The Doctor's Clinic & Hospital School Foundation, Inc.

July 30, 2009 BIR RULING [NSNP-(S30H-084) 471-09] Sec. 4, Art. XIV Constitution; 109 (H) Tax Code; ENPS-043-2008 The Doctor's Clinic & Hospital School Foundation, Inc. Gen. Santos Drive, Koronadal City, South Cotabato Attention: Arturo P. Pingoy, M.D. President Gentlemen : This refers to your letter dated March 17, 2009 requesting for a certificate of tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution, and exemption from the payment of value-added tax (VAT). It is represented that The Doctor's Clinic & Hospital School Foundation, Inc. is a non-stock, non-profit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. DN094000308 dated May 30, 1994 with Taxpayer Identification Number (TIN) 005-321-786; that it is duly recognized by the Commission on Higher Education in accordance with Government Recognition No. 011 series of 1995, Technical Education and Skills Development Authority (TESDA) Certificate of TVET Program Registration WTR No. 0412042025, NTR No. 0612042001, NTR No. 0612042002, and WTR No. 0612042033; and that it is authorized to operate Bachelor of Science in Nursing (B.S.N.), Six-Mo. Caregiver Course NC II, Pharmacy Aide NC II, Radiologic Technology NC II, Health Care Services 996 hrs. NC II. In reply thereto, 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." TcCSIa 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 on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). 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 institutions of their 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, The Doctor's Clinic & Hospital School Foundation, Inc. being a non-stock, non-profit educational institution, is exempt from taxes and duties 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 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, as amended, 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 1/2% tax on interest income under the expanded foreign currency deposit system imposed by Section 27 (D) (1) of the Tax Code of 1997, as amended; (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 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). Moreover, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. DETcAH Pursuant to Section 109 (H) of the Tax Code of 1997, as amended, educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions are exempt from the VAT. Since The Doctor's Clinic & Hospital School Foundation, Inc. is a CHED and TESDA recognized or accredited institution, it is exempt from VAT pursuant to Section 109 (H) of the Tax Code of 1997, as amended. However, 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 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. Accordingly, if The Doctor's Clinic & Hospital School Foundation, 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). It should be noted that VAT is an indirect tax payable by the seller and not 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. Thus, the shifting of the VAT to The Doctor's Clinic & Hospital School Foundation, Inc. does not make it the person directly liable and therefore, The Doctor's Clinic & Hospital School Foundation, Inc. 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 The Doctor's Clinic & Hospital School Foundation, Inc. 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. aHcACI Accordingly, the gross receipts from the operations of The Doctor's Clinic & Hospital School Foundation, Inc. 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 Sections 106 and 108 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 and 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. In addition, donations received by The Doctor's Clinic & Hospital School Foundation, Inc. as an educational institution, 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 30% of said gift shall be used for administration purposes. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, it is constituted as 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, as amended. Under Section 235 of the Tax Code of 1997, as amended, 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 The Doctor's Clinic & Hospital School Foundation, Inc. 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 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