BIR Ruling [DA-510-99]

September 3, 1999 BIR RULING [DA-510-99] Philippine National Bank PNB Financial Center Roxas Blvd., Metro Manila Attention: Ms . Ligaya R . Gagolinan Vice President Gentlemen : This refers to your letter dated August 25, 1998 requesting for a ruling on the taxability of the interest income derived by non-stock, non-profit educational institutions from a depository bank, under the expanded foreign currency deposit system, pursuant to Section 27(D)(1) of Republic Act No. 8424. It is represented that a number of non-stock, non-profit educational institutions maintain peso and foreign currency deposits with your bank; that under Department of Finance Order No. 149-95 dated November 24, 1995, amending Department Order No. 137-87 and Department Order No. 92-88, the interest income derived by non-stock, non-profit educational institutions from their peso deposits is declared to be exempt from taxes provided said income is used actually, directly and exclusively for educational purposes; and that there appears to be sufficient grounds to treat the interest income from FCDU deposits of non-stock, non-profit educational institutions actually, directly and exclusively used for educational purposes as exempt from the 7.5% final income tax. In reply, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Philippine 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. . . ." Accordingly, the interest income derived by an educational institution from a depository bank under the expanded foreign currency deposit system shall be exempt from the 7.5% final tax imposed under Section 27(D) of the Tax Code of 1997, subject to the 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: 1) 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% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D) of the Tax Code of 1997; 2) Certification of actual utilization of said income; and 3) 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 15 th day of the fourth month following the end of its taxable year. (Sec. 4, Finance Department Order No. 137-87). [BIR Ruling No. ENPS-001-99 dated January 14, 1999] However, please take note that educational institutions shall only enjoy such exemption from taxes upon proper verification that they are duly and currently accredited by the Department of Education, Culture and Sports (DECS), or by the Commission on Higher Education (CHED), or by the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing rules and regulations. Thus, an exemption certificate duly issued by this Office is a condition precedent to the grant of the said exemption. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group