the tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income78 for educational purposes.

the tax exemption granted by the
Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional Commission79 to provide broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in assisting the State provide a public good. The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.82 It may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a component of the tax base in income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair market value of real property is a component of the tax base in real property tax (RPT).87 Also, the landed cost of imported goods is a component of the tax base in VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall be exempted from shall depend on whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually, directly and exclusively used for educational purposes, even if the bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption granted under the Constitution.91 There is no exemption because the asset is not used actually, directly and exclusively for educational purposes. The commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly and exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes, they are exempt from duties and taxes.