Alindogan, Tatel & Co., CPAs

January 27, 2009 BIR RULING [NSNP-(S30H-016) 049-09] 27, 109, 235; ENPS-006-98/DA-323-05 Alindogan, Tatel & Co., CPAs 40-E San Guillermo St. Karuhatan, Valenzuela City Attention: Mr. Ramir C. Alindogan Managing Partner Gentlemen : This refers to your letter dated July 9, 2007 requesting on behalf of your client, Mount Carmel High School of Burdeos, Inc. (MCHS), for a ruling on the exemptions from the following: DTIACH a. Income tax from income derive from tuition and other related fees-Section 30 (H) of the Tax Code of 1997; b. 20% or 7-1/2% Final withholding Tax on Income derived from currency and expanded foreign currency deposits RMC 76-2003; c. Keeping of book of accounts registered with the BIR under Section 232 of the 1997 Tax Code (BIR Ruling No. 159-98 dated October 11, 1998); and d. Issuance of receipt and sales invoice printed with the permission of and stamped by the BIR under Section 238 of the said Code (BIR Ruling No. 159-98 dated October 11, 1998). It is represented that MCHS is a non-stock, non-profit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 20127 dated January 29, 1962; and that it is duly recognized by the Department of Education (DepEd) to operate Secondary Courses in accordance with Government Recognition No. 26 Series of 1955. In reply thereto, please be informed that under Article XIV, paragraph 3, Section 4 of the 1987 Constitution: "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." A non-stock, non-profit educational institution is exempt from tax on all revenues, consisting of tuition, miscellaneous and other fees derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational purposes. 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, a school shall on an annual basis submit to the Revenue District Office (RDO) concerned an annual information return and duly audited financial statement together with the following: DHaEAS (a) Certification from its 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 under 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 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). Income derived from assets used in the operation of cafeterias/canteens, dormitories, bookstores and exclusive school bus service for MCHS students are exempt from taxation, provided the aforestated assets are owned and operated by the educational institution as ancillary activities and that the same are located within the school premises. Proceeds from the sale of miscellaneous school-related operations like school apparel and other school related-materials are likewise exempt from tax, because earnings from activities the conduct of which is connected to the exercise or performance by such educational institutions are not subject to income tax. Anent the above, Section 4.109-1 (B) (h) of Revenue Regulations (RR) 16-2005, amending Sec. 109 (m) of the 1997 Tax Code, educational services rendered by private educational institutions duly accredited by the DepEd, the Commission on Higher Education (CHED), Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions shall be exempt from value-added tax (VAT). Since MCHS is a DepEd recognized or accredited institution, it is exempt from VAT pursuant to Section 109 (H) of the Tax Code of 1997, as amended. However, the said exemption does not extend to other activities involving sale of goods and services. (BIR Ruling No. DA-323-2005 dated July 19, 2005) Furthermore, VAT is an indirect tax payable by the seller and not the purchaser of goods. Yet, 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 MCHS does not make it the person directly liable and therefore, MCHS cannot invoke its tax exemption privilege under either Section 4 (3), Article XIV of the 1987 Philippine Constitution or Section 30 of the Tax Code of 1997, as amended, to avoid the passing on or shifting of the VAT. Hence, notwithstanding that MCHS is a non-stock, non-profit educational institution, 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, as amended. CTDAaE It is to be noted that Section 105 of the Tax Code of 1997, as amended, states 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 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 member of their guests), or government entity. Accordingly, if MCHS is engaged in the sale of goods or services other than those for which it was organized, including transactions incidental thereto, in general, it shall also be liable to VAT (BIR Ruling No. S-30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Such being the case, MCHS being a non-stock, non-profit educational institution, is exempt from taxes on all its revenues and assets used actually, directly and exclusively for educational purposes. As such, it is exempt from the payment of income tax on income received by it as an educational institution, and therefore, need not file an income tax return concerning such income. However, it shall be subject to internal revenue taxes on its income from trade, business and other activity the conduct of which is not related to the exercise or performance by such educational institution of their educational purposes or functions. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, MCHS is constituted as a withholding agent for the government, and it is 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. Moreover, in order to monitor the activities being conducted by MCHS, it is mandatory that it should maintain its books of accounts as prescribed in Section 235 of the 1997 Tax Code, as amended. It is likewise subject to the payment of the annual registration fee of P500.00 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 MCHS is registered [Revenue Memorandum Circular (RMC) No. 76-2003]. AHcDEI It is requested that a copy of this letter of exemption be attached to the Annual Information Return which your corporation will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, 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 MCHS to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service