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Upholding the Constitutional exemptions of non-stock, non-profit schools

We have come to a time when we are no longer afraid of change. We welcome change, believing that such will be a catalyst for improvement. We are all very excited by blow-by-blow developments. We have seen it slowly happening within the ranks of the Bureau of Internal Revenue (BIR) vis-à-vis the proposed amendments of the Tax Code.

With the vision to make government processes more efficient, there are numerous issuances at the administrative level which aim to promote efficiency across all levels.


Recently, the Commissioner of Internal Revenue issued Revenue Memorandum Order No. 44-2016. The issuance excluded educational institutions from the coverage of RMO 20-2013, which prescribed the Policies and Guidelines in the issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations.

The objective is to put in proper context the nature and tax status of non-stock non-profit educational institutions. The RMO recognizes that non-stock non-profit educational institutions are distinct because their exemption arises from the Constitution itself. As such only two requisites are required to avail the exemption, 1) the school must be non-stock and non-profit and 2) the income is actually, directly and exclusively used for educational purposes.

Stakeholders have another reason to rejoice as tax exemption rulings are already made perpetual. The rulings shall remain valid and effective unless recalled for valid grounds. Non-stock non-profit educational institutions are not required to renew or revalidate the tax exemption rulings previously issued to them.

Meanwhile, the list of requirements in applying for tax exemption ruling / certificate was cut from eleven to only six documents, as follows:

(a) Application latter for issuance of Tax Exemption Ruling;

(b) Ceritficate of Good Standing issued by the Securities and Exchange Commission;

(c) Certification under Oath of the Treasurer as to the amount of income, compensation, salaries or any emoluments paid to its trustees, officers and other executive officers;

(d) Copy of the Financial Statements of the corporation for the last three (3) years;

(e) Copy of government recognition/permit/accreditation to operate as an educational institution issued by the Commission on Higher Education, Department of Education, or Technical Education and Skills Development Authority; and,

(f) Certificate of utilization of annual revenues and assets by the Treasurer of the non-stock and non-profit educational institution.

The reduced list excluded, among others, the Articles of Incorporation, certificate of BIR registration, income tax return and BIR clearance.

However, newly established schools may have a problem with the requirement of submitting last three annual Financial Statements of the applicant corporation. This implies that a non-stock non-profit education institution may only avail of all the tax exemptions granted under the law on its fourth year of operation. In lieu of the requirement, the BIR may consider allowing newly established educational institutions to enjoy the exemption with the condition that the taxes that have been waived will be paid if the school cannot comply with the requirement.

Section 4 of the issuance provides that the BIR may require additional documents as may be warranted by the circumstances. Though it is not also clear who are authorized, in practice, it is the evaluating officers who determine whether additional documents are necessary. We still hope that this will not give rise to confusion and conflicting interpretations. 

A bigger source of confusion which could be addressed in succeeding issuances is the coverage of activities that may be deemed aligned with the educational purpose and are, therefore covered by the exemption and which activities would clearly be taxable. At the moment, guidance is scattered in various BIR rulings and court decisions which make compliance difficult.

To ensure that the government’s fiscal condition is not in peril, it is very important to balance the government’s interest and the taxpayers. Principles in law say that tax exemptions should be strictly interpreted against the one claiming it. On the other hand, in certain circumstances when there is a clear grant in the law of such exemption, what regulators need only to do is to ensure that conditions imposed under the law are met. Ancillary requirements, which are not directly relevant to the conditions required by law, should not cause denial of the application of exemption.

We must all understand that the State considers education as a primary factor in nation-building. Anent this, the Constitution provides that education should be accessible to all. With our current rate of population and economic growth, the government will surely have difficulty catching up. The role and contribution of non-stock non-profit educational institutions should be recognized and supported. 

As previously stated, we welcome change. In line with President Rodrigo R. Duterte’s directive to all government agencies to provide fast and hassle free service to the public. RMO 44-2016 is proof of the new BIR Commissioner’s adherence to the advocacy of the President for efficiency. We have high hopes that the bureau’s new strategies will uphold that the laws should not be interpreted and implemented in such a manner that will defeat or diminish the intent and language of the Constitution and the laws.

Gretchel N. Lim is a tax associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

As published in Business World, dated 9 August 2016