Simplifying tax exemptions for schools
As the new academic year begins, a welcome development is the recent announcement that the Bureau of Internal Revenue (BIR) has relaxed the ruling requirements for the tax exemption of non-stock, non-profit schools.
The new BIR Commissioner Caesar A. Dulay issued Revenue Memorandum Order (RMO) No. 44-2016 dated July 25, 2016, which seeks to exclude non-stock, non- profit educational institutions from the coverage of RMO 20-2013, which requires the filing of an application for Tax Exemption Ruling (TER) by all taxexempt entities, including non-stock, non-profit schools.
At the outset, RMO 44-2016 emphasized that the tax exemption of nonstock, non-profit educational institutions is directly granted by Article XIV, Section 4(3) of the 1987 Constitution, and reiterated in Section 30(H) of the Tax Code. The BIR noted that only the following are required for the tax exemption to apply:
(1) The school must be non-stock and non-profit; and,
(2) The income is actually, directly, and exclusively used for educational purposes.
No other conditions or limitations should be imposed aside from these requisites for these schools to enjoy the tax exemption. The BIR further recognized that the constitutional grant of the tax exemption should not be implemented in a manner that will defeat or diminish the Constitutional language and intent.
A comparison of RMO 44-2016 and RMO 20-2013 yields a number of apparent differences.
RMO 44-2016 limits to six the documentary requirements to support TER applications, including a Certification under Oath by the Treasurer as to the income, compensation, or other benefits paid to the school’s trustees or officers, Certification on the utilization of revenues and assets, and audited financial statements. On the other hand, RMO 20-2013 prescribes 11 documentary requirements, including the educational institution’s Articles of Incorporation and By-Laws, Certificate on the Modus Operandi of the institution, as well as all the amendments made to its Articles of Incorporation and By-Laws, if any.
RMO 44-2016 prescribes the filing of TER applications with the Office of the Assistant Commissioner, Legal Service, while RMO 20- 2013 requires the filing with the Revenue District Offices (RDO) where the non-stock, non-profit schools are registered. This change in filing venue effectively shortens the BIR evaluation process.
The TER application was previously required to be evaluated by the RDO subject to the review of the Legal Division of the Revenue Region, the Law and Legislative Division, the assistant commissioner for Legal Service, the deputy commissioner for Legal Group, and by the commissioner for final approval. Since TERs will now be filed with the Legal Service, the evaluation will be made directly by the Law and Legislative Division, subject to the review of the assistant commissioner, the deputy commissioner, and the commissioner himself.
The filing of the TER application with the Legal Service should also result in a uniform interpretation of the criteria or qualifications for tax exemption. The same level of scrutiny will be applied to all TER applications since these will be evaluated only by the Law and Legislative Division, and not by different RDOs.
More importantly, RMO No. 44-2016 now prescribes that TERs issued will continue to be valid and effective, unless recalled for valid grounds. Non-stock, non-profit schools are not required to renew or revalidate the TERs. RMO 20-2013 provided that TERs are valid only for a period of three years from the date of effectivity specified in the TER, subject to renewal upon the filing of another application.
This provision of RMO 44-2016 appears to be the most beneficial to nonstock, non-profit schools, considering the effort and length of time necessary to prepare for the filing of TER applications. The perpetual validity of TERs, unless recalled for valid grounds, effectively saves non- stock, non- profit schools from undergoing through the same process to confirm its tax exemption, even if there is no change in circumstances that will warrant the denial of the application.
RMO 44-2016 has simplified the requirements and processes for the application and grant of TERs for non-stock, non-profit educational institutions, to align these with the Constitutional provisions and objectives noted above.
Nevertheless, some questions remain on the implementation of RMO 44- 2016. For instance, the transitory provisions require that all non-stock, non- profit educational institutions with TERs or Certificates issued prior to June 30, 2012 are required to apply for new TERs. However, there is no mention on pending TER applications of non-stock, non-profit schools filed under RMO 20-2013. It is not clear whether the applications still with the RDOs or Regional Legal Divisions will be forwarded to the Law and Legislative Division for evaluation, or will be returned to the taxpayers concerned for refiling under RMO 44-2016.
RMO 44-2016 was only issued by the BIR commissioner on July 25, 2016, so it is possible that a clarificatory issuance will be forthcoming to address these questions.
Nonetheless, the issuance of RMO 442016 is a welcome relief to non-stock, non-profit educational institutions. After all, granting education to the people is primarily a duty of the state, even if this duty is largely implemented by non-stock, non-profit educational institutions. It is but fitting that these entities be given adequate relief and not unduly burdened to further support them in carrying out the noble task of educating the citizenry.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.