Bureau of Local Government Finance Opinion

February 15, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Rommel S. Agan 7th Floor, Electra House Building 115-117 Esteban St., Legaspi Village Makati City Sir : This refers to your letter dated January 24, 2012 requesting opinion on behalf of your client Fatima Medical Science Foundation, Inc. (FMSF for brevity) that the income generated from the operation and maintenance by FMSF of the medical and/or science courses offered at the Our Lady of Fatima University, Inc. (OLFU for brevity) is exempt from the payment of local business tax in the City of Valenzuela. It is represented that FMSF is a non-stock, non-profit foundation registered before the Securities and Exchange Commission (SEC) on August 27, 1979. Its primary purpose is "[t]o establish, organize and carry on the operations of a college of medicine that will afford the youth standard scientific, academic and technical learning opportunities and facilities, in accordance with the latest methods and practices of educational institutions in the Philippines and abroad in order to qualify its students to practice medicine or any branch thereof in accordance with existing and applicable laws, decrees, rules and regulations." On the other hand, it is represented that OLFU is a corporation organized and registered with the SEC sometime in 1991. Its primary purposes is "[t]o create, establish, maintain, operate and administer an educational institution providing therein education in the tertiary or college level, as well as post graduate studies and other allied cultural, vocational and human development courses that may contribute to the moral, social, cultural and political development of the students." DEAaIS It also represented that on April 2005, FMSF and OLFU entered into a Memorandum of Understanding and Agreement (MOUA), wherein it was provided, among others, that FMSF shall undertake to operate and maintain the college of medicine and sciences offered at OLFU, including other allied courses in the medical and science fields. It was likewise provided under the subject MOUA that the tuition fees and other income collected by OLFU from such operation shall immediately be remitted to the account of FMSF. It is contended that inasmuch as FMSF is a non-stock, non-profit educational institution, the income collected by OLFU from the operation and maintenance by FMSF of the college of medicine and other allied courses in the medical and science fields, which is eventually remitted by OLFU to FMSF should be exempt from the imposition of the local business tax. To support the above contention, paragraph 3, Section 4, Article XIV of the 1987 Constitution is cited, which provides that: "(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, . . . ." To further support its contention, Section 193 of the Local Government Code (LGC) of 1991 is cited which provides that: "Sec. 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." In resolving the issue it is worth noting that under the primary purpose of FMSF, it was stated that the operations of a college of medicine shall be in accordance with the latest methods and practices of educational institutions in the Philippines and abroad. Relative to the above citation is the fact that FMSF is a non-stock and non-profit education institution and accordingly therefore, the tax exemptions provided above shall apply. Said exemption embraces the income of FMSF collected by OLFU from the college of medicine and allied medical and science courses. CacEIS It is viewed likewise that the said income of FMSF should not form part of the income of OLFU as it is remitted and properly accounted to the account of FMSF in compliance with the MOUA. Impliedly, the MOUA creates a contract of agency, whereby OLFU binds itself to FMSF to collect for and in behalf of FMSF, the tuition fee and other fees from the operation and maintenance of the college of medicine and other allied medical and science courses. Under a contract of agency, one binds oneself to render some service or to do something in representation or on behalf of another, with the latter's consent or authority. (Article 1868 of the New Civil Code) In the case of Maria Tuazon, et al. vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005 , the Supreme Court held that: "The following are the elements of agency: (1) the parties' consent, express or implied, to establish the relationship; (2) the object, which is the execution of a juridical act in relation to a third person; (3) the representation, by which the one who acts as an agent does so, not for oneself, but as a representative; (4) the limitation that the agents acts within the scope of his or her authority. As the basis of agency is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from the principal's words or actions. In the same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency." By the foregoing definition, it is very clear that the MOUA establishes the relationship between FMSF and OLFU, whereby OLFU acts as an agent of FMSF in collecting the tuition fees from the students of the college of medicine and other allied medical and science courses. These fees collected by OLFU and remitted to FMSF are derived in pursuance to FMSF's purpose as a non-stock, non-profit educational institution. In view thereof, the income generated by FMSF, a non-stock and non-profit educational institution, from the operation of the college of medicine and other allied medical and science courses at OLFU, is exempt from local taxes pursuant to the aforecited provisions of law. It is suggested however, for purposes of local taxation that OLFU should issue a separate receipts for the collection of tuition fees to be remitted to FMSF to determine the amount to be exempted from local business tax considering that OLFU is a stock corporation and therefore, its own income is subject to the local business tax. HADTEC It must be stressed however, that the exemption from local taxes of educational institutions does not apply to the payment of permit fees because exemption from taxes does not carry with it the exemption from the payment of fees for regulation, inspection, surveillance and service rendered by a local government unit (LGU). This is for the reason that taxes are for revenue purposes while fees and charges are payment for expenses incurred to protect public interest and in furtherance of the general welfare clause of the Constitution as well as of the LGC. (Section 16, General Welfare clause) . Likewise, even the exemptions granted to non-stock, non-profit educational institutions under Section 4 (3), Article XIV of the 1987 constitution do not constitute exemption from regulatory fees as they specifically refer to tax privileges and exemption from custom duties. They do not extend to regulatory fees and charges imposed by an LGU. Notably, the collection of fees and service charges by LGUs are authorized under Section 147, in relation to Section 151 of the LGC, quoted as follows: "Sec. 147. Fees and Charges. The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 of this Code, on the practice of any profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling." Accordingly, both the OLFU and FMSF shall be subject to the payment of the Mayor's permit and other regulatory fees imposed under a duly enacted tax ordinance of the City of Valenzuela. The above views are expressed based on the facts presented herein. However, any fact or representation that may be discovered to the contrary, after verification and investigation by the local government concerned, shall automatically render the views expressed herein as null and void. Lastly, please be informed that the rulings, opinions and views of this Bureau were issued in order to determine the rights and obligations of the parties in a particular case specifically between an LGU and a taxpayer. Said rulings, opinions and views prevail at the time of its issuance so that prior inconsistent ones are deemed reversed or modified accordingly as may be stated therein. IcAaSD Generally, said issuances are prospective. The retroactive effect thereof is dependent upon the degree of compliance of the parties with the provisions of the LGC on Civil Remedies for Collection of Revenues (Sections 172 to 185) and Taxpayer's Remedies (Sections 194 to 196) for Local Government Taxation. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director