Simplified tax exemption for nonprofit schools

Nonstock, nonprofit educational institutions may have reason to be upbeat this school year with the issuance of Revenue Memorandum Order (RMO) No. 44-2016, excluding them from the renewal requirements of their tax exemption status.

Readers may recall that in 2013, the Bureau of Internal Revenue (BIR) issued RMO No. 20-2013, requiring nonstock, nonprofit organizations under Section 30 of the National Internal Revenue Code (NIRC) to secure confirmatory BIR rulings or certificates of tax exemption by submitting an application and supporting documents for evaluation. However, this requirement was declared null and void as far as nonprofit schools were concerned when a Regional Trial Court in 2014 cited the constitutional protections enjoyed by such institutions.

Despite the court ruling, the BIR released Revenue Memorandum Circular (RMC) No. 24-2016 in February 2016, reiterating a 1995 Department of Finance Order which requires nonstock, nonprofit educational institution to file documents detailing the state of their finances on an annual basis. The rationale for this was that income derived from trade, business or other activities not related to the nature, purpose or function of a nonstock nonprofit entity, if any, should be subject to tax. It sought to confirm whether the generated income is in line with the Constitution’s intent in exempting nonprofits from tax.

Congruent to the court decision, the recently issued RMO No. 44-2016 anchors on the clarity of the constitutional provision giving income tax exemption to all nonstock, nonprofit educational institutions on revenues generated from their integral purpose as an educational institutions, as echoed by Section 30(H) of the NIRC.

The new administration believes that existing jurisprudence and rulings affirm the doctrine that there are only two requisites for the constitutional exemption to be enjoyed by nonstock, nonprofit educational institutions: (i) the school must be nonstock and nonprofit; and (ii) the income is actually, directly and exclusively used for educational purposes. There are no other conditions and limitations. As such, the RMO stressed that the constitutional conferral of tax exemption given to nonstock, nonprofit educational institutions should not be implemented or interpreted in such a manner that will defeat or diminish the true intent and language of the Constitution.

Thus, the new RMO amended RMO 20-2013 by simplifying the requirements for nonprofit schools. This time, the application process for securing a tax exemption certificate or ruling has been shortened, with fewer documents to be submitted by new applicants, and without the need for intermittent renewal.

Under RMC 44-2016, the application can now be filed directly with the Office of the Assistant Commissioner for Legal Service, restricting the process to a single reviewing office, which will then issue the tax exemption ruling or certificate. The abbreviated procedure works favorably for institutions securing the certificate or ruling for the first time.

Further, schools are now required to submit only the following six documents with their ruling application, as compared to the previous 11 documents under the old RMO: 

1. Original application letter for issuance of tax exemption ruling;
   
   
2. Certified true copy of a Certificate of Good Standing issued by the Securities and Exchange Commission;
   
   
3. Original sworn certificate by the Treasurer as to the amount of the income, compensation, salaries or any emoluments paid to its trustees, officers and other executive officers;
   
   
4. Certified true copy of the Financial Statements for the last three years;
   
   
5. Certified true copy of government recognition/permit/accreditation to operate as an educational institution issued by the Commission on Higher Education (CHED), Department of Education (DepEd), or Technical Education and Skills Development Authority (TESDA); and
   
   
6. Original Certificate of utilization of annual revenues and assets by the Treasurer or his equivalent. 

All existing tax exemption rulings or certificates issued on or after June 30, 2012 shall remain valid and effective, unless revoked for valid grounds. They are no longer subject to renewal or revalidation, thereby superseding the three-year validity rule of the previous RMO.

However, to enable the Bureau to update its records and ensure a better monitoring system, those issued tax exemption rulings or certificates issued prior to June 30, 2012 are required to secure a new ruling.

Although the policy rationale may have been clear under the previous RMO/RMC, this recently issued one shows that policies can still be clear even while the implementation is made simple and the approach reasonable.

May the current Tax Bureau continue this approach in order to maintain an equilibrium between safeguards against potential abuse and the fair implementation of laws.