Fund for Assistance to Private Education (FAPE) Now Subject to 15% Final Withholding Tax on Interest

March 13, 1985 BIR RULING NO. 036-85 53 (c) (1) 006-84 036-85 Gentlemen : This refers to your letter dated November 19, 1984 requesting confirmation of the tax exempt status and the enjoyment of tax exemption privileges of the Fund for Assistance to Private Education (FAPE) including all its investments, its earnings therefrom, its programs of assistance to and for private education, for faculty development, incentives and benefits undertaken thru the Private Education Retirement Annuity Association (PERAA), for student scholarships and services in the testing requirements of students achievement thru the Center for Educational Measurement (CEM), its investments, grants, support and assistance therefor and earnings therefrom, and any grant, donation or other lawful transfer thereto from the Government or any other public or private entity as well as the assistance extended to private education, its constituent schools, teachers, parents and students in the furtherance of its purposes and objectives. It appears that FAPE was established by virtue of a bilateral agreement between the Government of the Republic of the Philippines and that of the United States of America as a permanent trust fund to finance various programs of assistance to private education; that for this purpose, the President of the Philippines constituted the Fund under Executive Order No. 156 as an irrevocable trust to be managed and administered by a trustee, the Private Education Assistance Committee (PEAC); and that under BIR Ruling dated February 21, 1969, this Office ruled that the income derived from investments into which the "Fund for Assistance to Private Education" may be channeled is exempt from the payment of income tax; in addition, the grants, donations and contributions received by it from public or private sectors, as well as the grants extended by it to private education are likewise exempt from payment of gift taxes. In reply thereto, I have the honor to inform you that pursuant to Section 29(c)(8)(B) of the Tax Code, income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof shall be exempt from taxation. The "Fund for Assistance to Private Education" was created by the President of the Philippines on November 5, 1968 by virtue of Executive Order No. 156. The creation of the FAPE is the implementation of the "Project Agreement" entered into on June 11, 1968 between the Government of the Republic of the Philippines and the Government of the United States of America, the prime purpose of which is the financing of various programs of assistance to private education. Considering that the FAPE was created by the President in the exercise of his governmental function, and for a public purpose, income accruing to the said FAPE from its various investments shall be exempt from income tax pursuant to Section 29(c)(8)(B) of the Tax Code. However, under Sections 21(d) and (24)(cc) of the Tax code as amended by P.D. No. 1959 which took effect on October 15, 1984, a final withholding tax of 15% shall now be imposed on interest income from Philippine currency bank deposits, whether savings or time deposits, and yield or any other monetary benefit from deposits substitutes and from trust fund and similar arrangements. Amending Sections 21(d), 24(cc) and 53(d)(1) of the Tax Code, P.D. No. 1959 has abolished the provisions on : (1) the exemption from the withholding tax if the aggregate amount of the interest at any time during the taxable year does not exceed P1,000 a year or P250.00 per quarter, in the case of Philippine currency bank deposits maintained by an individual, and if the recipient (individual or corporation) of such interest income is exempt from income taxation; and (2) the imposition of the preferential tax rates if the recipient (individual or corporation) of the income is enjoying preferential income tax treatment. The deletion of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the single 15% rate is imposable on all interest incomes, from deposits, deposit substitutes, trust funds and similar arrangement, regardless as to the tax status or character of the recipients thereof. (Revenue Memorandum Circular No. 31-84) Accordingly, FAPE is now subject to the 15% final withholding tax on (1) interest and/or yield on deposit substitute instruments issued beginning October 15, 1984 and (2) interest on savings and time deposits earned or accrued beginning October 15, 1984. (Rev. Regs. No. 17-84) Finally, grants, donations, and other lawful transfer by the Government of the Republic of the Philippines or any other public or private entity to FAPE shall be exempt from gift taxes under Section 123 (a)(3) of the Tax Code. Likewise, the assistance which shall be extended by the trustee in the form of grants to stock or non-stock educational corporation and to non-stock, non-profit associations shall be exempt from gift taxes. cdtech Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner