Bureau of Local Government Finance Opinion

February 14, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Sabino B. Padilla IV PADILLA LAW OFFICE 7/F Padilla-Delos Reyes Bldg. 232 Juan Luna Street, Binondo Manila 1006 Sir : This refers to your letter dated February 7, 2013 requesting in behalf of your client, St. Anthony School of Roxas City, Inc. (SASRCI), a ruling that Roxas City cannot assess and collect business tax from SASRCI, whether in respect to its educational activities or with respect to its hospital activities which are part and parcel of the whole educational institution. ITAaCc Representations are made that SASRCI is a non-stock, non-profit educational institution organized under the Philippine law and operated by the Roman Catholic congregation known as the Daughters of Charity of St. Vincent de Paul, Inc. (Daughters of Charity for short). SASRCI is located as San Roque Extension, Roxas City, Capiz. SASRCI was incorporated on August 28, 1964 and was originally known as the "St. Anthony School of Nursing and Midwifery, Inc.". Under its Article of Incorporation, the purpose for which SASRCI was established are as follows: "1. In General: (a) To establish and operate a Catholic center of learning for the integral formation of mature Filipino Christian persons given to the service of the Church and society, especially the more deprived; (b) To offer formal and/or non-formal courses of study in the pre-elementary, secondary, tertiary and graduate levels under such permits as may be issued by the Department of Education, Culture and Sports; (c) To establish, maintain and operate a school offering courses in Nursing, Midwifery, Physical Therapy, Health Aide, Associate in Food Technology, Associate in Respiratory Therapy, Medical Secretarial, general arts and sciences with varied areas of specification, and other courses, and to grant Diplomas, confer Degrees, and issue certificates of courses, subject to the authority granted by the Commission on Higher Education/Technical Education and Skills Development Authority (As amended on January 9, 2001) ; (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 not be connected with the corporation and who shall be freely and individually be contracted by the patients ; (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. EcTDCI 2. In particular: (a) To uphold and give religious formation as an essential element of education and of character development; (b) To make education accessible to poor but deserving students as far as its resources will allow; (c) To cultivate human and Christian attitudes among the members of the school community so that they can responsibly participate in genuinely renewing the groups to which they belong towards human development liberation and in animating them with truly Filipino, Christian and Vincentian values; (d) To advance the socio-economic goals of the country through the development of self-reliant and productive citizens ready to participate in the basic functions of society; (e) To promote pedagogical principles that encourage creativity, critical reflection, flexibility and adaptability to enable the learners to cope with rapidly changing situations in an evolving society; (f) To promote a lifestyle which is Christocentric, Marian and Vincentian, characterized by respect for human dignity, compassionate service, co-responsibility, solidarity with the poor, simplicity and social commitment; (g) To receive endowments and donation, acquire assets and employ such means as are necessary to attain its principal and secondary objectives." In accordance with its Article of Incorporation, SASRCI has operated a general and maternity hospital from inception and continues to do so. The general and maternity hospital is accredited by various agencies of the Department of Health and Philhealth while the school is accredited by the Commission of Higher Education and TESDA. In the tertiary level, SASRCI continues to maintain a School of Nursing and offers courses on Nurse Aid and Midwifery. The pharmacy is a necessary part of the hospital operations of the school and is part of the accreditation/recognition required by the Department of Health and Philhealth. In compliance with the regulations of the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR), SASRCI filed a general information sheet with attached Financial Statements to SEC and an Annual Information Return to BIR. EHASaD Every year, SASRCI secures a Mayor's Permit with Roxas City and pays the regulatory and inspection fees such as garbage fees, electrical inspection fees and the like. However, this year, apart from the usual regulatory fees, the Licensing Section of Roxas City also requires SASRCI to pay business tax on the operations of the school particularly on the canteen operation and pharmacy hospital department. The rationale of the City Government is that the Canteen, while located within School premises , sells goods not only to students but also to persons who manage to enter the campus and use said Canteen. Similarly, the pharmacy of the School's hospital department, which is also located within School premises , which does not advertise itself to the public and caters mostly to patients of the school's hospital is sought to be taxed on its revenues. SASRCI stressed that the fact that the revenues are derived from the operations of the pharmacy and canteen, both of which are located within the school premises, operated by the school itself and are not leased out, and which cater primarily to students and patients of the school, does not mean that the school is engaged in a business for profit that puts it outside the coverage of the exemption granted under the Constitution, for a non-stock, non-profit corporation is not prohibited from obtaining revenues or even income so long as no part of said corporation's assets, revenues or income shall inure to the benefit of any member, Trustee or private individual. Consistent with its corporate charter as non-stock, non-profit educational institution, no part of the assets, revenues or income of the school inures, as none has inured, to the benefit of any member, Trustee or private individual. In view of the foregoing, it is the position of SASRCI that the school and its hospital department, particularly the canteen and pharmacy, which is part of the school, is exempt from the payment of business taxes consistent with Section 4 (3), Article XIV of the Constitution and Section 193 of the Local Government Code (LGC) of 1991 as it is a non-stock and non-profit educational institution and operates as such. Section 4 (3), Article XIV of the Constitution provides as follows: "Sec. 4(3), Article XIV 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 Department of Finances interprets Section 4 (3) in its Department Order No. 137-87 dated December 16, 1987. Sec. 1.5 of the said Order provides that the term operated exclusively means primarily engaged in activities which accomplish the educational purposes . . . . The same Order also provides under Sec. 2.3 that 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 educational institution as ancillary activities and the same are located within the school premises. However, on June 16, 1988, the Department of Finance amended Department Order No. 137-87 implementing Section 4 (3), Article XIV of the New Constitutions particularly Section 2 hereof which provides that "the exemption . . . and in certain cases to local taxes imposed by local government units under the local tax code on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. EcAISC Section 193 of the LGC also provides as follows: " 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." (Emphasis ours) In this connection, please be informed that this Bureau has consistently expressed the view that non-stock and non-profit educational institutions are exempt from local business taxes pursuant to Article VI, Section 28 (3) and Article XIV, Section 4 (3) of the 1987 Constitution and Section 193 of the Local Government Code of 1991. With regards to the ancillary services of SASRCI such as the operation of the canteen and the 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 therefore is subject to local taxes. (BLGF letter dated December 11, 2003, copy attached). This really depends on the determination by the offices of the treasurer and the assessor. For this purpose, the basis for the collection of business taxes should be the gross sales or receipts derived from the customers other than the students, faculty and personnel of the school. We hope that we have clarified matters. IEHTaA Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director