BIR Ruling [DA-040-02]

March 07, 2002 BIR RULING [DA-040-02] S27 (D) (1) ENPS-001-99 Southville International School 136 Elizalde St., BF Homes Paraaque City Attention: Mr. Jerry A. Aguilar VP for Admin Affairs Gentlemen : This refers to your letter dated October 17, 2001 relative to your request for VAT exemption certificate. It is represented that Southville International School (SIS) is a non-stock, non-profit school organization duly recognized by the Department of Education, Culture and Sports (DECS); that as per Certification issued by Ms. Dinah F. Mindo, Director III, dated November 15, 2001, said Government Recognition is still in force as per Sec. 22 of Manual Regulations, 8th edition, which states that such Certificate of Recognition shall continue to be valid, unless a written order shall have been issued by the Department; that it is duly registered with the Securities and Exchange Commission under SEC Registration No. 162704 dated April 24, 1989; and that the purposes for which the corporation is incorporated are to establish, maintain, manage and operate a private institution of learning and/or school of scholastic and technical training of youths up to elementary level and such other purposes as may be determined by the Board of Trustees and conduct researches, investigations and studies and develop technology for the advancement and development of mental giftedness for children. In reply thereto, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz: "All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties." A non-stock, non-profit educational institution is exempt from tax on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational purposes. The exemption herein contemplated refers to internal revenue taxes imposed by the National Government on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. They shall, however, be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88) Such being the case, Southville International School, being a non-stock, non-profit educational institution, is exempt from taxes and duties on all its revenues and assets used actually, directly and exclusively for educational purposes. However, it shall be subject to internal revenue taxes on its income from trade, business and other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purposes or functions. It may not be amiss to state that under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of its purpose as an educational institution, are exempt from the 20% final tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution it shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997; (b) Certification of actual utilization of the said income; and (c) Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before the 15th day of the fourth month following the end of its taxable year (Sec. 4, Finance Department Order No. 137-87). Moreover, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. In addition thereto, your gross receipts from operations are exempt from the 10% VAT pursuant to Section 109(m) of the 1997 Tax Code provided that you are accredited as such by the Department of Education, Culture and Sports or by the Commissioner on Higher Education. However, this exemption does not extend to your other activities involving sale of goods and services. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, it is constituted as withholding agent for the government required to withhold the tax on compensation income of its employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. Under Section 235 of the Tax Code of 1997, any provision of existing general or special law to the contrary notwithstanding, the Revenue District Officer shall conduct an audit of annual information return filed, the books of accounts and other pertinent records of Southville International School to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. ENPS-015-99 dated December 29, 1999) IASEca This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service