BIR Ruling No. 487-11

December 5, 2011 BIR RULING NO. 487-11 Sections 27 (B), 30 (H); BIR Ruling No. 248-88; BIR Ruling No. DA-244-04; BIR Ruling No. DA-468-07; BIR Ruling No. 132-86 Philippine Medical Women's School, Inc. 59 Matatag Street corner V. Luna Road Diliman, Quezon City Attention: Mrs. Rubylen L. Yabut School Administrator Gentlemen : This refers to your letter dated 4 March 2009 requesting for tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Constitution, as amended. It is represented that Philippine Medical Women's School, Inc. with Taxpayer's Identification No. 200-696-800-000, is a non-stock corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. A1997-6244; that it is recognized by the government and permitted by the Department of Education, Culture and Sports (DECS) in accordance with Government Recognition No. E-027, S. 2004 to operate a Complete Elementary Course; and that the purposes for which it was incorporated are the following: 1. To organize a non-stock and non-profit educational corporation with particular emphasis on pre-elementary, full elementary and special education courses which may be allowed and duly accredited by the government; and to conduct training programs, seminars, workshops, correspondence and the like; 2. To provide an education which leads each child to experience his dignity as a human being; 3. To undertake the search for new knowledge and applying this to the Philippine realities and involvement in the knowledge and discussion of key national issues; 4. To provide an atmosphere conducive to the development of the learner to acquire the skills necessary to examine national goals, to explore viable alternatives for the well being of the society and to be imbued with a deep love for his country, language and culture; and DcCASI 5. To purchase, acquire, hold, improve, sell, lease, exchange, or otherwise dispose of and deal in property of every kind and description whether real or personal and to enter into any contract of any kind or nature whatsoever convenient or appropriate for promoting and achieving the purposes, goals, and objectives of the Philippine Medical Women's School, Inc. 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; . . . ." Furthermore, Section 3 of Department Order No. 92-88, amending Department Order No. 137-87 dated December 16, 1987 provides, viz. : "SEC. 3. Section 2 of the said Department Order is likewise amended to read as follows: "SEC. 2. Coverage of Exemption under Section 4(3), Article XIV of the New Constitution. The exemption herein contemplated refers to internal revenue taxes and duties, in appropriate cases, imposed by the national government and in CERTAIN CASES TO LOCAL TAXES IMPOSED BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL TAX CODE on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes." TCADEc Thus, both under the Constitution and Sec. 30 (H) of the Tax Code of 1997, educational institutions to be exempt from tax must be non-stock and non-profit and that all revenues and assets must be used actually, directly and exclusively for educational purposes. (BIR Ruling No. DA-244-04 dated May 7, 2004) 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. 248-88 dated June 6, 1988). A perusal of your Articles of Incorporation however shows that you are not a "non-stock, non-profit" corporation but a "non-stock" corporation. The two are different since not all non-stock corporations are non-profit whereas all non-stock, non-profit corporations are "non-stock" (BIR Ruling DA-468-07 dated August 24, 2007). Therefore, the applicable provision in your case should be Section 27 (B) of the Tax Code of 1997 which read as follows: "Sec. 27. Rates of Income Tax on Domestic Corporation . xxx xxx xxx (B) Proprietary Educational Institutions and Hospitals . Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term '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 hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations." EAHcCT As a non-stock private educational corporation organized and operated for education purposes, you are subject to the 10% preferential rate of income tax provided for under then Section 24 (now Section 27) of the Tax Code, as amended, on your taxable net income from operation of the school, related school activities (BIR Ruling No. 132-86). Based on the foregoing, Philippine Medical Women's School, Inc. is not a non-stock, non-profit corporation organized and operated for education purposes, thus, Philippine Medical Women's School, Inc. is subject to the 10% preferential rate of income tax provided for under then Section 24 (now Section 27) of the Tax Code, as amended, on your taxable net income from operation of the school, related school activities (BIR Ruling No. 132-86). This however, does not include taxable income covered by Subsection (D) of Section 27 of the Tax Code. Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) of Section 27 of the Tax Code shall be imposed on the entire taxable income. 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