BIR Ruling [DA-144-97]

April 4, 1997 BIR RULING [DA-144-97] Our Lady of Unity Parochial School, Inc. 11th St., UPS-V, Sucat Paraaque, Metro Manila Attention: Rev . Fr . Nestor P . Fajardo Parish Priest/School Director Gentlemen : This refers to your letter dated September 15, 1995, requesting for exemption as a non-stock nonprofit educational institution pursuant to Section 4(3) Article XIV of the Philippine Constitution as implemented by Finance Department Order No. 137-87, as amended. Documents submitted to this Office disclosed that OUR LADY OF UNITY PAROCHIAL SCHOOL, INC. is a non-stock, non-profit adjucational foundation which was incorporated and duly registered with the Securities and Exchange Commission under SEC Reg. No. ANO94-000030 dated January 04, 1994 or the following purposes: cdt "That the primary purpose for which said corporation is formed is to teach religion, morals, arts, sciences and other studies and courses of instruction; to grant certificates and diplomas for completion for such courses under such rules and regulations as may from time to time be promulgated by the Board of Trustees and the Department of Education, Culture and Sports; to foster Catholic formation, character education and civic consciousness in students with a view of moulding them into upright and responsible members of the community, aware of their duties, rights, dignity and destiny as human beings created in the image of their Creator; and "That the secondary purpose for which the Corporation is formed is to provide auxiliary services incident to its primary purpose, such as book and school supplies, canteen and transportation services exclusively for its students, faculty and non-academic staff." that no income, pecuniary or otherwise, shall inure to the benefit of the members, being a non-stock, non-profit corporation. In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Philippine Constitution provides, viz: "All revenues and assets of non-stock, non-profit institutions used actually directly and exclusively for educational purposes shall be exempt from taxes and duties. . . ." The aforementioned Constitution was ratified at a plebiscite held for the purpose on February 2, 1987. Accordingly, the tax exemption privileges of non-stock, non-profit educational institutions took effect as of said date. Non-stock, non-profit institutions/foundations are exempt from tax on all revenues derived in pursuance of their objectives as educational institutions and used actually, directly and exclusively for educational purposes. The exemption herein contemplated refers to internal revenue taxes and customs duties, in appropriate cases, imposed by the National Government and in certain cases to local taxes imposed by the Local Government Units under the Local Government 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 which is not related to the exercise or performance by such educational institutions of their educational performance by such educational institutions of their educational purposes or function. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Such being the case, Our Lady of Unity Parochial School, Inc., being a non-stock, non-profit educational institution, is exempt from taxes and duties on all its revenues and assets used actually, directly and exclusively for educational purposes as of February 2, 1987. However, it shall be subject to internal revenue taxes on its income from trade or 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 Finance Department Order No. 137-87, interest income from Philippine 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 20% final tax imposed by Section 24(e)(1) of the Tax Code, as amended, 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 its depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax imposed by Section 24(e) of the Tax Code, as amended; (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) Likewise, revenues derived from and assets used in the operations 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 . (Department Order No. 137-87). It is understood, in this connection that its tax exemption does not cover certain 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 pursuant to section 72(a), Chapter X, Title II of the Tax Code as implemented by Revenue Regulations No. 6-82 as amended, or the tax on income payments to persons subject to the creditable expanded withholding tax pursuant to Section 50(b) of the Tax Code, as amended, and as implemented by Revenue Regulations No. 6-85 as amended. Furthermore, as a non-stock, non-profit educational institution/foundation, donations in favor of Our Lady of Unity Parochial School, Inc. are exempt from the payment of donor's tax pursuant to Section 94(a)(3) of the Tax Code, as amended, subject to the condition that not more than 30% of the said gifts shall be used for administration purposes. On the other hand, Section 29(h)(2)(C) of the Tax Code, as amended by Batas Pambansa Blg. 45, as implemented by BIR-NEDA Regulations No. 1-81, as amended by Revenue Regulations Nos. 1-82 and 10-82 provides that donations to a private foundation which means a non-profit corporation or association organized and operated exclusively for scientific, research, educational . . . purposes or a combination thereof, no part of the net income of which inures to the benefit of any private individual shall be deductible in full from the taxable business income of the donor. However, under Section 29 of the Tax Code as amended by Republic Act No. 7496 (An Act Adopting the Simplified Net Income Taxation Scheme [SNITS] for the Self-Employed and Professionals Engaged in the Practice of Their Profession), and as implemented by Revenue Regulations No. 2-93, effective July 28, 1992, individuals engaged in business or practice of profession shall only be allowed as deduction from gross income, among others, contributions made to Government and accredited relief organizations for the rehabilitation of the calamity-stricken areas declared by the President . Pure compensation income earners are allowed to deduct from their gross compensation income only their personal and additional exemptions. (SEC. 29, Tax Code) In view thereof, this Office is of the opinion as it hereby holds that for income tax purposes, contributions and donations in favor of the Our Lady of Unity Parochial School, Inc. by individual donors/contributors shall not be deductible from their gross income; and that since the Our Lady of Unity Parochial School, Inc. is a non-stock, non-profit educational foundation, contributions and donations in its favor, shall be deductible in full from the gross income of the corporate donors/contributors. It is requested that a copy of this letter of exemption be attached to the annual information return which you will file on or before April 15, of each year. 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. (BIR Ruling No. 517-A-93 dated December 23, 1993) Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Asst. (Legal Service)