Request for Tax Exemption of Income Derived from U.P. Investments in Treasury Bills and Time Deposit Accounts

September 26, 2000 BIR RULING NO. 046-00 Sec. 30 (I), NIRC Sec. 4, Art. XIV, 1987 Phil. Const. 000-00 University of the Philippines Quezon Hall, U.P. Campus Diliman, Quezon City Attention: Mr. Francisco Nemenzo President Gentlemen : This refers to your letter dated November 18, 1999 requesting for tax exemption of the income derived from your investments in Treasury bills and time deposit accounts which are made and maintained to fulfill the educational purposes for which the University of the Philippines was created. It is represented that the University of the Philippines (the "University") was created and is operating as an institution of higher learning pursuant to Act. No. 1870, as amended, otherwise known as the Charter of the University of the Philippines; that the University, as an educational institution, does not have shares of stock; that it operates primarily "to provide advanced instruction in literature, philosophy, the sciences, the arts and to give professional and technical advice" (Sec. 2, Act No. 1870, as amended); that practically a majority of programs and projects being undertaken by the University are being utilized to assist the National Government and its various units; and that the University invested in Treasury bills, as well as maintained time deposit accounts, which income therefrom are actually, directly and exclusively used in the furtherance of its primary purpose as stated in its Charter. In reply, please be informed that Section 30(I) of the 1997 Tax Code listed government educational institution as one of the organizations exempt from income tax. Section 30 of the Tax Code pertains to various non-stock, non-profit organizations whose income/revenues received as such are exempt from tax imposed under Title II of the same Tax Code. In relation thereto, paragraph 3, Section 4, Article XIV of the 1987 Philippine Constitution which provides that: "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. cCTESa xxx xxx xxx categorically exempts from taxes and duties all revenues and assets of non-stock, non-profit educational institutions, which are actually, directly and exclusively used for educational purposes. The exemption is limited to a non-stock, non-profit educational institution only. As a non-stock, non-profit government educational institution, UP falls squarely within the purview of the above constitutional provision; hence, it is eligible to avail of the tax exemption granted thereat with respect to its revenues derived in pursuance of its educational purpose and when such revenues are actually, directly and exclusively used therefor. Conversely, the revenue or income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions shall be subject to internal revenue taxes when the same is not actually, directly or exclusively used for the intended purpose/s. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). In connection with your query, Department Order No. 149-95 dated November 24, 1995 amending Finance Department Order No. 137-87 categorically provides that interest income from Philippine currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of the educational purpose for which an educational institution was created, are exempt from the 20% final withholding tax imposed by then Section 24(e) of the Tax Code, as amended (now Section 27(D)(1) of the Tax Code of 1997), subject to compliance with the conditions that as a tax-exempt educational institution, the University 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: a) Certification from its depository banks as to the amount of interest income earned from passive investments not subject to the 20%, final withholding tax imposed by Section 27(D)(1) 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., livelihood projects, health and sanitation program and the like) to be funded out of 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) Likewise, pursuant to Section 32(B)(7)(g) of the 1997 Tax Code, gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with maturity of more than five (5) years, shall also be exempt from income tax. 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. aSIATD Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue