BIR Ruling [DA-184-05]

April 21, 2005 BIR RULING [DA-184-05] Section 30 (H); DA-093-2003 Kawanihan Ng Ingatang-Yaman Department of Finance Intramuros, Manila 1002 Attention: Hon. Eduardo Sergio G. Edeza Treasurer of the Philippines Gentlemen : This refers to your letter dated November 20, 2003 requesting for a clarification on the tax treatment of coupon and/or interest yield in government securities earned by non-stock, non-profit educational institutions from their investments on government securities. It is represented that a number of non-stock, non-profit educational institutions invest in government securities issued by the Republic of the Philippines through the Bureau of the Treasury (BTr, for brevity); that as a pre-requisite for their investment, these tax-exempt institutions submit a certified copy of their Tax Exemption Certificate or Confirmatory Revenue Ruling under which their tax-exempt status is confirmed as well as the extent of their exemption; that while these tax-exempt institutions are by law exempt from taxes and duties on all their revenues and assets used actually, directly and exclusively for educational purposes, doubts normally crop up as, to whether or not their investments in government securities are in pursuance of their educational functions or purposes; that the BTr is not competent to determine a tax-exempt educational institution's compliance with the requirements of Department Order No. 149-95 since the documents required to be submitted therein are filed with the Bureau of Internal Revenue; and that the BTr is observing the policy to withhold the 20% final withholding tax on income or yield from government securities of tax-exempt nonstock, non-profit educational institutions on the ground that it is an income earned not in pursuance of an educational purpose or function, or that it is income earned in an activity or profit. 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, 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. 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 1/2% 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 1/2% 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). 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 non-stock, non-profit educational institution to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. (BIR Ruling No. ENPS-015-2000 dated March 21, 2000) aCHDAE Accordingly, to ensure compliance by a non-stock, non-profit educational institution of the requirements under Department Order No. 149-95, such non-stock, non-profit educational institution should furnish your Office as a prerequisite for their investment, a 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 and a duly notarized certification of actual utilization of the said income. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group