Diaz Murillo Dalupan & Company

January 25, 2008 BIR RULING [DA-046-08] Sections 30, 109 (H); BIR Ruling No. 149-95; DA-283-04; S30-040-02 & 027-2003 Diaz Murillo Dalupan & Company 5/F, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village, Makati City Attention: Mr. Willie B. Santiago Assistant Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated October 4, 2007 requesting in effect for a ruling exempting your client, the Consolidated Training Systems, Inc. ("CTSI") [formerly Maritime Resources Foundation, Inc.], from the payment of taxes under Sections 30 and 109 (H) of the Tax Code of 1997, as amended. As represented, CTSI is a non-stock, non-profit organization existing under the laws of the Republic of the Philippines. CTSI was incorporated on July 26, 1999 with the Securities and Exchange Commission (SEC) under SEC Registration No. 126533. The primary purpose for which it was incorporated is "to engage in, conduct and/or offer formal and non-formal education and training, degree and related courses for seamen and seafarers and for graduates of nautical, maritime transportation and marine engineering degrees and safety and related courses and seminars for the petroleum offshore industry (as amended on 26 February 1999); to establish and maintain free training programs for deserving students who graduated from any public or private Nautical Schools; to support, establish and maintain training center facilities and/or libraries for the forgoing purposes and to publish and disseminate the findings derived from legal researchers and studies conducted by the Foundation with the right to acquire, hold, own, use, lease, sell or dispose of copyrights, licenses, patents or similar privileges or rights in connection therewith. . . ." CTSI is accredited with the Maritime Training Council (MTC) and was granted permits to offer and operate basic maritime training courses as indicated therein. AaDSEC In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz .: "(3) 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. . . ." The exemption under Section 4 (3), Article XIV of the 1987 Constitution refers to internal revenue taxes and customs duties, in appropriate cases, 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 (BIR Ruling No. 248-88 dated June 6, 1988). Likewise, in recognition of the foregoing provision of the Constitution, Section 30 (H) of the Tax Code of 1997, as amended, specifically exempts a non-stock, non-profit educational institution from income tax. As a non-stock, non-profit educational institution, CTSI, therefore, is exempt from tax on all revenues derived in pursuance of its purpose as an educational institution. However, CTSI is subject to internal revenue taxes on income from trade or business or other activity the conduct of which is not related to the exercise or performance of its educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, as amended, 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 1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27 (D) (1) of the 1997 Tax Code 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 1/2% tax on interest income under the expanded foreign currency deposit system imposed by Sec. 27 (D) (1) of the 1997 Tax Code; b) Certification of actual utilization of the said income; and ADaSEH 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; ENPS-012-98 dated November 25, 1993; BIR Ruling No. 46-00 dated September 26, 2000; and BIR Ruling No. DA-283-04 dated May 24, 2004). SHacCD On the other hand, CTSI's gross receipts from operations as a non-stock, non-profit educational institution are exempt from VAT pursuant to Section 109 (H) of the Tax Code of 1997, as amended. However, this exemption does not extend to other activities involving sale of goods and services which are subject to VAT imposed under Section 106 of the same Code. Hence, as long as CTSI will not engage in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, CTSI will remain exempted from VAT (BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. DA-040-02 dated March 7, 2002; and BIR Ruling No. S30-027-2003 dated November 21, 2003). On the other hand, CTSI's purchases, i.e., materials for repairs of its facilities, are subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended. Such tax payment may legitimately be passed on to customers like non-stock, non-profit educational institutions (BIR Ruling No. 248-88 dated June 6, 1988). 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, or that the requirements herein stated are not complied with, then this ruling shall be considered null and void. cDTCIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service