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Taxation of nonstock, nonprofit educational institutions

It is undeniable that education plays a vital role in cultivating future generations. In
recognition thereof, educational institutions are placed under the supervision and
regulation of the State. More importantly, the 1987 Philippine Constitution explicitly
grants tax exemption to nonstock, nonprofit educational institutions, the rationale of
which, according to distinguished Constitutionalist Fr. Bernas, SJ, is (1) to preserve the
democratic choice of students; (2) to enable educational institutions to improve their
quality; and (3) to make quality education more affordable to students.
Specifically, Article XIV, Section 4(3) of the Constitution provides that [A]ll revenues and
assets of nonstock, nonprofit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in a manner provided by law. xxx
Relative thereto, the Supreme Court had the occasion of laying down in YMCA case
(G.R. No. 124043; October 14, 1998) the requisites in availing oneself of the
constitutionally mandated exemption: that the taxpayer claiming such exemption must
prove with substantial evidence that (1) it falls under the classification nonstock,
nonprofit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly, and exclusively for educational purposes. For this
purpose, the High Tribunal recognized the technical definition of educational institution
or institution of learning as that referring to schools, pursuant to the Education Act of
1982.
Following this principle, the Court of Tax Appeals in CTA Cases 7303 and 7246, dated
January 5, 2010 and March 11, 2010, respectively, reiterated the foregoing
jurisprudence in the tax assessment cases against two of the foremost universities in the
country.

The first case (CTA Case 7303, dated January 5, 2010) involves an assessment for
deficiency income and value-added taxes for the income from the lease of schools real
property for restaurants/canteens and bookstores. As the taxpayer assessed is, indeed,
a nonstock, nonprofit education institution, the question that needs to be addressed
would be whether the revenues thus received from such lease arrangements were used
actually, directly, and exclusively for educational purposes.
In order to substantiate the contention that said revenues were actually used for
educational purposes, the taxpayer presented Secretarys Certificates stating the
approval of the Board of Trustees for the transfer of the rental income to its fund
accounts to be utilized for its capital projects such as the construction of PE Sports
Complex as well as for the payment of a loan rimarily secured to finance the said
construction. Such entries in the books of accounts of the taxpayer were likewise verified
by the Independent CPA commissioned by the CTA. The taxpayer also submitted
Statements of Receipts, Disbursements and Fund Balances for the years covered by the
assessment showing therein the sources and uses of the PE Sport Complex Fund
account.
The CTA, however, noted that while the loan for the construction of the sports complex
was secured from the bank by the taxpayer in 1999 and 2000, the taxpayer failed to
include the same in its 2001 Statement of Receipts, Disbursements and Fund Balances
as its beginning balance. Hence, the CTA held that it was not sufficiently proven that the
proceeds of the loan were actually used for the construction of the sports complex. Also,
the taxpayer failed to fully account the use of its income from other lease agreements for
canteen and bookstore services. The taxpayer alleged that the funds were used for
contributions, grants, donations and loans to St. Yon, an institution operating a dormitory
for the Institutions visiting professors. However, considering the failure by the taxpayer
to submit a copy of its agreement with St. Yon for the use of its dormitory rendered the
court unable to ascertain the nature of the transaction and the basis of the amount paid.
Hence, the CTA sustained the assessments for the revenues not fully accounted for by
the taxpayer.
In contrast, the CTA ordered the cancellation of the income and value-added taxes
assessments issued by the tax authorities in the second case (CTA Case 7246, dated
March 11, 2010) involving the receipt of concession fees from the cafeterias operated
within the schools premises. The CTA held that the taxpayer was able to fully
substantiate the sources and use of the concession fees received by showing that all
revenue and expenses relating to the cafeteria operations form part of a general fund
that will be utilized for schools expenditures such as salaries, employee benefits, capital
expenses, etc.
The taxpayer submitted a breakdown of accounts receivable, a
summary of its income and contribution and expenditures as well as its projection of
revenues where the revenues from its cafeteria operations were included in its budget.
As grants of tax exemptions are to be construed against the taxpayers, proper
documentation should always be an utmost consideration. As appreciation of evidence
is primarily a judiciary responsibility, it is incumbent upon the taxpayer therefore to
substantiate fully its contention. It is only with proper compliance with the prescribed
requirements that one can really enjoy the grant of tax exemption so as to realize the
purpose of the said grant of tax exemption.

The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law).
If you have any comments or questions concerning the article, you can e-mail the author
at deo.saludario@bdblaw.com.ph or call 403-2001 local 320.