Asian Institute of E-Commerce

April 29, 2009 BIR RULING [NSNP-(S30H-051) 283-09] Sec. 4 (3) Art. XIV, 1987 Constitution; ENPS-057-2007 Asian Institute of E-Commerce 3F KT Tower Building No. 2 Afable Street, East Bajac-Bajac Olongapo City Attention: Aveleo Q. Fuentes Chairman of the Board/CEO Madam : This refers to your letter dated March 5, 2009 requesting for tax exemption pursuant to paragraph 3, Section 4 Article XIV of the 1987 Constitution. Documentary evidence submitted disclosed that the Asian Institute of E-Commerce (AIE College Olongapo, Inc.) is a non-stock, non-profit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. CN200728639 dated June 8, 2007 with Tax Identification Number (TIN) 252-409-817-000; and that it is duly recognized by the Technical Education and Skills Development Authority (TESDA) with WTR 0703072351 for PC Operations NC II, WTR 0703072352 for Computer Hardware Servicing NC II, WTR 0703074353 for Programming NC IV, NTR 0703072354 for Diploma in Electronic Commerce NC II, NTR 0703072358 for Diploma in Business and Information Management NC II, NTR 0703072357 for Diploma in Computer Engineering NC II, NTR 0703072356 for Diploma in Information Technology NC II and NTR 0703072355 for Diploma in Computer Education NC II. In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz. : "(3) 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. . . ." The exemption under Section 4 (3), Article XIV of the 1987 Constitution is self-executing. It refers to internal revenue taxes and customs duties, in appropriate cases, imposed by the national government on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes (BIR Ruling No. 248-88 dated June 6, 1988). TEcADS As a non-stock, non-profit educational institution, the AIE College Olongapo, Inc. 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 pursuant to Section 4 (3), Article XIV of the 1987 Constitution. The AIE College Olongapo, Inc. is, however, subject to internal revenue taxes on income from trade or business or other activity the conduct of which is not related to the exercise or performance of its educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Accordingly, revenues derived from and assets used in the operations of cafeterias/canteens, dormitories, bookstores are exempt from taxation provided they are owned and operated by the school as ancillary activities and the same are located within the school premises (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88; BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. ENPS-012-98 dated November 25, 1998; and BIR Ruling No. ENPS-006-99 dated May 17, 1999). Accordingly, if the cafeteria/canteen is being leased, income from the operation thereof is subject to income tax. 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 the educational purpose of the institution is 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 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: 1) Certification from its depository bank 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 by Section 27 (D) (1) of the 1997 Tax Code; 2) Certification of actual utilization of the said income; and 3) 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 the 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; ENPS-012-98 dated November 25, 1998; and BIR Ruling No. 46-00 dated September 26, 2000) Accordingly, this serves as authority for depository banks to forego the withholding of the 20% tax imposed on interest income from bank deposits and interest and/or yield from deposit substitute instruments maintained by the AIE College Olongapo, Inc. with them. TcICEA In the case of investments in shares of stock, the conduct of said activity is not related to the performance of its purpose as an educational institution, the gains derived from the sale, exchange or disposition thereof is subject to the capital gains tax imposed under Section 27 (D) of the 1997 Tax Code, as amended. (BIR Ruling No. 130-90 dated July 4, 1990). As a non-stock, non-profit educational institution, the AIE College Olongapo, Inc. is also exempt from payment of the 20% final tax on interest earnings derived from time deposit accounts (BIR Ruling No. 46-00 dated September 26, 2000), treasury bonds, treasury bills and other bank notes which also form part of its assets used for educational purposes (BIR Ruling No. DA-13-02 dated January 30, 2002). Likewise, gross receipts from its operations as a non-stock, non-profit educational institution are exempt from the 12% (then 10%) value-added tax (VAT) pursuant to Section 109 (H) [then Section 109 (m)] of the Tax Code of 1997 as amended by Republic Act No. 9337 provided that it is accredited as such by the Department of Education, the Commission on Higher Education or the Technical Education and Skills Development Authority. The VAT exemption provided under Section 109 (H) [then Section 109 (m)] of the Tax Code of 1997, as amended, only pertains to the educational services rendered by private educational institutions but does not include their purchases of goods and services. Thus, while the school is exempt from VAT, it cannot invoke the same exemption privilege to avoid paying VAT on its purchase of goods and/or services even if intended for school operational use because its exemption covers only taxes for which it is directly liable, as a seller of educational service. It does not cover VAT, which is an indirect tax on its purchases of goods and services from VAT-registered suppliers. Thus, the 12% (then 10%) VAT for the supply of goods and services may be shifted or passed on to the school by its VAT-registered suppliers. Once shifted, the VAT will form part of the cost of the goods and/or services supplied to the school. (VAT Ruling No. 017-02 dated March 20, 2002 and VAT Ruling No. 031-03 dated June 24, 2003). Moreover, the above exemption does not extend to the school's other activities involving sale of goods and services which are subject to the 12% VAT imposed under Section 106 of the same Code. Hence, as long as the AIE College Olongapo, Inc. engages in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, it is subject to VAT (BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. DA-40-02 dated March 7, 2002; and BIR Ruling No. S30-27-2003 dated November 21, 2003). IEHSDA Section 116 of the Tax Code of 1997, as amended, subjects to the 3% percentage tax "any person whose sales or receipts are exempt under Section 109 (z) [now Section 109 (V)] of this Code from the payment of value-added tax and who is not a VAT-registered person . . . ." The 12% VAT or the 3% percentage tax, whichever is applicable, is a tax on the business transaction or activity and is an indirect tax which the seller may pass-on or shift to the customer who ultimately bears or assumes the burden of the tax. Accordingly, the school's sale of goods or services which is not directly related to or necessary in the performance of educational services is subject to either the 12% VAT or 3% percentage tax if such gross sales or receipts from sale of goods and services do not exceed P1,500,000.00, which tax payment may legitimately be passed on to its customers i.e., students (BIR Ruling No. 248-88 dated June 6, 1988). However, its importation of books, films, slides and other educational materials and equipment such as computers to be actually, directly and exclusively used for educational purposes shall be exempt from VAT and customs duties, provided the guidelines under Department Order No. 137-87 in addition to the usual import requirements are observed (BIR Ruling No. 248-88 dated June 6, 1988 and BIR Ruling No. 130-90 dated July 4, 1990). The books of accounts and other pertinent records of the AIE College Olongapo, Inc. shall be subject to examination by the Bureau of Internal Revenue for the purpose of ascertaining whether it is complying with the conditions under which it has been granted tax exemption and its tax liability, if any (RMC No. 89-78 dated October 30, 1973 publishing the amendment effected by P.D. No. 1457 to then Section 324 [now Section 235 in relation to Section 232] of the Tax Code). Finally, it is subject to the payment of the annual registration fee of PhP500.00 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 they are registered. (RMC No. 76-2003) 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 as null and void. IaDSEA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service