Bureau of Local Government Finance Opinion

March 19, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Rolando P. Nonato Legal Tax Division Cebu Business and Investment Consultants Room 302, 3rd Floor, Tulips Center A. S. Fortunata St. Mandaue City Sir : This refers to your letter dated July 17, 2000 requesting in behalf of your clients, Cebu Doctor's College, Inc. (CDCI) and Cebu Doctor' Hospital (CDHI) a ruling on whether or not, under the Local Government Code of 1991 (LGC), said institutions, as a private school of medicine and nursing and as a private hospital operating as stock corporations, respectively, are subject to local business taxes. HEDSCc Representations are made that the CDHI, a duly accredited institution by the Department of Education and Culture and Sports (DECS), derives principally its income from tuition fees. In addition, it also derives rental income from the lease of portion of its school building, as well as from the sale of books. Books are sold only to students of the school. It is your claim that under the LGC, there is no specific provisions subjecting schools and hospitals to local business taxes and Mayor's permits, claiming further that under the provisions of the old Local Tax Code, schools and hospitals have not been considered as businesses subject to local taxes citing a ruling of the Ministry of Finance dated February 25, 1983, whether it was held that school are not business establishments, therefore, not subject to Mayor's permit fees and local taxes. It was likewise held that the operation by the school of bookstore is also non-taxable. On the other hand, the City Treasurer of Cebu invoked Section 193 of the LGC as the legal basis of taxing schools and hospitals, quoted as follows: "Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax exemption 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cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and education institutions, are withdrawn upon the effectivity of this Code." However, that Office believes that Section 193 cannot be made the basis of now subjecting to local business taxes private or proprietary schools and hospital, because, in the first place, schools and hospitals in general are still not subject to local taxes, for the simple reason that there is no specific provisions in the old Local Tax Code, nor in the new Local Government Code of 1991, expressly subjecting to local taxes school and hospitals. The mention of non-stock and non-profits hospitals and educational institutions, are still tax exempt, or its exemption not being withdrawn, is a surplusage, because such exemption, in the first place is expressly guaranteed by the Constitution of the Philippines, to wit: "All revenues and assets of non-stock, non-profit educational institutions used actually, and exclusively for educational purposes shall be exempt from taxes and duties. . . ." [Article XIV, Section 4(3)]. ACaDTH That Office likewise added that the treatment of schools and hospitals as a "non-business and non-taxable activities" is not without any constitutional bases. Article XIV, Section 1 provides that "The State shall protect and promote the right of all citizens to quality education at all levels and shall take appropriate steps to make such education accessible to all". Under Section XIII, Section 11 Provides that "The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable costs. . . . ." In imposing the business tax on schools and hospitals, the Cebu Treasurer relied on Section 3 of the Cebu City Tax Ordinance LXIX which provides: "Subject to the provisions of the pertinent laws in force or which may hereafter be promulgated, this Ordinance shall apply to and cover all persons engaged in any occupation or business, or those exercising some privileges within the City of Cebu; the imposition of fees and charges for services rendered in connection with any business profession or occupation being conducted therein, and to all acts or transactions performed or to be carried within its territorial limits, irrespective of whether they are temporary, transitory, or partly being done in another city, municipality or jurisdiction, and upon which acts or transactions, taxes, licenses or fees shall be levied, by virtue hereof, for local public purposes." However, you maintain that the aforequoted provision is not applicable because your clients are not engaged in business, though privately owned. The main issue here is whether or not the Cebu Doctor's College, Inc. and Cebu Doctor's Hospital, Inc. are engaged in business and therefore subject to local business tax and other regulatory fees. Heavy reliance was made in a ruling of the Ministry of Finance dated 25 February, 1983 wherein it was opined that schools are not business establishments. It should be noted that the said ruling was made when the 1973 Constitution was still in effect. Under the 1973 Constitution, educational institutions did not enjoy any exemption from taxes. But there are educational institutions which are genuinely non-profit and are not conducted for business purposes. It is but proper not to subject them to taxes. It is in this light that the aforementioned ruling of the Ministry of Finance was made. It is applicable only in the case of San Beda College and other schools similarly situated. In the case of San Beda College vs. Court of Industrial Relations and National Labor Union , (G.R. No. L-7649, October 29, 1955) it was therein manifested that " San Beda College is an educational institution founded by the Benedictine Order in the Philippines for the sole purpose of which is the education of your men. . . . . As an educational institution, it is devoted to educational teaching and preparation of your men to prepare them for life and for better citizenship. It is not founded and conducted for gaining profits. It is not an industrial pursuit unlike private business devoted solely to the realization of profits for its financial investment. The Benedictine Order does not derive any compensation or remuneration for their services because the rules and laws of the religious order do not allow their members to profit from the fruits of their industry or effort . . . ." (underscoring supplied) DAEIHT Under the 1987 Constitution, educational institutions are granted tax exemptions as provided in the following provisions: "Art. VI, Sec. 28. . . . (3) Charitable institutions, churches and parsonages or convents appertained thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly , and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (underscoring supplied) xxx xxx xxx. Art. XIV, Sec. 4. . . . (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. (underscoring supplied) xxx xxx xxx. Proprietary educational institutions , involving 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". (underscoring supplied) The above constitutional provisions expressly grant exemption to non-profit and non-stock educational institutions. Proprietary educational institutions may be granted exemptions as may be provided by law. This is in recognition of the fact that there are educational institutions which are operated for profit or for business purposes. For a better view of the rationale behind these provisions, reference is made to the following commentaries and comments of Fr. Joaquin Bernas in his book "The 19 87 Co nstitution of the Philippines, A Commentary, 1996 Ed., pp. 1106-1107", thus: "To come under the exemption, the educational institution must be "non-stock non-profit". This is a safeguard against abuse. The two go together and there is no comma separating them. Commissioner Suarez explained this thus: Mr. SUAREZ: The moment we organize a stock corporation, then we as stockholders will surely have interest in the assets and are now entitled to dividends. In other words, although it may be essentially non-profit in character, the fact remains that when we put up a stock corporation, we are thinking in terms of stockholders who have interest in the corporation in the event of dissolution or liquidation. TEHIaD Father Bernas elaborated the same point: Fr. BERNAS: The word "non-stock" is placed mainly as a safeguard because the moment we form a stock corporation the implication is that it is for profit . So just to make sure that there will be no getting around the non-profit idea, we require that the corporation be also non-stock. That is already a banner saying that this is non-profit. The word "non-profit" means that no income accrues to the benefit of any member of the corporation." (underscoring supplied) The foregoing discussions strengthen the view that educational institutions may be conducted for profit or for business purposes. Therefore, the ruling of the Ministry of Finance that schools are not business establishments should be qualified. It depends on whether or not the educational institution is a stock or a non-stock corporation as herein discussed. The Corporation Code of the Philippines (B.P. 68), defines stock corporation as corporations which have capital stock divided into share and are authorized to distribute to the holders of such shares dividends or allotment of the surplus profit on the basis of the shares held." (Sec. 3, BP 68) (underscoring supplied) The Cebu Doctor's College, Inc. was organized as a stock corporation on 25 June 1976 as shown in the Certificate of Registration No. 68310 issued by the Securities and Exchange Commission. The mere fact that it is operating as a stock corporation is sufficient to consider that it is conducted for profit and engaged in business. The foregoing principles are applicable likewise to the Cebu Doctor's Hospital, Inc. The Cebu Doctor's Hospital, Inc. was organized as a stock corporation on 6 May 1975 as shown in the Certificate of Registration No. 2715. Being a stock corporation, it is considered as operating for profit and therefore engaged in business. It is contended that there is no specific provision in the Local Government Code of 1991 expressly subjecting schools and hospital to local taxes. In this regard, attention is invited to Art. 232 (h) of the Implementing Rules and Regulations (IRR) implementing Sec. 143 (h) of the Code, which provides thus: "Art. 232. Tax on Business . The municipality (city) may impose taxes on the following businesses: aIcHSC xxx xxx xxx. "(h) On any business, not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax provided that on any business subject to excise tax, VAT, or percentage tax under the NIRC, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year and provided further, that in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, Gasoline, and other petroleum products shall not be subject to any local tax imposed in this Article. The sanggunian concerned may prescribe a schedule of tax rates but in no case to exceed the rates prescribed in this Article." (underscoring supplied) The abovequoted provision is a "catch-all" provision of the Code. This means that any business not specifically covered by the preceding paragraphs of the said provision may be subjected to business tax. The City Tax Ordinance No. LXIX of Cebu City contains a similar provision in Sec. 65, Chapter XVII, which states as follows: "Section 65. Percentage Tax . On any business, not otherwise specified under the preceding sections a percentage tax of two and one-half (2 1/2%) percent of gross sales or receipts of the preceding calendar year is hereby imposed and be collected by the City of Cebu." (underscoring supplied) Since schools and hospitals are not specifically covered under any sections immediately preceding Sec. 65, Chapter XVII Business Taxes, it follows that they are taxable under the "catch-all" provision of Section 65. The provision clearly and expressly imposes a tax on any business not otherwise specified in the preceding section to said chapter. In view hereof, this Bureau is of the opinion that privately-owned schools and hospitals which were organized as stock corporations are engaged in business and are therefore subject to local business tax and other regulatory fees. We trust the issues herein raised were clarified. SEHACI Very truly yours, (SGD.) BENJAMIN A. GERONIMO Executive Director <http://www.blgf.gov.ph/downloads/opinion/localtax/2001/a2000-0729.pdf> last visited November 5, 2013.