Professional Documents
Culture Documents
Taxation; Tax Exemptions; The Supreme Court holds that Section 27(B)
of the National Internal Revenue Code (NIRC) does not remove the income
tax exemption of proprietary non-profit hospitals under Section 30(E) and
(G).―The Court partly grants the petition of the BIR but on a different
ground. We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).
Same; Preferential Tax Rate; Section 27(B) of the National Internal
Revenue Code (NIRC) imposes a 10% preferential tax rate on the income of
(1) proprietary non-profit educational institutions and (2) proprietary non-
profit hospitals.―Section 27(B) of the NIRC imposes a 10% preferential
tax rate on the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications for hospitals
are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as
“any private school maintained and administered by private individuals or
groups” with a government permit. “Non-profit” means no net in-
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* SECOND DIVISION.
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come or asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution’s purposes and all its
activities conducted not for profit.
Same; “Non-profit” does not necessarily mean “charitable.”―“Non-
profit” does not necessarily mean “charitable.” In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962), this Court
considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise.
Same; Tax Exemptions; Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the public
which would otherwise fall on the shoulders of government; The
government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the
burden.―To be a charitable institution, however, an organization must meet
the substantive test of charity in Lung Center of the Philippines vs. Quezon
City, 433 SCRA 119 (2004). The issue in Lung Center concerns exemption
from real property tax and not income tax. However, it provides for the test
of charity in our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In other
words, charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury.
Same; Same; Charitable institutions are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the law
granting it.―Charitable institutions, however, are not ipso facto entitled
to a tax exemption. The requirements for
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a tax exemption are specified by the law granting it. The power of Congress
to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that “[n]o law granting
any tax exemption shall be passed without the concurrence of a majority of
all the Members of Congress.” The requirements for a tax exemption are
strictly construed against the taxpayer because an exemption restricts the
collection of taxes necessary for the existence of the government.
Same; Same; Income Taxation; Real Estate Taxes; For real property
taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property; The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the
property not devoted to charity.―For real property taxes, the incidental
generation of income is permissible because the test of exemption is the use
of the property. The Constitution provides that “[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.” The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution.
The test requires that the institution use the property in a certain way, i.e. for
a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its
lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the
property not devoted to charity.
Same; Same; The Constitution exempts charitable institutions only
from real property taxes. In the National Internal Revenue Code (NIRC),
Congress decided to extend the exemption to income taxes.―The
Constitution exempts charitable institutions only from real property taxes. In
the NIRC, Congress decided to extend the exemption to income taxes.
However, the way Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution. Section 30(E)
of the NIRC defines the corporation or association that is exempt from
income tax. On the other hand, Section 28(3), Article VI of the Constitution
does not define a charitable institution, but requires that the institution
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on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G)
of the NIRC requires that an institution be “operated exclusively” for
charitable or social welfare purposes to be completely exempt from income
tax. An institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from
for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
Same; Tax Exemptions; A tax exemption is effectively a social subsidy
granted by the State because an exempt institution is spared from sharing in
the expenses of government and yet benefits from them.―A tax exemption is
effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should
therefore be limited to institutions beneficial to the public and those which
improve social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other taxpayers.
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CARPIO, J.:
The Case
The Facts
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1 The consolidation of the petitions is pursuant to the Resolution of this Court dated 4 April
2011. Rollo (G.R. No. 195960), p. 9.
2 This Resolution denied the motions filed by both parties to reconsider the CTA En Banc
Decision dated 19 November 2010.
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3 CTA First Division Decision dated 23 February 2009, citing the earlier decision
in St. Luke’s Medical Center, Inc. v. Commissioner of Internal Revenue, CTA Case
No. 6993, 21 November 2008. Rollo (G.R. No. 195909), p. 68.
4 This prompted St. Luke’s to file an Amended Petition for Review on 12
December 2003 before the First Division of the CTA.
5 CTA First Division Decision, citing the Answer filed by the BIR before the
CTA. Rollo (G.R. No. 195909), p. 62.
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6 Id., at p. 63.
7 Id., at pp. 65-67.
8 Id., at p. 67. The operating expenses of St. Luke’s consisted of professional care
of patients, administrative, household and property expenses.
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9 This income in the amount of P17,482,304 was declared by St. Luke’s as “Other Income-
Net” in its 1998 Income Tax Return/Audited Statements of Revenues and Expenses.
10 C , Art. VIII, Sec. 5(2)(e). Except for criminal cases where the penalty
imposed is reclusion perpetua or higher, the enumeration under Article VIII, Section 5(1) and
(2) of the Constitution generally involves a question of law.
11 R C , Rule 45, Sec. 1.
12 C , Art. VIII, Sec. 5(2)(e). See note 10.
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P6,275,370.38 counted from October 15, 2003 until full payment thereof,
pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED.13
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13 Rollo (G.R. No. 195909), pp. 82-83. Emphases in the original.
14 See note 9. This is one of the errors assigned by St. Luke’s in its petition before
this Court.
15 Rollo (G.R. No. 195909), p. 65. The revised total deficiency income tax
assessed by the BIR is P63,113,952.79, which includes the deficiency under “Other
Income-Net.”
16 CTA Case No. 6993, 21 November 2008.
17 These are documentary evidence which, among others, show that government
agencies such as the Department of Social Welfare and Development and the
Philippine Charity Sweepstakes Office recognize St. Luke’s as a charitable institution.
18 123 Phil. 38; 16 SCRA 226 (1966).
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19 Id., at p. 41; p. 229 citing 51 Am. Jur. 607.
20 95 Phil. 16 (1954).
21 Commonwealth Act No. 466, as amended by Republic Act No. 82, Sec. 27
provides: Exemption from tax on corporation.―The following organizations shall not
be taxed under this Title in respect to income received by them as such―
xxxx
(e) Corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, cultural, or educational purposes, or for the
rehabilitation of veterans no part of the net income of which inures to the benefit of
any private stockholder or individual: Provided, however, That the income of
whatever kind and character from any of its properties, real or personal, or from any
activity conducted for profit regardless of the disposition made of such income, shall
be liable to the tax imposed under this Code[.]
22 Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20 at
p. 21.
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require that the hospital be “non-stock.” The CTA stated, “it is clear
that non-stock, non-profit hospitals operated exclusively for
charitable purpose are exempt from income tax on income received
by them as such, applying the provision of Section 30(E) of the
NIRC of 1997, as amended.”25
The Issue
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23 Id.
24 The CTA adopted its earlier interpretation in St. Luke’s Medical Center, Inc. v.
Commissioner of Internal Revenue. Supra note 16.
25 Rollo (G.R. No. 195909), p. 76. Italics in the original.
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26 410 Phil. 241; 358 SCRA 38 (2001).
27 Id., at p. 257; pp. 49-50; Rollo (G.R. No. 195960), pp. 15-16.
28 Rollo (G.R. No. 195960), p. 24.
29 Id., at p. 50.
30 NIRC, Sec. 248(A)(3).
31 NIRC, Sec. 249(C)(3) provides: “A deficiency tax, or any surcharge or interest
thereon on the due date appearing in the notice and demand of the Commissioner,
there shall be assessed and collected on the unpaid amount, interest at the rate
prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall
form part of the tax.”
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32 CTA En Banc Resolution dated 1 March 2011. Rollo (G.R. No. 195909), p. 56.
Section 249 of the NIRC provides:
(A) In General.―There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may
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be prescribed by rules and regulations, from the date prescribed for its payment until
the amount is fully paid.
(B) Deficiency Interest.―Any deficiency in the tax due, as the term is defined in
this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which
interest shall be assessed and collected from the date prescribed for its payment until
the full payment thereof.
xxxx
33 Id., at pp. 21-27. Section 27(E) of the NIRC of 1977 provides:
Sec. 27. Exemptions from tax on corporations.―The following organizations
shall not be taxed under this Title in respect to income received by them as such―
xxxx
(E) Corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural pur-
80
St. Luke’s claims tax exemption under Section 30(E) and (G) of
the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare. The arguments of St. Luke’s
focus on the wording of Section 30(E) exempting from income tax
non-stock, non-profit charitable institutions.34 St. Luke’s asserts that
the legislative intent of introducing Section 27(B) was only to
remove the exemption for “proprie-
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poses, or for the rehabilitation of veterans, no part of the net income of which
inures to the benefit of any private stockholder or individual.
xxxx
34 See Comment of St. Luke’s dated 19 September 2011 in G.R. No. 195909. Id.,
at pp. 105-116.
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The Court partly grants the petition of the BIR but on a different
ground. We hold that Section 27(B) of the NIRC does not remove
the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together without
the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific
institutions, namely, proprietary non-profit educational institutions36
and proprietary non-profit hospitals, among the institutions covered
by
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35 Id., at pp. 106-108.
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Section 30, to the 10% preferential rate under Section 27(B) instead
of the ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit.
“Proprietary” means private, following the definition of a
“proprietary educational institution” as “any private school
maintained and administered by private individuals or groups” with
a government permit. “Non-profit” means no net income or asset
accrues to or benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and all its
activities conducted not for profit.
“Non-profit” does not necessarily mean “charitable.” In Collector
of Internal Revenue v. Club Filipino Inc. de Cebu,37 this Court
considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course.38
The club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise.39
The sports club in Club Filipino Inc. de Cebu may be non-profit,
but it was not charitable. The Court defined “charity” in Lung
Center of the Philippines v. Quezon City40 as “a gift, to be applied
consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under
the influence of education or religion, by assisting them to establish
themselves in life or [by] oth-
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37 115 Phil. 310; 5 SCRA 321 (1962).
38 Id., at p. 311; p. 322.
39 Id., at p. 314; p. 324.
40 G.R. No. 144104, 29 June 2004, 433 SCRA 119.
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41 Id., at pp. 128-129. Emphasis supplied.
42 For further discussion of the Subsidy Theory of Tax Exemption, see H.
Hansmann, The Rationale for Exempting Nonprofit Organizations from Corporate
Income Taxation, 91 YALE L. J. 54 (1981) at 66-75. See also M. Hall & J. Colombo,
The Charitable Status of Nonprofit Hospitals: Toward a Donative Theory of Tax
Exemption, 66 WASH. L. REV. 307 (1991).
84
provision that “[n]o law granting any tax exemption shall be passed
without the concurrence of a majority of all the Members of
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43
Congress.” The requirements for a tax exemption are strictly
construed against the taxpayer44 because an exemption restricts the
collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption
from real property taxes. This ruling uses the same premise as
Hospital de San Juan45 and Jesus Sacred Heart College46 which
says that receiving income from paying patients does not destroy the
charitable nature of a hospital.
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43 C , Art. VI, Sec. 28(4).
44 Commissioner of Internal Revenue v. The Philippine American Accident
Insurance Company, Inc., 493 Phil. 785; 453 SCRA 668 (2005); Lung Center of the
Philippines v. Quezon City, supra note 40 at pp. 133-134; Mactan Cebu International
Airport Authority v. Marcos, 330 Phil. 392; 261 SCRA 667 (1996); Manila Electric
Company v. Vera, 160-A Phil. 498; 67 SCRA 351 (1975).
45 Supra note 18.
46 Supra note 20.
47 Lung Center of the Philippines v. Quezon City, supra note 40 at pp. 131-132.
Citation omitted.
85
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48 C , Art. VI, Sec. 28(3).
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49 C Code (B.P. Blg. 68), Sec. 87.
50 Id.
51 Supra note 40. Emphasis supplied.
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52 Since the exemption is proportional to the revenue of the institution, Hall &
Colombo say that “a general tax exemption suffers from the same ‘upside down’
effect as many tax deductions: those entities with the highest net revenues or the
greatest value of otherwise-taxable property receive the greatest amount of subsidy,
yet these are the entities that least need support. From the standpoint of equity among
different tax-exempt entities, the result of the general tax exemption is that entities
that are the ‘poorest’ in either an income or property tax sense, and thus most in need
of government assistance to serve impoverished and uninsured patients, receive the
least government assistance. Because uncompensated care is an expense item, those
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hospitals with the most net revenues are more likely to have actually rendered the
least free care, all other things being equal.” Hall & Colombo, supra note 42 at pp.
355-356. Citations omitted.
53 Comment of St. Luke’s dated 19 September 2011. Rollo (G.R. No. 195909), p.
113.
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54 Supra note 40 at p. 137. Emphasis supplied; citations omitted.
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to make profit over and above the cost” of services.55 The P1.73
billion total revenues from paying patients is not even incidental to
St. Luke’s charity expenditure of P218,187,498 for non-paying
patients.
St. Luke’s claims that its charity expenditure of P218,187,498 is
65.20% of its operating income in 1998. However, if a part of the
remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is “devoted or used
altogether to the charitable object which it is intended to achieve.”56
The income is plowed back to the corporation not entirely for
charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income
from activities for profit is taxable “regardless of the disposition
made of such income.”
Jesus Sacred Heart College declared that there is no official
legislative record explaining the phrase “any activity conducted for
profit.” However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for the
Senate, which introduced the phrase “or from any activity conducted
for profit.”
_______________
55 Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20 at pp. 20-21.
56 Lung Center of the Philippines v. Quezon City, supra note 40.
91
a ‘income tax’, y es una de las razones que hemos tenido para insertar las
palabras o frase ‘or from any activity conducted for profit.’57
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that this was one of the reasons Congress inserted the phrase “or any
activity conducted for profit.”
The question in Jesus Sacred Heart College involves an
educational institution.58 However, it is applicable to charitable
institutions because Senator Cuenco’s response shows an intent to
focus on the activities of charitable institutions. Activities for profit
should not escape the reach of taxation. Being a non-stock and non-
profit corporation does not, by this reason alone, completely exempt
an institution from tax. An institution cannot use its corporate form
to prevent its profitable activities from being taxed.
The Court finds that St. Luke’s is a corporation that is not
“operated exclusively” for charitable or social welfare purposes
insofar as its revenues from paying patients are con-
_______________
57 Supra note 20 at p. 29.
58 Supra note 20 at p. 23. Jesus Sacred Heart College distinguished an
educational institution from a charitable institution: “More important still, the law
applied in the case relied upon by [the BIR] exempted from taxation only such
educational institutions as were established for charitable or philanthropic purposes.
Consequently, the amount of fees charged or the intent to collect more than the
cost of operation or instruction was material to the determination of such
purpose. Upon the other hand, under Section 27(e) of [the old] National Internal
Revenue Code, as amended, an institution operated exclusively for educational
purposes need not have, in addition thereto, a charitable or philanthropic character, to
be exempt from taxation, provided only that no part of its net income ‘inures to the
benefit of any private stockholder or individual.’” (Italics in the original; emphasis
supplied)
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59 Italics supplied.
93
SO ORDERED.
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60 See CTA First Division Decision dated 23 February 2009. Rollo (G.R. No.
195909), p. 69.
61 533 Phil. 101; 501 SCRA 450 (2006).
62 Id., at pp. 108-109; p. 460.
** Designated Acting Member per Special Order No. 1308 dated 21 September
2012.
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――o0o――
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