St. James Academy of Pasuquin Ilocos Norte, Inc.

April 24, 2009 BIR RULING [NSNP-(S30H-048) 277-09] Section 27 (D) (1); ENPS-006-2003 St. James Academy of Pasuquin Ilocos Norte, Inc. Poblacion, Pasuquin, Ilocos Norte Attention: Rev. Fr. Hermogenes G. Saturnino, Jr. School Director Gentlemen : This refers to your letter dated February 15, 2008, requesting Certificate of tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution. Documents submitted disclosed that ST. JAMES ACADEMY OF PASUQUIN, ILOCOS NORTE, INC. (St. James Academy, for short) with TIN: 005-510-423, is a non-stock, non-profit educational institution duly registered with the Securities and Exchange Commission on July 21, 2000, bearing SEC Reg. No. B200000483; that it was duly issued by the Department of Education-Regional Government Permit (R-1) No. PE-358 S. 2007 to operate a Pre-Elementary Course for school year 2007-2008; that however, its purpose is to establish and operate a pre-elementary and complete secondary course. 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." 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 herein contemplated refers to internal revenue taxes imposed by the National Government and in certain cases to local taxes imposed by the 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. STcAIa It shall, however, be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institution of its educational purposes or functions. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Such being the case, St. James Academy, 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. 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 its educational purposes or functions. It may not be amiss to state that under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, 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 7.5% 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 it shall on an annual basis submit to the Revenue District Office 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 7.5% 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). It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, it is constituted as a withholding agent for the government 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. HADTEC Moreover, pursuant to Section 109 (H) of the Tax Code of 1997, and as implemented by Section 4.109 (h) of Revenue Regulations No. 16-2005, educational services rendered by private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education, Culture and Sports (DECS) or by the Commission on Higher Education (CHED) and TESDA and those rendered by government educational institutions. The tax exemption granted to St. James Academy as a non-stock, non-profit educational institution cover only educational services. 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/customer as an addition to the cost of 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 shifting of the VAT to St. James Academy does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 109 (H) of the Tax Code 1997, as amended, to avoid the passing on or shifting of the VAT. Accordingly, the gross receipts from the operations of St. James Academy are exempt from the 12% VAT. However, the sale of goods and services by educational institutions not in connection with their primary purposes is subject to the 12% VAT imposed under Section 106 of the Tax Code of 1997, as amended, or 3% percentage tax imposed under Section 116 in relation to Section 109 (V) of the same Code if the gross sales or receipts from such sale of goods or services do not exceed One Million Five Hundred Thousand Pesos (P1,500,000.00) which tax payment may legitimately be passed on to buyers of such goods and services. Finally, 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 St. James Academy to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. ENPS-006-2003 dated April 30, 2003) 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. cETCID Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service