BIR Ruling [DA-373-04]

July 5, 2004 BIR RULING [DA-373-04] par. 3, Sec. 4, Art. XIV, 1987 Constitution BIR Ruling No. ENPS-12-98 Philippine National Bank Mandaluyong Branch Attention: Ms . Ofelia H. Daway Business Manager Gentlemen : This refers to your letter dated May 25, 2004 requesting on behalf of Sisters of Mary of Banneux, Inc .for a ruling exempting it from the payment of the final withholding tax on interest income from its bank deposits with you. It is represented that Sisters of Mary of Banneux, Inc. is a non-stock, non-profit educational institution with principal address at No. 1000 corner Cordillera Sts.,Sta. Mesa, Manila; and that the ruling will be used to comply with the requirements of your product, the TIER 2 Capital, which was offered last February 2004. In reply, 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. ..." Non-stock, non-profit educational institutions are exempt from taxes on all revenues derived in pursuance of their 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 of which is not related to the exercise or performance by such educational institution of their educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Such being the case, Sisters of Mary of Banneux, 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. 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. Moreover, under Department Order No. 149-95 dated November 4, 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 the 20% final tax imposed by Section 27(D)(1) of the Tax Code of 1997 and the seven and one-half percent (7 1/2%) interest income under the expanded foreign currency deposit system imposed by Section 24(B)(1) of the same 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 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 tax imposed by Section 27(D) 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. STcaDI 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