BIR Ruling [DA-447-05]

October 28, 2005 BIR RULING [DA-447-05] De Mesa Zaballero & Partners Law Offices Suite 2602, 26th Floor, The Atlanta Centre No. 31 Annapolis Street, Greenhills 1500 San Juan, Metro Manila Attention: Attys. Priscilla F. Zaballero, Maria Theresa C. San Pablo and Mayah S. Ongtangco Gentlemen : This refers to your letter dated August 03, 2005 requesting confirmation of your opinion that Kostka School Quezon City, Inc. ("Kostka Quezon City") and Kostka School of Marikina, Inc. ("Kostka Marikina"),hereinafter collectively referred to as "Kostka Schools",being non-stock non-profit educational institutions, are exempt from final tax on their interest income from bank deposits and yield from deposit substitute instruments. It is represented that Kostka Quezon City is a non-stock, non-profit educational institution duly recognized by the Department of Education and Commission on Higher Learning to conduct and operate a Bachelor of Elementary Education Course and a Bachelor of Secondary Education Course, as per Government Recognition Nos. E-0008 Series of 1992 and S-002, Series of 1994, respectively; that it is duly registered with the Securities and Exchange Commission on October 10, 1996 under SEC Registration No. 151865; It is further represented that the purposes for which Kostka Quezon City is incorporated are to organize, manage and maintain an elementary school and a high school that develop its students according to their level of maturity, in order to equip its students with the basic tools of knowledge, understanding, skills, habits, attitudes and values which are immediately needed for secondary and college education, and eventually for higher levels of education, as well as for life-long use; that it was likewise incorporated to organize, manage and maintain research activities related to elementary and high school education, develop and publish print and non-print educational materials, and to develop and implement training programs for elementary and high school personnel. On the other hand, it is represented that Kostka Marikina is also a non-stock, non-profit educational institution duly recognized by the Department of Education and Commission on Higher Learning to conduct and operate an educational institution, with courses for the nursery and kindergarten level, as well as complete elementary and secondary courses, pursuant to Government Recognition Nos. P-102 Series of 2003, E-008 Series of 2002 and S-007 Series of 2003, respectively. It is likewise registered with the Securities and Exchange Commission on 26 October 1995 under SEC Registration No. AN09504041. It is represented as well that the purposes for which Kostka Marikina is incorporated are similar with the purposes for which Kostka Quezon City was incorporated, i.e. to organize, manage and maintain an elementary school that develop its students according to their level of maturity, in order to equip its students with the basic tools of knowledge, understanding, skills, habits, attitudes and values which are immediately needed for secondary and college education, and eventually for higher levels of education, as well as for life-long use. It was likewise incorporated to organize, manage and maintain research activities related to elementary and high school education, develop and publish print and non-print educational materials, and to develop and implement training programs for elementary and high school personnel. 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." 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 on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. Such being the case, under Finance Department Order No. 149-95 dated November 24, 1995 amending Finance Department Order No. 137-87, and Revenue Memorandum Circular No. 76-03 dated November 14, 2003, any interest income derived by Kostka Quezon City and Kostka Marikina from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of its purpose as educational institutions, are exempt from the 20% final tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997, subject to their compliance with the condition that as tax-exempt educational institutions, both institutions shall, on an annual basis, submit to the Revenue District Offices concerned an annual information return and duly audited financial statements together with the following: (a) Certification from their respective 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 Section 27(D)(1) of the Tax Code of 1997; (b) Certification of actual utilization of their respective income; and (c) Board Resolution by their respective 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; BIR Ruling Nos. [DA-017-99] dated January 11, 1999; [DA-144-97] dated April 4, 1997; [DA-103-03], dated April 2, 2003). 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service