BIR Ruling [DA-071-04]

February 12, 2004 BIR RULING [DA-071-04] 109 (m) ENPS-015-99; 068-2001 Follosco Morallos & Herce Suite 1506, 15th Floor, 88 Corporate Center 141 Valero Street corner Sedeno Street Salcedo Village, Makati City Attention: Atty. Rachel P. Follosco Gentlemen : This refers to your letter dated November 21, 2003 requesting on behalf of your clients University of San Jose-Recoletos, Inc. (USJ-R, Inc.) and University of Negros Occidental-Recoletos, Incorporated (UNO-R, Inc.) for exemption from income tax and value-added tax. It is represented that USJ-R, Inc. and UNO-R, Inc. (Corporations) are non-stock and non-profit corporations duly registered with the Securities and Exchange Commission; that as provided in their Articles of Incorporation, the Corporations are authorized to maintain an educational institution that offers quality Christian community-oriented educational as well as ennobling experience in learning and growing in arts, sciences and professions for which the usual diplomas may be awarded and degrees; certificates and honors conferred; that "USJ-R, Inc. was established primarily to assume the operations of the present University of San Jose-Recoletos (USJR) located in Cebu City, an unincorporated educational institution operated as an independent activity of the Superior de la Corporacion Filipina de Padres Agustinos Recoletos, Inc. (OAR), a corporation sole constituted by the Prior Provincial of the Order of Augustinian Recollects in the Philippines; that USJR offers elementary, secondary and tertiary courses; that on October 22, 2003, the Department of Education approved USJ-R, Inc.'s request to have the government recognitions for elementary and secondary courses of USJR transferred to its name; that on the other hand, UNO-R, Inc. was organized to assume the operations of the present University of Negros Occidental-Recoletos (UNO-R), another school operated as an independent activity of OAR; that UNO-R, Inc. has made a request similar to that of USJ-R, Inc. to the DepEd for the transfer of the government recognitions of UNO-R to its name; that the DepEd has likewise approved said request by UNO-R, Inc. by letter dated September 30, 2003; and that the applications for the transfer of the tertiary level education recognitions of both UNO-R and USJ-R to UNO-R, Inc. and USJ-R, Inc., respectively, are in process before the Commission on Higher Education. 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, University of San Jose-Recoletos, Inc. and University of Negros Occidental-Recoletos, Incorporated, being non-stock, non-profit educational institutions, are exempt from taxes and duties on all their revenues and assets used actually, directly and exclusively for educational purposes. However, they shall be subject to internal revenue taxes on their income from trade, business and other activity the conduct of which is not related to the exercise or performance by such educational institution of their 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. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their 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 University of San Jose-Recoletos, Inc. and University of Negros Occidental-Recoletos, Inc. 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) Moreover, pursuant to Section 109(m) of the 1997 Tax Code, private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission on Higher Education. aEcTDI Accordingly, the gross receipts from the operations of University of San Jose-Recoletos, Inc. and University of Negros Occidental-Recoletos, Inc. are exempt from the 10% VAT. However, this exemption does not extend to their other activities involving sale of goods and services. 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 Assistant Commissioner Legal Service