BIR Ruling [DA-103-03]

April 2, 2003 BIR RULING [DA-103-03] Bulacan State University Marcelo H. del Pilar College of Law Malolos City Attention: Dr. Rosario Pimentel President CA Justice Jose C. De La Rama (Ret.) Dean Gentlemen : This refers to your letter dated March 14, 2003 requesting for exemption from the payment of income tax and the filing of the corresponding income tax return under Sec. 4(3), Art. XIV of the 1987 Philippine Constitution; and donor's tax on whatever contributions made by a resident to the Bulacan State University under Section 101(A)(3) of the Tax Code of 1997. It is represented that Republic Act No. 7665, otherwise known as "An Act Converting The Bulacan College of Arts and Trades in the Province of Bulacan Into a State University to be known as The Bulacan State University"; and that it is organized, among others, (C) [t]o receive in trust legacies, gifts and donations of real and personal properties of all kinds and to administer and dispose the same when necessary for the benefit of the University and subject to the limitations, directions, and instructions of the donor, if any. Such donations shall be exempt from all taxes and shall be considered as deductible items from the income tax of the donor: Provided, that such donation shall not be disposed, transferred or sold. 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. The Bulacan State University 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 institution of its 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, the Bulacan State University, being a non-stock, non-profit educational institution, is exempt from taxes 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: DTAESI (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 under 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 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, it is constituted as a withholding agent for the government 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 the Bulacan State University, to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. ( BIR Ruling No. ENPS-049-2001 dated December 21, 2001 ) Moreover, since the Bulacan State University is an entity created by law (R.A. No. 7665), which is not conducted for profit, any donation made to the Bulacan State University is exempt from the payment of donor's tax pursuant to Section 101(A)(3) of the Tax Code of 1997. Finally, Section 34(H)(2)(a) of the Tax Code of 1997 provides that donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to be used in undertaking priority activities in education shall be deductible in full from the gross income of the donor for income tax purposes subject to the conditions set forth under the afore-quoted provisions of the said Code. Accordingly, any donation to be received by the Bulacan State University shall be deductible in full from the gross income of the donor. ( BIR Ruling No. 062-99 dated May 5, 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service