Tax Exemption Privilege of Non-Stock, Non-Profit Educational Institutions

March 27, 1989 BIR RULING NO. 047-89 24 (b) 000-00 047-89 Gentlemen : This refers to your letter dated January 20, 1989 requesting a ruling on the following queries: "1. Is our income or surplus balance of our budget exempted from payment of the 10% income tax? "2. Is the profit derived from the sales of textbooks, rentals of lockers exempted from income tax when all such income are used exclusively for the operation of the school? "3. Is the interest earned on our bank placement subject to any tax? "4. Are donation received by the school subject to any tax?" In reply thereto, I have the honor to inform you that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz: "(3) 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. . . ." The aforementioned Constitution was ratified at a plebiscite held for the purpose on February 2, 1987. Accordingly, the tax exemption privilege of non-stock, non-profit educational institutions took effect as of said date. Non-stock, non-profit educational institutions are 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 and customs duties in appropriate cases imposed by the National Government and in certain cases to local taxes imposed by local government units under the Local Tax Code on all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes . They shall, however, be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose or function. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88) Such being the case, you are exempt from the 10% tax on your income as an educational institution, e.g., your income or surplus balance of your budget. Profits derived by you from the sale of textbooks and rentals of lockers are exempt from tax provided all such income are used exclusively for the operation of the school. However, while your interest income from Philippine currency bank deposits is exempt from the 20% final withholding tax, earnings or yield realized from your deposit substitute instruments, e.g. money market placements, treasury bills, etc., not being derived in pursuance of your purpose as an educational institution, are subject to the 15% final tax. Pursuant to paragraph 4, Section 4, Article XIV of the 1987 Constitution, all grants, endowments, donation, or contributions used actually, directly and exclusively for educational purposes shall, subject to conditions prescribed by law, be exempt from tax. Since you are an educational institution, donations, and/or contributions to you are exempt from gift tax provided that not more than 30% of said donations/contributions shall be used by you for administration purposes pursuant to Section 94(a)(3) of the Tax Code, as amended. Moreover, the aforesaid donations/contributions are deductible from the gross income of the donor or contributor to the extent of 6% in the case of individual donor, or 3% in the case of corporate donor of the taxpayer's taxable income as computed without the benefit of the deduction, pursuant to Section 29(h) in relation to Sections 21 and 24 both of the Tax Code, as amended. Finally, as a tax-exempt educational institution, you shall file an annual information return on or before the 15th day of the 4th month following the end of your taxable year. (Sec. 4, Finance Department Order No. 137-87) cd Very truly yours, (SGD.) JOSE U. ONG Commissioner