BIR Ruling [DA-093-03]

March 25, 2003 BIR RULING [DA-093-03] Sec. 30 (H) Sec 30-12-2002 Bureau of the Treasury Department of Finance Intramuros, Manila 1002 Attention: Mr. Eduardo S. Mendiola Deputy Treasurer of the Philippines Gentlemen : This refers to your letter dated November 12, 2002 requesting for a clarification as to whether the income from the investments in government securities by educational institutions like the Ateneo de Davao University and Davao Medical School Foundation are subject to the 20% final tax. It is represented that the Ateneo de Davao University and Davao Medical School Foundation are both non-stock, non-profit educational institutions based on BIR Ruling No. 237-87; that these educational institutions have investments in Retail Treasury Bonds; that the Bureau of the Treasury has no means of knowing if the interest income from the RTB holdings of said entities are used actually, directly or exclusively for educational purposes; and that the Bureau of the Treasury withheld the 20% final tax on said income last September 27, 2002 and deposited this in an escrow account. 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 and in certain cases to local taxes imposed by local government units under the Local Tax Code 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, Ateneo de Davao University and Davao Medical School Foundation, being a non-stock, non-profit educational, institutions, are exempt from taxes and duties on all its revenues and assets used actually, directly and exclusively for educational purposes which includes customs duties and value added tax on its importation of equipment to be actually, directly and exclusively used for educational purposes. (BIR Ruling No. 009-90 dated January 31, 1990) 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 and 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 7.5% tax on interest income under the expanded foreign currency deposit system imposed by 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 statements together with the following: a) Certification from their depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax and 7.5% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(I) 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 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 (Section 4, Finance Department Order No. 137-87). 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 expanded withholding tax on income payments to persons subject to tax pursuant to Section 57(B) of the Tax Code of 1997. EcTCAD 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 Ateneo de Davao University and Davao Medical School Foundation to determine compliance with the conditions set forth in the Certificate of Tax Exemption and tax liabilities, if any. (BIR Ruling No. ENPS-001-99 dated January 14, 1999) 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