St. Therese of the Child Jesus Hospital, Inc.

March 31, 2009 BIR RULING [NSNP-(S30E-042) 242-09] Section 30 (E);BIR Ruling No. S30-29-01 & VAT Ruling No. S30-47-01 St. Therese of the Child Jesus Hospital, Inc. Bacon District, Sorsogon City Attention: Sr. Yolanda U. Garcia, SFSC Chief Executive Officer Gentlemen : This refers to your letter dated January 10, 2008 indorsed to this Office by Assistant Regional Director, Revenue Region No. 10, Legazpi City, requesting for exemption from the payment of income tax and the filing of the corresponding income tax return under Section 30 of the Tax Code of 1997, as amended. Documents submitted show that St. Therese of the Child Jesus Hospital, Inc. is a non-stock, non-profit charity hospital which caters the impoverished people of Bacon District, Sorsogon City, and its neighboring place. Its primary purpose is "To own, establish, operate and maintain medical hospitals and clinics for the poor, including clinical, laboratory and allied centers and pharmacies for quick and responsive delivery of health care subject to the condition that purely professional medical, medico technical and nursing services shall be performed solely by duly qualified physicians, medical technologist, nurses and medical practitioners". It is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A200102151 dated May 23, 2007 with Taxpayer Identification Number (TIN) 005-765-675. It is administered by the Franciscan Sisters of the Sacred Hearts, a religious missionary congregation. Its Articles of Incorporation provides that the charitable corporation is not organized, nor shall it be operated for pecuniary gain or profit. It does not contemplate the distribution of gains, profits, income nor shall any part of its assets inure to the benefit of any trustee, officer, or member or to the benefit of any person whatsoever. The basis of its application for tax exemption is Section 30 (E) of the Tax Code of 1997, as amended, which provides: CDTSEI "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 (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxx xxx xxx" Section 3 (c) of Revenue Regulations No. 8-74 dated September 24, 1974 defines a charitable institution as generally one that exists to carry out a purpose recognized in law as charitable, such as the relief and comfort of the poor, the sick and the afflicted, and, in general, to promote the welfare of others in need, no part of the net income of which inures to the benefit of any private individual. In Jesus Sacred Heart College vs. Collector of Internal Revenue (95 Phil. 16),the Supreme Court on said occasion ruled that the making of profit does not destroy tax exemption of a charitable, benevolent or educational institution, viz. : "The fact that a hospital charges fees for paying beds does not make it lose its character as a charitable institution if the same were used to partly finance the expense of the free wards maintained by the hospital. (U.S.T. Hospital, L-6988, May 24, 1952; Col. of Internal Revenue vs. St. Paul's Hospital in Iloilo, L-12127, May 25, 1959; San Juan de Dios Hospital vs. Metropolitan Water District, 54 Phil. 174). "The mere charging of medical and hospital fees from those who can afford to pay does not make the institution one established for profit or gain." ( Manila Sanitarium and Hospital vs. Gabuco, 7 SCRA 14). "The mere realization of profits out of its operation does not automatically result in the loss of an educational institution's exemption from income tax as long as no part of its profits inures to the benefit of any stockholder or individual. ( Collector of Internal Revenue vs. University of the Visayas ,1 SCRA 669). In Commissioner of Internal Revenue vs. Bishop of the Missionary District, etc. ,L-19445 dated August 11, 1965, the Supreme Court in its resolution of whether St. Luke's Hospital is a charitable institution considering that it admits paying patients, the High Tribunal invoked the Herrera ruling, supra ,that the admission of pay-patients does not detract from the charitable character of a hospital, if its funds are devoted exclusively to the maintenance of the institution, viz. : IDScTE "...the admission of pay patients does not detract from the charitable character of a hospital, if all of its funds are devoted "exclusively to the maintenance of the institution",as a "public charity" (84 C.J.S.,617; see also 51, Am. Jur. 607; Colley on Taxation, Vol. 2, p. 1562, 144 A.L.R.,1489-1492)."In other words, where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character." ( Prairie Du Chian Sanitarium Co. vs. City Prairie Du Chian, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480). Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it had 140 paying beds maintained only to partly finance the expenses of the free wards, containing 203 beds for charity patients ( U.S.T. Hospital Employees Associations vs. Sto. Tomas University Hospital, L-6988, May 24, 1954),that St. Paul's Hospital of Iloilo, a corporation organized for "charitable, educational and religious purposes" can not be considered as engaged in business merely because its pharmacy department charges paying patients the cost of their medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of charge to charity patients ( Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25, 1959),and that the amendment of the original articles of incorporation of the University of Visayas to convert it from a non-stock to a stock corporation and the increase of its assets from P9,000 to P50,000, distributed among the members of the original non-stock corporation in terms of shares of stock, as well as the subsequent move of its board of trustees to double the stock dividends of the corporation, in view of a gain of P200,000.00 in property, besides good-will, which was not carried out, does not justify the inference that the corporation has become one for business and profit, none of its profits having inured to the benefit of any stockholder or individual ( Collector of Internal Revenue vs. University of Visayas, L-13554, February 28, 1961). "xxx xxx xxx "...the St. Catherine's Hospital is, therefore, a charitable institution, and the fact that it admits pay patients, does not bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay patients is devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who come only for consultation. ...( Herrera vs. Quezon City Board of Assessment Appeals, 3 SCRA 186) It is to be noted and documents show that St. Therese of the Child Jesus Hospital, Inc., a non-stock, nonprofit charitable institution is a health care institution operated by the Franciscan Sisters of the Sacred Hearts, a religious missionary congregation and is committed "To own, establish, operate and maintain medical hospitals and clinics for the poor, including clinical, laboratory and allied centers and pharmacies for quick and responsive delivery of health care subject to the condition that purely professional medical, medico technical and nursing services shall be performed solely by duly qualified physicians, medical technologist, nurses and medical practitioners". That St. Therese of the Child Jesus Hospital, Inc., is a hospital does not give rise to the conclusion that it is engaged in "business".The mere fact that it makes profit as a hospital will not deprive St. Therese of the Child Jesus Hospital, Inc., of its benevolent/charitable character if its funds are devoted exclusively to the maintenance of the said hospital. Under the aforestated facts it is the view of this Office that Income Tax St. Therese of the Child Jesus Hospital, Inc., being a charitable institution is within the ambit of Section 30 (E) of the Tax Code of 1997, as amended, and therefore exempt from income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. However, it 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, as amended. 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. CDaSAE It is requested that a copy of this letter of exemption be attached to the annual information return which St. Therese of the Child Jesus Hospital, Inc. will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, as amended, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organization or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any. It should be understood that the said exempt non-government organization 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 amended, as implemented by Revenue Regulations (Rev. Regs.) 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, as amended, also as implemented by Rev. Regs. No. 2-98, as amended. Value-Added Tax (VAT) Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997, as amended, covers only income taxes for which it is directly liable. Section 105 of the Tax Code of 1997, as amended, 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 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. IDSETA Thus, the shifting of the VAT to the corporation 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, as amended, to avoid the passing on or shifting of the VAT. Accordingly, if St. Therese of the Child Jesus Hospital, 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. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). 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. However, the above exemption from the 12% VAT does not extend to its purchase of goods or properties or services and importation of goods. 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 (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). Donor's Tax Inasmuch as St. Therese of the Child Jesus Hospital, Inc. being a charitable corporation, donations to it 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 thirty percent (30%) of said gift shall be used for administration purposes. Deductibility of Donation Section 34 (H) (2) (C) of the Tax Code of 1997 provides that donations to an accredited non-government organization (NGO),which means a non-profit domestic corporation or association organized and operated exclusively for scientific, research, educational, character building and youth and sports development, health, social welfare, cultural or charitable purposes or a combination thereof, no part of the net income of which inures to the benefit of any private individual shall be deductible in full from the taxable business income of the donor depending on the donee's compliance with the level of administrative expense and utilization requirements. In case of failure on the part of the accredited NGO to comply with the level of administrative expense and utilization requirements, its donors shall be entitled only to the limited deductions (in an amount not in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the donor's taxable income derived from trade, business or profession as computed without the benefit of Section 34 (H) of the Tax Code of 1997, as amended, as provided for under Section 34 (H) (1) of the same Tax Code. HSCATc Donations, contributions or gifts actually paid or made within the taxable year to an accredited NGO shall be allowed full deductibility on the taxable year it was incurred pursuant to Section 34 (H) (2) (C) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-124-2004, April 20, 2004 and BIR Ruling No. S30-016-2004 dated May 6, 2004). Accordingly, for purposes of full deductibility from the taxable business income of the donors, St. Therese of the Child Jesus Hospital, Inc., must first be accredited by the Philippine Council for NGO Certification (PCNC) and the Department of Social Welfare and Development (DSWD) pursuant to the Memorandum from the Director-General of the Presidential Management Staff dated January 29, 2008. For further inquiries on the accreditation and certification process, please contact PCNC at 6/F, SCC Building, CFA-MA Compound, 4427 Interior Old Sta. Mesa, 1016 Manila or call their office at 715-9594, 715-2756, 782-1568 and 715-2783 (telefax).You may also visit their website: http://www.pcnc.com.ph or email them at [emailprotected]. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service