 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 Marlow Navigation Training Center, 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. 169-2011 dated May 25, 2011) TACEDI However, Marlow Navigation Training Center, 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, Marlow Navigation Training Center, 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 (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. (The increase in the threshold amount for the sale or lease of goods or properties or the performance of services covered by Section 109 (P), (Q) and (V) of the 1997 Tax Code took effect on January 1, 2012, pursuant to Revenue Regulations No. 16-2011 dated October 27, 2011) Hence, as long as Marlow Navigation Training Center, 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. 159-2011 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. 168-2011 dated 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: cDCHaS (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 Marlow Navigation Training Center, Inc. as ancillary activities and the same are located within its premises. It must be noted, however, that donations received by Marlow Navigation Training Center, Inc. as an educational institution, are not exempt from the payment of donor's tax pursuant to Section 101 (A) (3) of the Tax Code of 1997, as amended, considering that more than thirty percent (30%) of those donations has been used or is being used for administration purposes as shown by the documents, such as the financial statements, submitted to this Office. Donors cannot avail of full deductibility for purposes of computing taxable income under Revenue Regulations No. 13-98 without the accreditation of Marlow Navigation Training Center, 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. Marlow Navigation Training Center, Inc. is advised to contact The Secretariat, Philippine Council for NGO Certification (PCNC), at tel. nos. 7821-568; 7159-594; 7152-756 or telefax 7152-783. cACTaI It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, Marlow Navigation Training Center, 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, Marlow Navigation Training Center, 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 Marlow Navigation Training Center, Inc. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. 155-2011 dated May 17, 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