BIR Ruling [DA-504-06]

August 18, 2006 BIR RULING [DA-504-06] 34 (A) (2); 074-85 Tan & Busmente 7th Floor, BPI Building, Plaza Cervantes Binondo, Manila Attention: Atty. Rufino R. Tan Counsel Gentlemen : This refers to your letter dated July 12, 2006 stating that your client, University of the East (UE), is an educational institution operating under Philippine Laws and Rules and Regulations promulgated by the Department of Education and Commission on Higher Education; that UE has an unfinished building for expansion of its facilities as of March 31, 2003, end of the fiscal year starting April 1, 2002; that UE deducted from its gross income from said fiscal year the total cost of the construction of a school building amounting to P162,508,808.00; and that UE chose and adopted accelerated depreciation under Section 34(A)(2) of the Tax Code of 1997 by deducting outright total costs and expenses incurred or paid for the building, provided that what was already deducted will not again be deducted in the succeeding year. In connection therewith, you now request for an opinion as to whether or not UE is allowed to deduct outright the total costs and expenses incurred or paid for the construction of the said building pursuant to Section 34(A)(2) of the Tax Code of 1997. In reply thereto, please be informed that Section 34(A)(2) of the Tax Code of 1997 provides that "(2) Expenses Allowable to Private Educational Institutions . In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof." In BIR Ruling No. 074-85 dated May 21, 1985 , this Office ruled that ". . . Section 30(a)(3) of the Tax Code as amplified by BIR-MECS Regulations No. 6-84 in addition to the business expenses allowable as deductions, a private educational institution, whether stock or non-stock, shall also be allowed to deduct from its gross income, expenses incurred during the taxable year relating to the expansion of school facilities. . . ." Thus, the term "school facilities" refers to land, buildings and other civil work or improvements, library facilities, machineries, equipment and instruments including their cost of installations provided that such facilities shall be used solely to pursue the expansion activities of the school. (BIR-MECS Regulations no. 6-84) On the other hand, the term "expansion of school facilities" refers to the acquisition, development or improvement of school facilities. ( supra ) DHTCaI SUCH BEING THE CASE, this Office holds that in applying the above-cited section of the Tax Code in relation to the cited BIR Ruling, this Office holds that UE is allowed to deduct outright the total costs and expenses incurred for the construction of the building. However, it should be emphasized, that where the said expenses have been claimed as deductions, no further claim for yearly depreciation of the said building will be allowed. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service