BIR Ruling [DA-283-04]

May 24, 2004 BIR RULING [DA-283-04] Sec. 27 (D) (l); BIR Ruling No. 13-02 Bureau of the Treasury Intramuros, Manila Attention: Ms. Mina C. Figueroa Officer-In-Charge Gentlemen : This refers to your faxed letter dated May 23, 2003 requesting for a clarificatory ruling on the issue of whether or not the yield on investment in Government Securities (e.g. Treasury Bills/Retail Treasury Bonds) of tax-exempt educational institutions are exempt from the 20% Final Withholding Tax imposed under Section 27(D)(l) of the 1997 Tax Code. It is represented that Ateneo de Davao University and Davao Medical School Foundation, both representing to be tax-exempt educational institutions, are registered holder of Retail Treasury Bonds (RTBs) issued by the Republic of the Philippines, through the Bureau of the Treasury (BTr); that upon payment of the quarterly coupons due said RTBs, the BTr withheld the 20% final tax since it has no way of determining whether or not subject tax-exempt educational institutions are or would actually, directly and exclusively use the interest income/yield from the RTBs for educational purposes; and that the tax withheld was however, deposited in an escrow account pending receipt from BIR of the requested clarificatory ruling on the matter. In reply; please be informed that pursuant to paragraph 3, Section 4, Article XIV of the 1987 Constitution, viz : "(3) 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. . . ." BIR Ruling No. 248-88 dated June 6, 1988 citing BIR Ruling No. 2-88 clarified that the exemption under Section 4(3), Article XIV of the 1987 Constitution refers to internal revenue taxes and customs duties, in appropriate cases, imposed by the national government on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. Non-stock, non-profit educational institutions are 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. They shall, however, be subject to internal revenue taxes on income from trade or business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose or function (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). 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 1997 Tax Code 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: SEAHcT 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 by Sec. 27(D)(1) of the 1997 Tax Code; 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 the 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; ENPS-012-98 dated November 25, 1998; and BIR Ruling No. 46-00 dated September 26, 2000) As early as July 4, 1990, this Office ruled in BIR Ruling No. 130-90 that while interest income from Philippine currency bank deposits is exempt from the 20% final withholding tax, earnings or yield realized by Asian Social Institute, a non-stock, non-profit educational institution, from its passive investment arising from deposit substitute instruments, e.g. money market placements, treasury bills, etc., not having been derived from any activity the conduct of which is not related to the performance by such educational institution of its educational purpose or function are subject to the 20% final tax. In the case of investments in shares of stock, the conduct of said activity is not also related to the performance of its purpose as an educational institution; hence, the gains derived from the sale, exchange or disposition thereof is subject to the capital gains tax imposed under Sec. 27(D) of the 1997 Tax Code. In BIR Ruling No. 13-02 dated January 30, 2002, this Office ruled that Southeast Asian Regional Center for Graduate Study and Research in Agriculture, a non-stock, non-profit educational institution, is exempt from payment of the 20% final tax on interest earnings derived from treasury bonds, treasury bills and other bank notes also form part of its assets used for educational purposes in conformity with the dictum of the Court of Tax Appeals in CTA Case No. 4982 entitled Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA) vs. Commissioner of Internal Revenue . As such, it is exempt from tax by virtue of the proviso of paragraph 3, Section 4, Article XIV of the 1987 Constitution. Corollary to this, this Office ruled in BIR Ruling No. 46-00 dated September 26, 2000 that the income derived from investments in Treasury bills and time deposit accounts which are made and maintained by the University of the Philippines to fulfill the educational purposes for which it was created is exempt from income tax. In view of the foregoing, it is the opinion of this Office that the yield on investment in Government Securities (e.g. Treasury Bills/Retail Treasury Bonds) of tax-exempt educational institutions form part of their assets. Accordingly, said income is exempt from tax and consequently, to the 20% final withholding tax imposed under Section 27(D)(1) of the 1997 Tax Code by virtue of the proviso of paragraph 3, Section 4, Article XIV of the 1987 Constitution. However, the institution concerned must secure a ruling with this Office through a letter-request indicating therein how and where the said income will be used and attaching pertinent documents to prove the same. The Revenue District Office concerned shall conduct the necessary investigation to ascertain the truth of the facts as represented in the letter-request and determine compliance by the institution with the same requirements as set forth under Finance Department Order No. 149-95. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group