Franciscan Montessori School of the Nativity

October 26, 2009 BIR RULING [NSNP-(S30H-116) 674-09] S27 (D) (1); ENPS-001-99 Franciscan Montessori School of the Nativity Agapita Road, Lopez Avenue Los Baos, Laguna Attention: Sr. Elfa C. Palmares School Directress/Board Member Gentlemen : This refers to your letter dated January 18, 2008 requesting for tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution. It is represented that Franciscan Montessori School of the Nativity is a non-stock, non-profit corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission under SEC Registration No. CN200704058; that it is recognized by the government and permitted by the Department of Education, Culture and Sports to operate as an educational institution; and that the purposes for which it is incorporated are the following: 1. To operate an institution of learning, offering pre-elementary and elementary courses in accordance with up-to-date and modern educational theories and methods as may be authorized by the Department of Education; 2. To establish, maintain, equip, conduct, support any lawful, charitable, educational activity which directly or indirectly provide, contribute, to the advancement of the moral, religious and economic development of the youth and less fortunate through services, grants, scholarships and other forms of assistance; ISDCaT 3. To organize, operate and maintain dormitories, canteens, stores, and engage in any undertaking and do such acts connected with the operation and development of an institution of learning which may be related to, necessary, convenient or incidental to the attainment of the above purposes; and 4. To acquire by purchase, donation, devise, gifts, bequests, hold, administer otherwise deal in real and personal property as may be necessary or useful to carry out the objects and purposes of the corporation. 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." 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. They 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). Moreover, educational services rendered by private educational institutions duly accredited by the Department of Education, Culture and Sports (DECS) and the Commission on Higher Education (CHED) and those rendered by government institutions as exempt from the value-added tax pursuant to Section 109 (m) of the 1997 Tax Code. However, Section 105 of the Tax Code of 1997 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 * (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 members or their guests), or government entity. DIcTEC Accordingly, if Franciscan Montessori School of the Nativity 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). Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. 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/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 it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Such being the case, Franciscan Montessori School of the Nativity, 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, 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 their 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; CTcSAE (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. 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. 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 Franciscan Montessori School of the Nativity to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. ENPS-015-99 dated December 29, 1999) 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