FACTS: St. Luke’s Medical
Center, Inc. is a hospital organized as a non-stock and non-profit corporation.
The BIR assessed St. Luke’s deficiency taxes for 1998, comprised of
deficiency income tax, value-added tax, withholding tax on compensation and
expanded withholding tax. St. Luke’s filed an
administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of
the NIRC. Thus, St. Luke’s appealed to the CTA.
BIR’s contentions: The BIR argued before
the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax
rate on the income of proprietary nonprofit hospitals, should be applicable to
St. Luke’s. According to the BIR, Section 27(B), introduced in 1997, “is a new
provision intended to amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of the 1997
Tax Code x x x.” It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock,
non-profit charitable institutions and civic organizations promoting social
welfare. The BIR claimed that St. Luke’s was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes. Moreover, the
hospital’s board of trustees, officers and employees directly benefit from its
profits and assets.
St. Luke’s contention: St. Luke’s contended
that the BIR should not consider its total revenues, because its free services
to patients was P218,187,498 or 65.20% of its 1998 operating income. St. Luke’s
also claimed that its income does not inure to the benefit of any individual.
St. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of the NIRC.
It argued that the making of profit per se does not destroy its income tax
exemption.
ISSUE/S: Whether St. Luke’s is liable for deficiency income tax in
1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of
10% on the income of proprietary non-profit hospitals.
RULING:
There is no dispute that St. Luke’s is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke’s
from paying taxes. This only refers to the organization of St. Luke’s. Even if
St. Luke’s meets the test of charity, a charitable institution is not ipso facto
tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of
the Constitution requires that a charitable institution use the property
“actually, directly and exclusively” for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution
must be “organized and operated exclusively” for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be “operated exclusively” for social welfare.
However, the last paragraph of Section 30 of
the NIRC qualifies the words “organized and operated exclusively.”
Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or
personal, or from any of their
activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code
In short, the last paragraph of Section 30
provides that if a tax exempt charitable institution conducts “any” activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the
“[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable x x x
purposes x x x.” It likewise qualifies the requirement in Section 30(G) that
the civic organization must be “operated exclusively” for the promotion of
social welfare.
Thus, even if the charitable institution must
be “organized and operated exclusively” for charitable purposes, it is
nevertheless allowed to engage in “activities conducted for profit” without
losing its tax exempt status for its not-for-profit activities. The only
consequence is that the “income of
whatever kind and character” of a charitable institution “from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be subject to
tax.”
In 1998, St. Luke’s had total revenues of
P1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 billion from paying patients is not
an institution “operated exclusively” for charitable purposes. Clearly,
revenues from paying patients are income received from “activities conducted
for profit.” Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a “purpose to make profit
over and above the cost” of services.
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 concerned. This
ruling is based not only on a strict interpretation of a provision granting tax
exemption, but also 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).
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