San Lorenzo Ruiz Diocesan Academy

February 9, 2009 BIR RULING [NSNP-(S30H-020) 086-09] 27, 109, 235; ENPS-006-98; DA-323-05 San Lorenzo Ruiz Diocesan Academy Poblacion, San Leonardo Nueva Ecija Attention: Ms. Felina M. Fernandez Officer-In-Charge Gentlemen : This refers to your letter dated September 19, 2008 requesting for exemption from taxes of your educational institution. It is represented that San Lorenzo Ruiz Diocesan Academy, Inc. (formerly San Lorenzo Ruiz Development Center Nueva Ecija, Inc. and SLRDA for brevity), is a non-stock, non-profit educational institution which shall provide courses of study in elementary and secondary courses; that the corporation shall have no share or capital stock and that no dividends or pecuniary profit shall ever be declared or paid to any of its members. The Department of Education (DepEd), Region III under Government Recognition Nos. E-147 s. 2003, E-141 s. 2004 and S-025 s. 2007 granted authority to SLRDA to operate Pre-Elementary, Complete Elementary and Secondary Courses, respectively. 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: (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). Pursuant to Section 4.109-1 (B) (h) of Revenue Regulations 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 VAT. Since SLRDA is a Department of Education, Culture and Sports (DECS) 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) 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 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 member of their guests), or government entity. The gross receipts from SLRDA's operation as an educational institution are exempt from the 12% VAT, however, this exemption does not extend to its other activities involving sale of goods and services pursuant to Revenue Memorandum Circular (RMC) No. 76-2003 dated November 14, 2003. So long as SLRDA is not engaged in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, SLRDA is not subject to VAT and consequently should not file a VAT return. Accordingly, if SLRDA 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 to VAT (BIR Ruling No. S-30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). 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 SLRDA does not make it the person directly liable and therefore, SLRDA 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 SLRDA 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. Income derived from assets used in the operation of cafeterias/canteens, dormitories, bookstores and exclusive school bus service for SLRDA 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. Such being the case, SLRDA 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, SLRDA 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. 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 SLRDA 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