Local Business Tax Exemption of St. Anthony School of Roxas City, Inc. (SASRCI)

June 5, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Sabino B. Padilla IV Padilla Law Office 7/F Padilla-Delos Reyes Bldg. 232 Juan Luan St., Binondo Manila 1006 SUBJECT : Local Business Tax Exemption of St. Anthony School of Roxas City, Inc. (SASRCI) Dear Atty. Padilla : This refers to your letter dated 08 May 2017 regarding your request for amendment of the BLGF Opinion dated 14 February 2013 on the local business tax exemption of SASRCI. Representations were made that SASRCI is a non-stock, non-profit educational institution organized under Philippine Laws and incorporated on 28 August 1964. The issue came about when, in 2013, the Business Permit and Licensing Division of Roxas City reportedly started assessing and subjecting the operations of the hospital pharmacy of SASRCI to a 'sales tax,' on the basis that said pharmacy also caters to the general public, and not only to students, faculty and in-patients of SASRCI. Earlier, this Bureau rendered an opinion, dated 14 February 2013, on your previous request, which was reiterated in a 2nd Indorsement dated 19 April 2016, stating that: "With regards [sic] to the ancillary services of SASRCI, such as the operation of the canteen and pharmacy, we would like to emphasize that if said canteen and pharmacy are for the exclusive use of its students, faculty members and employees, the same are considered incidental to the educational purpose of the school, and therefore, exempt from local taxation. However, if the canteen and pharmacy cater to the needs of the public and not for the exclusive use of students, faculty members and employees, its operation as well as the property being used is subject to local taxes. This really depends on the determination by the office of the treasurer and the assessor." In your various letters dated 19 February 2016, 21 July 2016, 11 August 2016, and 08 May 2017, you expressed that the abovequoted opinion of this Bureau runs counter to Section 4 (3), Article XIV of the 1987 Constitution 1 and the provisions of Section 193 2 of the LGC and is also contrary to the 2013 DOJ Opinion on the said LGC provision. In your 08 May 2017 letter, you cited Commissioner of Internal Revenue v. De La Salle University as relevant to the instant case. In addition, in your 02 June 2017 letter, you submitted a copy of the 07 January 2013 letter of the President of SASRCI to the Head of Pharmacy Department, as proof that SASRCI's hospital pharmacy is actually operating as an in-patient pharmacy. Hence, your request for this Bureau's clarification on the subject. Hospital and pharmacy as necessary facilities for SASRCI's operations as a non-stock, non-profit educational institution It is SASRCI's representation that the hospital it established and operated, since its inception in 1956, is part of its mandate as a non-stock, non-profit educational institution. Upon perusal of its Articles of Incorporation, SASRCI's purposes are, as follows: "xxx xxx xxx 1. In General xxx xxx xxx (d) To establish, maintain and operate a general and maternity hospital with competent medical staff and adequate medical clinic and facilities for the confinement and/or treatment of patients subject to the condition that purely professional, medical or surgical services in connection therewith shall be performed by duly qualified physicians and surgeons who may or may not be connected with the corporation and who shall be freely and individually be contracted by the patients. (emphasis supplied) (e) To establish, maintain and operate chemical laboratories, buy import drugs, medicines , chemical, pharmaceutical , medical and industrial and other preparation, surgical apparatuses, physician's and hospital supplies, as may be necessary for the exclusive use of the school and the hospital . " (emphasis supplied) x x x. As can be clearly gleaned from the abovecited provisions and from the documents submitted, SASRCI's hospital is jointly incorporated as part of its non-stock, non-profit educational institution, since SASRCI is authorized to "establish, maintain and operate a general and maternity hospital." Further examination of the General Information Sheet of SASRCI submitted to the Securities and Exchange Commission reveals that the primary purpose for which SASRCI is engaged in is " IN THE OPERATION OF A TERTIARY SCHOOL OFFERING BS IN NURSING, MIDWIFERY, BS IN PHYSICAL THERAPY, ASSOCIATE IN FOOD TECHNOLOGY, ASSOCIATE IN RESPIRATORY THERAPY AND HEALTH AIDE COURSE. IT ALSO OPERATES 165 BED CAPACITY HOSPITALS AS THE LABORATORY OF HEALTH RELATED COURSES ." Evidently, SASRCI, as an educational institution offering academic health programs, needs to maintain facilities and ancillary services in pursuit of its purpose. Pursuant to existing Department of Health policy, 3 it appears that a pharmacy is required as a support unit for all hospitals, regardless of level, category, scope, or functional capacity, to wit: "2. All hospitals shall provide basic hospital functions such as , but not limited to, acute medical and surgical services, anesthesia services, emergency and outpatient services, nursing service, dental service for Levels 2 and 3 be it by referral system or outsourcing, with common diagnostic and support units as pathology, radiology, and pharmacy ." (emphasis supplied) In regard to its pharmacy operations, the 07 January 2013 letter of Sr. Ma. Myrna C. Bas, D.C., President of SASRCI, addressed to Sr. Salve A. Magistrado, D.C., Head of Pharmacy Department, is instructive of SASRCI's management policy that the pharmacy should cater solely to in-patients or those confined in the hospital and those patients seen by doctors of SASRCI's hospital. The letter reads in part, as follows: "xxx xxx xxx Please remind all those in Pharmacy Department of the long-standing policy of College that the medicines at the Pharmacy are to be given (charged) solely to confined patients in the Hospital as well as patients seen by the doctors of the Hospital in the Hospital premises . (underscoring supplied) The Hospital does not operate an out-patient pharmacy , and, therefore, the dispensing and sale of medicines and other items to parties other than the in-patients x x x is prohibited . (underscoring supplied) x x x." With the above supplementary information, it can be inferred that any violation of SASRCI's policy on its in-patient pharmacy operations must first be brought to the attention of its Management for rectification or institution of action on any violation by staff or employees assigned to the said pharmacy, as it is the duty of SASRCI to cause full and strict compliance of its established policy, or internal rules and regulations. The DOJ Opinion on Sec. 193 of the Local Government Code of 1991 On 12 September 2013, the Secretary of Justice issued an opinion, upon the request of this Bureau, which categorically stated that the exemption provided under Section 193 of the LGC covers both non-stock, non-profit educational institutions, and non-stock, non-profit hospitals, to wit: "xxx xxx xxx Based on the foregoing, it is the Department's opinion that the interpretation of Section 193 of the Local Government Code is as follows: General Rule: tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government owned and/or controlled corporations, are thereby withdrawn upon the effectivity of the LGC; Exception: Where the LGC itself provides; and The withdrawal of tax exemptions or incentives is not applicable to the following: i. Local water districts; ii. Cooperatives duly registered under R.A. 6938 ; iii. Non-stock and non-profit hospitals ; and iv. Non-stock and non-profit educational institutions . (underscoring supplied) x x x." The DOJ, thus, categorically clarified the distinction of entities that are not covered by the withdrawal of tax exemptions or incentives under the LGC. Applying to the instant case, SASRCI, whether viewed with or without the hospital, having one Board of Trustees and Management, Articles of Incorporation, and consolidated Income Tax Return, is deemed entitled to tax exemptions as granted by the Constitution and Section 193 of the LGC, it being a non-stock, non-profit educational institution. Assets and revenues of non-stock, non- profit educational institutions proved to have been used actually, directly, exclusively for educational purposes are exempt from duties and taxes Recently, in Commissioner of Internal Revenue vs. De La Salle University, Inc. (G.R. Nos. 196596, 198841 and 198941 dated 09 November 2016), the Supreme Court held that the tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income for educational purposes. The Court, thus, comprehensively explained, as follows: "We find that unlike Article VI, Section 28(3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets , i.e. , "all lands, buildings, and improvements , actually, directly, and exclusively used for religious, charitable, or educational purposes. . . ," Article XIV, Section 4(3) categorically states that " [a]ll revenues and assets . . . used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties." The addition and express use of the word revenues in Article XIV, Section 4(3) of the Constitution is not without significance. We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional Commission to provide broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in assisting the State provide a public good. The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit educational institutions. Further, a plain reading of the Constitution would show that Article XIV, Section 4(3) does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties . (emphasis supplied) We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets. Revenues consists of the amounts earned by a person or entity from the conduct of business operations. It may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a component of the tax base in income tax, VAT, and local business tax (LBT) . (emphasis supplied) Assets , on the other hand, are the tangible and intangible properties owned by a person or entity. It may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair market value of real property is a component of the tax base in real property tax (RPT) . Also, the landed cost of imported goods is a component of the tax base in VAT on importation and tariff duties. Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT and LBT . On the other hand, when it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT. (emphasis supplied) xxx xxx xxx To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually, directly and exclusively used for educational purposes, even if the bookstore or canteen caters only to university students, faculty of staff. The leased portion of the building may be subject to real property tax , as held in Abra Valley College, Inc. v. Aquino . We ruled in that case that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes . xxx xxx xxx However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school building, such revenues shall be exempt from taxes and duties . The tax exemption no longer hinges on the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes . (emphasis supplied) Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly and exclusively for educational purposes the revenues or income sought to be exempted . (emphasis supplied) The crucial point of inquiry then is on the use of the assets or on the use of the revenues . These are two things that must be viewed and treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes , they are exempt from duties and taxes ." (emphasis supplied) Non-qualification of constitutionally granted tax exemption to non-stock, non-profit educational institutions In the above discussed decision, the Supreme Court declared the last paragraph 4 of Section 30 of the Tax Code 5 without force and effect for being contrary to the Constitution, in so far as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose, thus disregarding the disposition of the income or revenues made by the non-stock, non-profit educational institutions for educational purposes. The Court explained that tax exemption constitutionally granted to non-stock, non-profit educational institutions is not subject to limitations imposed by law. The Court, thus, ruled that the 1997 Tax Code cannot qualify the tax exemption constitutionally granted to non-stock, non-profit educational institutions, because the "tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income 6 for educational purposes." Verily, as the Court already clarified in the abovementioned case that "when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT and LBT ," then the provisions of the LGC should not be construed to provide qualifications too, and, in effect, allow for the imposition of local business tax (LBT) or 'sales tax' on revenues or income derived by non-stock, non-profit educational institutions that are actually, directly and exclusive used for educational purposes. Granting for the sake of argument that SASRCI's pharmacy, canteen, and any other ancillary services and facilities cater also to the general public, it cannot be used as grounds to subject the revenues or income of non-stock, non-profit educational institutions, which are actually, directly and exclusively used for educational purposes, as basis for imposing local business tax thereon. It is, thus, erroneous and infirm to contend that the constitutionally granted tax exemption to non-stock, non-profit educational institutions apply only to national impositions or internal revenue taxes and custom duties, following the abovecited jurisprudence. Simply put, the local government nor an administrative agency should not set any qualifications that go against the intent and letter of the Constitution. Moreover, we find the jurisprudence in Commissioner of Internal Revenue vs. St. Luke's Medical Center 7 inapplicable in the instant case, the pertinent portion thereof reads: "Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax ." (underscoring supplied) It is clear from the said decision that any activities conducted for profit, regardless of the use of such income, shall be subject to tax. However, we deem this ruling to be true only in so far as charitable institutions, like St. Luke's Medical Center are concerned. In view of the supervening decision in Commissioner of Internal Revenue vs. De La Salle University, Inc. , it reiterated and clarified the tax exemption of income or revenues acquired by a non-stock, non-profit educational institution, provided that it shall make use of such income, revenue or assets actually, directly and exclusively for educational purposes. The declaration of nullity of the last paragraph of Section 30 of the Tax Code was clarified to be applicable only to non-stock, non-profit educational institution, and does not cover the other exempt organizations of the aforementioned section. Prescinding from the above discussions, we deem it best to underscore that a non-stock, non-profit educational institution, like SASRCI, is not prohibited from obtaining revenues or income, so long as no part of its assets, revenues or income shall inure to the benefit of any member, Trustee or private individual, and, for it to be entitled to tax exemptions, such assets, revenues or income shall be proven to be actually, directly and exclusively used for educational purposes. In view of the foregoing, the Opinion of this Bureau dated 14 February 2013 and the reiteration in the 2nd Indorsement dated 19 April 2016, regarding the local business taxability of SASRCI, are hereby REVERSED. This Opinion is issued based on the information provided and to guide the local treasurer in collecting taxes and other local impositions. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void. We hope we have provided clarity on the matter. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. 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 . Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. (emphasis supplied) 2. Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. 3. Item 2 of Part V, A of Department of Health Administrative Order No. 2012-0012-A, dated Sep. 03, 2015. 4. The following organizations shall not be taxed under this Title [Tax on Income] in respect to income received by them as such: xxx xxx xxx (H) A non-stock and non-profit educational institution x x x Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this code . [underscoring and emphasis supplied] 5. National Internal Revenue Code, Presidential Decree No. 1158, as amended up to RA 9504. 6. Cited as: 78 For purposes of construing Article XIV, Section 4 (3) of the Constitution, we treat income and revenues as synonyms. Black's Law Dictionary (Fifth Edition, 1979) defines revenues as "return or yield; profit as that which returns or comes back from investment; the annual or periodical rents, profits, interest or issues of any species of property or personal. . ." (p. 1185) and income as "the return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc. . ." (p. 687) 7. G.R. No. 195909, September 26, 2012.