BIR Ruling No. 636-12

December 3, 2012 BIR RULING NO. 636-12 Section 4 (3), Article XIV of the 1987 Constitution; Sections 27 (D) (1), 30 (H); 101 (A) (3); 105; 109 (H) of the Tax Code of 1997, as amended; BIR Ruling No. 168-2011; BIR Ruling No. 155-2011; BIR Ruling No. 152-2011; BIR Ruling No. 117-2011; BIR Ruling No. 052-2011 Admin Christian Academy, Inc. 44-A South Drive, Baguio City Attention: Dave B. Nardo Principal Gentlemen : This refers to your letter dated February 28, 2012 requesting for the issuance of a certificate of tax exemption enjoyed by a non-stock, non-profit educational institution under Section 30 (H) of the Tax Code of 1997 as amended. ADScCE It is represented that the ADMIN CHRISTIAN ACADEMY, INC., with Taxpayer Identification Number (TIN) 403-865-809, is a non-stock, non-profit educational institution duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company Registration No. CN201027052 dated January 15, 2010; that the purposes for which the School is established are: 1) "To establish and operate an educational institution or learning center which shall provide courses of study in Pre-school, Elementary School Grades and General Secondary Education subject to the laws of the Philippines"; 2) "To establish and operate an educational institution which shall provide courses of study in private technical, vocational and post secondary non-degree education subject to the laws of the Philippines"; 3) "To receive tuition and miscellaneous fees, accept donation, endowments, grants, legacies and instruments conformably with existing applicable statutes"; and 4) "To lead children for Christ by providing Biblically based individualized educational material and services." and that it is granted by the Department of Education (DepEd) the following government permits: 1) Government Permit (DepEd-CAR) No. P-002, s. 2011 dated October 26, 2011 for the School 2012-2013 to operate the Elementary Level; 2) Government Permit (DepEd-CAR) No. P-001, s. 2011 dated October 26, 2011 for the School 2012-2013 to operate the Preschool Level; and 3) Government Permit (DepEd-CAR) No. SED P-0001, s. 2012 dated February 27, 2012 for the School 2012-2013 to operate the Secondary Course (First Year, Second Year and Third Year only). In support of its request, ADMIN CHRISTIAN ACADEMY, INC. has submitted the following documents: 1) Letter application for tax exemption; ECaHSI 2) Copy of the SEC Certificate of Incorporation; 3) Certified true copy of the Amended Articles of Incorporation which includes the following provisions: a) That the primary purpose for which it was created is to establish and conduct an educational institution under Section 30 (H) of the Tax Code of 1997, as amended; b) That no part of the income which the corporation may obtain as an incident to its operation shall be distributed as dividends to its members, trustees or officers; c) That the trustees of the association do not receive any compensation; and d) In case of dissolution, assets of the association shall be transferred to similar institution or to the government. 4) Certified true copy of the By-Laws; 5) Certified true copy of 2012 SEC General Information Sheet; 6) Certified true copies of the 2010 and 2011 Annual Income Tax Returns and Financial Statements; 7) Certified true copies of DEPED Government Permits; and 8) Certification dated April 25, 2012 issued by DEPED. In reply, please be informed that this Office cannot as yet issue the requested ruling/certificate of tax exemption because ADMIN CHRISTIAN ACADEMY, 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. (BIR Ruling No. 168-2011 dated May 25, 2011) ADMIN CHRISTIAN ACADEMY, 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. HcaATE However, ADMIN CHRISTIAN ACADEMY, 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 bank 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. (BIR Ruling No. 155-2011 dated May 17, 2011) It should be understood that as a non-stock, non-profit corporation educational institution, ADMIN CHRISTIAN ACADEMY, 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. 152-2011 dated March 17, 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. 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 ADMIN CHRISTIAN ACADEMY, 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. 117-2011 dated April 12, 2011) IaDSEA 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. 052-2011 dated February 25, 2011) Finally, for purposes of securing a permanent exemption after the three (3)-year period, ADMIN CHRISTIAN ACADEMY, 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; IEcDCa 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. 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, or CHED, or TESDA recognition, as the case may be; 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 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