By Atty. Josephrally L. Chavez, Jr.
Gold there is, and rubies in abundance, but lips that speak knowledge are a rare jewel [Proverbs 20:15]. Who is wise and understanding among you? Let them show it by their good life, by deed done in humility that comes from wisdom [James 3:13]. In Matthew 9:13, it is written “But go and learn”. Aristotle once said. “The roots of education are bitter, but the fruits are sweet”. Nelson Mandela uttered: “Education is the most powerful weapon which you can use to change the world”. Mahatma Gandhi pronounced that: “Live as if you were to die tomorrow. Learn as if you were to live forever”. Martin Luther, King Jr., articulated that: “Intelligence plus character, that is the goal of true education”. Benjamin Franklin expressed that: “An investment in knowledge always pays the best interest”.
Kobe Bryant believed that: ”If you’re afraid to fail, then’ you’re probably going to fail”. Roger Federer once exclaimed that: “As long as you are breathing, it’s never too late to start a new beginning. Hard work, dedication and pure motivation makes you who you are and will become”. Tony Blair verbalized that: Education is the best economic policy there is”. With this, I remember my old man, my DAD, my idol (a tough act to follow): having had sculpted on the walls of our dwelling that: “It is better to endure the hardship of learning than to taste the bitterness of ignorance”, where everybody could see it, anytime and almost all of the time.
As to our government, even the drafters of our Constitution recognized and acclaimed the importance of education. And by its mandate, they granted tax exemptions and privileges favoring the creation and operation of educational institutions. The Congress as well respected educational institutions by drafting laws granting exemptions. E.g. The Local Government Code and The National Internal Revenue Code. [See The New Tax Code of the Philippines, For Practitioners, Entreprenuers and Bar Candidates, 2018 Edition, By: Atty. JLChavez, Jr.,]
Under the Constitution [Art. XIV, Sec. 4(3)], all revenues and assets of a non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Simply put, a non-stock, non-profit school [NSNPS for brevity] is exempt from income tax.
Likewise, under the same supreme law of the land [Art. VI, Sec. 28(3)], it is also exempt from real property tax. This real property tax exemption is also inscribed in Section 234(b) of the Local Government Code.
Notably however, Section 21 of the Tax Code provides for seven (7) internal revenue taxes. These are: income tax, estate and donor’s tax; VAT, other percentage taxes; excise taxes; documentary stamp taxes and other taxes as are imposed and collected by the BIR.
Let us talk about this blow by blow. Firstly, NSNPS is exempt from income tax. The Supreme Court ruled that the last paragraph of Section 30 of the Tax Code which imposes tax on income of whatever kind and character of a NSNPS from any of their properties, real or personal, or from any of their activities conducted for profit x x x… does not apply. And for the constitutional exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two requisites: (1) The school must be non-stock and non-profit; and (2) The income is actually, directly and exclusively used for educational purposes. There are no other conditions and limitations. [CIR vs. St. Paul College Makati [G.R. No. 215383, 8 March 2017] Likewise, RMC 44-206 (dated 25 July 2016) seeks to exclude NSNPS from the coverage of RMO 20-2013, which mandates the filing of an application for Tax Exemption Ruling (TER) by all tax exempt entities. However, under the said circular the NSNPS are required to submit certain documents for the purpose of applying a tax exemption certificate. [See Income Taxation Illustrated and Simplified, A Guide to Passing the Bar, 2019 Edition, Volume 1, By: Atty. JLChavez, Jr.,]
With this, once a the NSNPS is granted an exempt-status by the BIR, the Tax Exemption Rulings or Certificate of Tax Exemption remains valid and effective, unless recalled for valid grounds. The NSNPS is not required to renew or revalidate the Tax Exemption Rulings previously issued to them. [Caveat: The Certificate of Tax Exemption is a non-negotiable instrument. See Negotiable Instruments Law Simplified A Guide to Passing the Bar, 2015 Edition, Volume 3, By: Atty. JLChavez, Jr.,]
Secondly, a NSNPS is not liable for estate tax as the same applies only to natural persons. The estate tax is levied, assessed, collected and paid only upon the the transfer of net estate left behind by a decedent [Sec. 84]. As to donor’s tax, if the NSNPS is the donor, the donation is exempt from donor’s tax if it is in compliance with Section 101 of the Tax Code.
Thirdly, as to VAT, a NSNPS is exempt by virtue of Section 109 (H). Note that the exemption refers to output VAT. Meaning, there is no VAT liability, it has no VAT payable. However, with respect to its purchases, Section 105 of the Tax Code is clear, it is liable to pay input VAT on its purchases and importations. And it cannot claim a refund or credit for that matter. E.g. In its acquisition of school supplies and equipment, it cannot invoke exemption on the imposition of 12% VAT passed on to them (the NSNPS) by the seller. It will just form part of the purchase price or acquisition cost which may eventually be amortized by way of depreciation. [See Transfer Taxes, VAT & Remedies Illustrated and Simplified, A Guide to Passing the Bar, 2020 Edition, Volume 2, By: Atty. JLChavez, Jr.,]
Fourthly, with respect to other percentage taxes and excise taxes, a NSNPS is also exempt. The Tax Code does not provide impositions on these taxes.
Fifthly, while DST is in the nature of an excise tax, a NSNPS is not exempt therefrom. As long as the documents and papers are not exempted under Section 199 of the Tax code, then it is liable for DST. E.g. In obtaining loans, in the issuance of certificates and diplomas, a NSNPS must pay the DST.
Lastly, as to other taxes imposed and collected by the BIR, e.g. The withholding tax on compensation. While the NSNPS has a juridical personality separate and distinct from the persons composing it, the nature of its tax liability is by way of withholding agent. While the payor-employee is the taxpayer to whom the tax is imposed on their income, the withholding agent or the NSNPS-employer simply acts as an agent of the BIR to ensure the collection of taxes. However, the Tax Code [Sec. 57] makes the NSNPS-employer, the agent, personally liable in case it failed to remit the withholding tax on compensation due from its employees. Its liability emanates from the breach of its legal duty to remit the tax to the BIR. But in case of failure to withhold, the agent is liable only on account of its negligence to withhold. The duty to pay the income tax on compensation still rests with the taxpayer, the employee. The reason is simple, it is the employee who earned income.
But is a NSNPS exempt from BIR audit or investigation? NO. The BIR Commissioner is empowered to obtain information, and to summon, examine and take testimony of persons, [Sec. 5] and conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts [Sec. 6]. The objective is not to make an assessment and thereupon determine the tax liability of the NSNPS. This is merely to determine compliance that in truth and in fact, the assets and revenues of a non-stock, non-profit educational institution are actually, directly and exclusively used for educational purposes. That, the NSNPS is beyond doubt and based on best evidence obtainable an educational institution, incorporated as a non-stock, non-profit entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation, in case of dissolution, its assets should proceed to another non-stock entity with similar purpose and that its administrative expenses must not exceed 30%. [See The New Corporation Law Illustrated and Simplified, A Guide to Passing the Bar, 2020 Edition, Volume 4, By: Atty. JLChavez, Jr.,]
SIMPLY PUT, a NSNPS with the exception of DST is exempt from internal revenue taxes and real property tax. [This Article is crafted as prayed for by a Priest who is dear to my heart, in reverence to my Alma Mater, San Sebastian College-Recoletos, dedicated to the OAR Family and an endowment to the very same priest who gave me a Ukelele on my wedding day for me to sing SOMETHING by the Beatles on that very special day parallel to Paul McCartney’s version. Happy Birthday Rev. Fr. William C. Villaflor, OAR, aka Fr. Wing. BRAVO BASTE!!!]
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