BIR Ruling

February 21, 1969 Hon. Onofre D. Corpuz Chairman Private Education Assistance Committee Department of Education Arroceros St., Manila S i r : This refers to your letter dated December 12, 1968 requesting a ruling on the following questions, viz: Whether or not the income derived from investments into which the "Fund for Assistance for Private Education" created by Executive Order No. 156 dated November 5, 1968, may be channelled, is exempt from the payment of taxes; and whether or not the grants by the Private Education Assistance Committee to private education as well as the grants received by the said Committee from private donors are subject to gift taxes. aisadc It appears that pursuant to a "Project Agreement" entered into on June 11, 1968, between the Government of the Republic of the Philippines and the Government of the United States of America, executed in accordance with the "Exchange of Notes" between said Governments the sum of $6,154,000 U.S. currency from the Special Fund for Education authorized by the United States Public Law 88-94, will be made available as a "Fund for Assistance to Private Education" (hereinafter called the Fund) for the purpose of providing a permanent trust fund to finance various programs of assistance to private education; that for this purpose, it is required that the Fund be constituted as an irrevocable trust fund to be managed and administered by a "Private Education Assistance Committee"; that in carrying out this objective, the President of the Philippines constituted the Fund as an irrevocable trust fund under Executive Order No. 156; that the principal of the Fund shall consist of the aforesaid sum of $6,154,000, U.S. currency, or its Philippine peso equivalent; that to insure the enduring character of the Fund, the principal thereof shall be maintained intact but may be augmented from time to time by grants, donations and other lawful transfers by the Government of the Republic of the Philippines or any other public or private entity, the disposition of the income of which shall be governed by the terms and conditions outlined in said Executive Order; that the Fund shall be managed so as to maximize its earnings and in a prudent manner consistent with its character as a perpetual trust; that the Fund shall be established for the purpose of financing programs of assistance to private education utilizing only the earnings thereof, whether in the form of interests, dividends, or capital gains, through grants and/or loans for faculty training and development in the form of scholarship, research grants, faculty incentives, inter-institutional cooperative projects, and other programs of benefit to private education, but excluding any support of religious worship or instruction; that a Committee which will serve as the trustee of the Fund and in this capacity shall administer, manage and supervise the operations of the Fund, which shall be known as the "Private Education Assistance Committee" (hereinafter called the Trustee) is created and shall be composed of the Secretary of Education or his representative as Chairman, and with a representative from the National Economic Council, the Catholic Association of the Philippines, the Association of Christian Schools and Colleges and the Philippine Association of Colleges and Universities, as members; that in order to insure the enduring character of the trust fund, the Government of the United States of America and the Government of the Republic of the Philippines have mutually agreed that the said trust fund shall be operated strictly as a capital fund for investment and re-investment; that the same shall be maintained intact, with only the net earnings of the Fund being authorized to be utilized for financing programs of assistance to private education but excluding any support of religious worship or instruction; that the Fund shall be deemed to have "net earnings" that may be earmarked or disbursed for financing programs of assistance of private education if as at determination date the total of the cash on hand and in bank, the market value of the investment then held, after adjusting for accrued expenses as of that date, be in excess of the dollar value of its peso equivalent of the trust fund or as such fund may be augmented; that the dollar value or its peso equivalent of such excess shall be the maximum level of funds that may be earmarked or disbursed for financing programs of assistance to private education for the period immediately following a determination date at which until the succeeding determination date; that in order to provides a hedge against the impairment of trust fund, the trustee shall, as far as practicable, refrain from committing funds for programs of assistance for private education in excess of 90% of such net earnings; and that the trust fund constituted may be augmented from time to time by grants, donations or other lawful transfer by the Government of the Republic of the Philippines or any other public or private entity, the disposition of the principal and/or income of which shall likewise be governed by the provision of Executive Order No. 15, or by such special terms and conditions as may be imposed in the particular deed, bequest or other instrument or transfer conveying such grants, donations, or other transfer, and agreed to by the Trustee. Any unused earnings may be capitalized to increase the principal of the Fund. In this connection, I have the honor to inform you that pursuant to Section 29(b)(7)(B) of the National Internal Revenue Code, income from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof, shall be exempt from taxation. The "Fund for Assistance to Private Education" was created by the President of the Philippines on November 5, 1968 by virtue of Executive Order No. 156. The creation of the "Fund" is the implementation of the "Project Agreement" entered into on June 11, 1968 between the Government of the Republic of the Philippines and the Government of the United States of America, the prime purpose of which is the financing of various program of assistance to private education. The "Fund" having been created by the President in the exercise of his governmental function, and for a public purpose, all the income accruing to the said "Fund" from its various investments shall be exempt from income tax by virtue of the afore-quoted provision of law. Furthermore, grants, donations, and other lawful transfer by the Government of the Republic of the Philippines or any other public or private entity to the Fund shall be exempt from gift taxes under Section 12(a)(3) of the Tax Code. Likewise, the assistance which shall be extended by the Trustee in the form of grants to stock or non-stock educational corporations and to non-stock, non-profit associations shall be exempt from gift tax. In view of the foregoing facts, this Office believes and so holds that the income derived from investments into which the "Fund" for Assistance to Private Education" may be channelled is exempt from the payment of income tax; in addition, the grants, donations and contributions received by it from public or private sectors, as well as the grants extended by it to private education are likewise exempt from payment of gift taxes. LLphil Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue