BIR Ruling [DA-072-04]

February 16, 2004 BIR RULING [DA-072-04] Section 30; BIR Ruling No. 15-95; 23-97 and 114-97 Asian Institute of Management Eugenio Lopez Foundation Bldg. Joseph R. McMicking Campus 123 Paseo de Roxas, Makati City Attention: Mr. Felipe B. Alfonso Co-Vice Chairman, Board of Trustees Gentlemen : This refers to your letter dated November 20, 2003 requesting for a confirmation of your opinion that the interest being received by Aim Scientific Research Foundation (AIM SRF) from the financial assistance it has provided to Asian Institute of Management (AIM) will not be subject to the imposition of income tax on the basis that the character of the aforesaid transaction is not an activity conducted for profit. It is represented that AIM SRF is a non-stock, non-profit organization registered with the Securities & Exchange Commission (SEC) in 1968. It was organized for the following purposes, among others: [i] to promote, encourage, sponsor and/or initiate scientific research and development projects in any or all of the following fields: industry, agriculture, health sciences, biological and physical sciences, atomic energy, food and nutrition, engineering and/or social sciences, and humanities; [ii] to establish, set up and/or maintain scholarship or professional chairs in order to foster, promote and encourage the study and improvement of fundamental or pure research, applied research, developmental work and/or economic evaluation in any or all of the following fields: industry, agriculture, health sciences, biological and physical sciences, atomic energy, food and nutrition, engineering and/or social sciences or humanities; and [iii] to build, improve, enlarge, or equip or to cause the building, improvement, enlarging or equipping of building, libraries, laboratories, workshops or other educational accessories required for scientific research. AIM SRF's funding requirements are maintained through contributions, donations, bequests and/or endowments. It also accepts sponsorships from individual benefactors, international organizations, private foundations and government. No part of its net income inures to the benefit of any private individual or member. AIM, likewise, is a non-stock, non-profit organization registered with the SEC also in 1968. Among others, the purposes for which AIM was organized are as follows: [i] to promote and encourage the advancement of industrial and management sciences in the Philippines and scientific research directed toward benefiting the public, through the organization; [ii] establishment and maintenance of a progressive institute of learning of high academic standards; [iii] to foster, promote, and encourage the study and improvement of industrial, technological and management sciences and scientific research based on programs and activities that deal in and with problem areas of genuine concern to the industrial and business communities, particularly as related to management sciences, including but not limited to computer sciences, operations research, industrial engineering sciences, industrial and management accounting and other industrial and management sciences; [iv] to improve and develop the overall quality of professional management in the Philippines and in other neighboring countries in order to provide the academically trained men and women to occupy top management positions in the business and industrial sectors; and [v] to achieve the promotion of industrial and management sciences through financial support, scholarships, donations and other forms of financial aid and assistance out of the funds of the institute. The funding needs of AIM are sustained through contributions, donations, bequests and/or endowments, and sponsorships. As a non-stock, non-profit organization, no part of its net income inures to the benefit of any of its members or private individual. In consideration of the alignment of the objectives between the two (2) organizations and in accord with the mandates of AIM SRF, the latter consistently provides AIM support for its undertakings parallel and in harmony with the thrusts of AIM SRF, by way of financial assistance and grants. In December 2001, towards providing AIM relief from the heavy burden of financing payment for its external debts incurred for the construction of its building facility which houses the libraries, laboratories, workshops and other educational accessories required for scientific research, AIM SRF granted financial assistance to AIM. As AIM SRF took out the aforesaid financial assistance from the sponsorships and donations it has obtained from other sources, such take-out is subject to the requirement that the funds will have to be used judiciously with an end-view of obtaining returns thereto to increase the funds reservoir that will help support the furtherance of the objectives of AIM SRF (including providing support to AIM). In view thereof, the financial assistance granted to AIM was made subject to certain conditions, i.e. , re-payment and interest payment, among others. The charging of interests is not intended for AIM SRF to realize profits from the financial support extended to AIM but for AIM SRF to faithfully comply with the terms of sponsorships and donations from which the financial assistance was taken out as well as conserve the funds of AIM SRF. The interests realized from the transaction had never been collected by AIM SRF as such interests are immediately assigned to AIM to support its operational requirements. Thus, the transaction between AIM SRF and AIM is devoid of any character suggesting income-activity on the part of AIM SRF. In reply, please be informed that the last paragraph of Section 30 of the Tax Code of 1997, is very emphatic when it states that "the income of whatever kind or character of such organizations from any of their properties, real or personal ( i.e. , interest income/yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements), or from any of their activities conducted for profit regardless of the disposition of such income, shall be subject to tax imposed under the Tax Code (BIR Ruling No. 15-95 dated February 9, 1995 and BIR Ruling No. 023-97 dated March 10, 1997) . Income, in the broad sense, means all wealth which flows into the taxpayer other than a mere return of capital. It includes the forms of income specifically described as gains and profits (Section 36, Revenue Regulations No. 2). Interest which is the compensation paid for the use of money ( Sayles v Commissioner of Corporation & Taxation , 286 Mass 102, 189 NE 579, 91 ALR 1267) is taxable income (Ballentine's Law Dictionary). However, if as represented AIM SRF will not derive income because the charging of interests is intended for AIM SRF to faithfully comply with the terms of sponsorships and donations from which the financial assistance was taken out as well as conserve the funds of AIM SRF; and no consideration is involved, the interests realized from the transaction never having been collected by AIM SRF as such interests since they are immediately assigned to AIM solely for the purposes for which AIM was organized i.e. , to support its operational requirements, the transaction is not subject to income tax. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group