Request for Review of Bureau of Internal Revenue Ruling No. 466-2014 (SH30-0207-2020) Dated 10 March 2020

June 16, 2021 DOF OPINION NO. 003.2021 Atty. Michelle V. Basmayor Delloro Espino & Saulog Law Offices Units 911 & 912 CityState Centre Building 709 Shaw Boulevard corner Oranbo Drive, Pasig City SUBJECT : Request for Review of Bureau of Internal Revenue Ruling No. 466-2014 (SH30-0207-2020) Dated 10 March 2020 Dear Atty. Basmayor : This refers to the request for review filed by your Office on behalf of CALAYAN EDUCATIONAL FOUNDATION, INC. (CEFI) of Bureau of Internal Revenue (BIR) Ruling No. 466-2014 (SH30-0207-2020) dated 10 March 2020, which denied CEFI's request for tax exemption as a non-stock, non-profit educational institution under Section 4 (3), Article XIV of the 1987 Constitution and Section 30 (H) of the National Internal Revenue Code (NIRC), as amended. HTcADC CEFI represents that it is a non-stock, non-profit educational institution duly organized and existing under the laws of the Republic of the Philippines. CEFI applied for tax exemption certificate with the BIR to confirm its status as a non-stock, non-profit educational institution under Section 30 (H) of the National Internal Revenue Code of 1997 (NIRC), as amended. As part of the documentary requirements CEFI submitted to the BIR, it was disclosed that its 2010 Amended By-Laws entitled its Board of Trustees to per diem. Article III of CEFI's Amended By-Laws provides: Article III. Board of Trustees. x x x. Trustees are entitled to reasonable per diems according to the tenets of corporate governance for public accountability. (As Amended 3 September 2010) Additionally, Article V of CEFI's Amended By-Laws provides that its officers and trustees are entitled to a monthly endowment for life beginning immediately after their retirement, the pertinent provision of which states: Article V. Emeritus Title. The Board of Trustees, by majority vote, shall authorize the grant of "emeritus" privilege and distinction to officer or trustees, including but not limited to, its founders, former: Chairpersons, Presidents, Deans, heads of academic department or full profession with at least twenty (20) years of continuous and meritorious service to the Corporation, likewise, for such reasons, the Board of Trustees may deem proper. The honorees shall be entitled to a monthly endowment equivalent to thirty percent (30%) of their last monthly basic salary for life beginning immediately after their retirement . The Board of Trustees shall formulate the implementing rules within one (1) year after the effectivity of these By-Laws and ratified by the majority vote of all the members of the Corporation. (As amended 3 September 2010) On the basis of which, the BIR on 10 March 2020 denied CEFI's request for tax exemption, ruling that: CAIHTE "The giving of per diem/honorarium and endowment to the members of the Board of Trustees is considered a distribution of the equity (including the net income) of [CEFI]. This is a form of private inurement which the law prohibits in the organization and operation of a non-stock, non-profit corporation. This act violates the requirement that no part of the net income or assets of the corporation shall inure to the benefit of any individual or specific person. Thus, [CEFI] cannot be qualified as a non-stock, non-profit corporation under Section 30 (H) of the NIRC of 1997, as amended. xxx xxx xxx "In view of the foregoing, the request of [CEFI] to be exempted from income tax on its income as a Section 30 (H) corporation is hereby denied as it failed to prove that it is a non-profit corporation. Therefore, [CEFI] shall be treated as an ordinary corporation subject to thirty percent (30%) income tax rate pursuant to Section 27 (A) and other internal revenue taxes imposed by the NIRC of 1997, as amended." Aggrieved with BIR's ruling, on 25 August 2020, CEFI through counsel filed the instant request for review. Prior to filing this request for review, on 10 August 2020, CEFI's Board of Trustees and Corporate Members resolved 1 to delete the aforesaid provisions from its By-Laws. In its request for review, CEFI alleged that they have now abandoned the contended provisions. This Department requested for a copy of the Securities and Exchange Commission (SEC)-approved revised By-Laws, with which CEFI requested for additional time to submit the same. We, however, believe that the submission by CEFI of its Amended By-Laws duly approved by the SEC should be with the BIR for purposes of processing anew an exemption request under Section 30 (H) of the 1997 Tax Code, as amended, thereby denying the request for additional time. 2 Verily, the issue to be resolved in this case is whether the BIR is correct in denying CEFI's request for tax exemption on the ground that CEFI violated the requirement that no part of its net income or assets shall inure to the benefit of any individual or specific person and that its net income was not used actually, directly and exclusively for educational purposes. The 1987 Constitution expressly exempt all revenues and assets of non-stock, non-profit educational institutions from taxes provided that they are actually, directly and exclusively used for educational purposes, to wit: aScITE Section 4. (1) The State recognizes the complementary roles of public and private institutions in the educational system and shall exercise reasonable supervisions and regulation of all educational institutions. xxx xxx xxx (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. 3 The income tax exemption of non-stock, non-profit educational institutions is likewise provided in Section 30 of the NIRC, as amended, which enumerates the corporations exempt from income tax. Section 30 (H) of the NIRC, as amended provides: SEC. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (H) A nonstock and nonprofit educational institution; xxx xxx xxx In the case of La Sallian Educational Innovators Foundation, Inc. v. Commissioner of Internal Revenue (CIR) , 4 the Supreme Court held that an educational institution shall be granted with tax exemption after proving that: (1) it falls under the classification of non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes . In this case, however, CEFI failed to prove that it is a non-profit educational institution and that the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. The Supreme Court, in the case of CIR v. St. Luke's Medical Center, Inc. , 5 had the opportunity to define "non-profit," which means that "no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit." Moreover, in the case of La Sallian Educational Innovators Foundation, Inc. v. CIR , 6 the Supreme Court declared: "[A] simple reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also been earned 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. In the instant case, petitioner Foundation firmly and adequately argued that none of its income inured to the benefit of any officer or entity . Instead, its income has been actually, exclusively and directly used for performing its purpose as an educational institution. Undoubtedly, petitioner Foundation has also proven this second requisite. (emphasis supplied) DETACa The same could not be said to be true in CEFI's case. The submitted documents of CEFI reveals that its SEC-approved By-Laws mandates the grant of per diems (Article III) and incentives in the form of monthly endowment for life after retirement (Article V) to officers and Board of Trustees. As held in our previously issued opinions, 7 per diem per se is not prohibited , so long as the same is subjected to proper liquidation or reimbursement procedures, such as the case of transportation allowances doled out to trustees to attend meetings. Compensation and/or monthly endowments to officers and/or employees are neither prohibited. As long as they are commensurate to the functions and services rendered, these are considered as legitimate and reasonable expenses incurred in furtherance of the duties and responsibilities of the trustees or officers, and ultimately, the objectives of the organization. 8 A perusal of the documents in the BIR docket of this case show that CEFI was unable to demonstrate through its submitted documents that the per diem of its trustees and monthly endowment for life after retirement of its qualified officers and trustees were reasonable and commensurate to the services they render or the performance of the tasks needed of them. Thus, if any of the income or assets of the organization are unfairly or unreasonably benefiting, either directly or indirectly, individuals who have close relationship with the organization, the same will be considered as private inurement which will disqualify the entity from exemption. Any form of private inurement would negate claims that the entity is non-profit and that the income or assets of the organization are used actually, directly and exclusively for educational purposes. As discussed, Section 4 (3), Article XIV of the 1987 Constitution imposes certain conditions to avail of the exemption. An educational institution, by reason alone of its registration as a non-stock corporation, is not ipso facto exempt from income tax. It must still prove that its assets and revenues do not accrue to or benefit any member or specific person, and are actually, directly, and exclusively used for educational purposes. After all, it is a cardinal rule in taxation that tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. 9 The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. 10 Thus, in case of doubt, non-exemption is favored. 11 Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. 12 HEITAD In view of the foregoing, this Office denies the request for review. Kindly note that this ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered as null and void. Thank you. Very truly yours, (SGD.) CARLOS G. DOMINGUEZ Secretary Footnotes 1. Secretary's Certificate executed and signed by Maybelyn V. Calayan, Corporate Secretary. Attached as Annex H-1 to the Request for Review. 2. Letter dated 16 April 2021 signed by Undersecretary Antonette C. Tionko of the Revenue Operations Group, this Department. 3. Section 4 (3), Article XIV, 1987 Constitution. 4. G.R. No. 202792, 27 February 2019. 5. G.R. Nos. 195909, 195960, [September 26, 2012], 695 PHIL 867-895). Emphasis supplied . 6. G.R. No. 202792, 27 February 2019. 7. DOF Opinion No. 005-2019 and DOF Opinion No. 005-2020. 8. Id. In these cases, the trustees receive emoluments of Two Thousand Pesos (Php2,000.00) to cover travel expenses to and from the meeting venue. These emoluments are valid and are not considered as an inurement, provided, that they are subject to proper liquidation and reimbursement procedures. 9. CIR v. Seagate Technology (Philippines) , G.R. No. 153866, February 11, 2005, 451 SCRA 132, 152. 10. Republic v. Caguioa , G.R. No. 168584, October 15, 2007, 562 PHIL 187-217. 11. Id. 12. CIR v. Bank of the Philippine Islands , G.R. No. 134062, April 17, 2007, 549 PHIL 886-903.