BIR Ruling No. 137-84

August 8, 1984 BIR RULING NO. 137-84 209-000-00-137-84 Gentlemen : This refers to your letter dated June 16, 1982 stating that your client, College Assurance Plan Philippines, Inc. (CAP), a domestic corporation duly registered with, and issued by the Securities and Exchange Commission (SEC) a License/Certificate of Permit to Offer Securities for Sale dated April 18, 1980, sells pre-need educational plans whereby it binds itself under a Scholarship Funding Agreement (SFA) executed for this purpose, to pay direct to the school chosen by the subscriber or nominee the fees for a four-year college course leading to a Bachelor's degree; that CAP shall establish and maintain a trust/reserve account with a banking corporation of its choice which is authorized to do business in the Philippines, wherein all the funds allocated for the Scholarship Reserve shall be deposited; that funding of the Scholarship Reserve consists of the deposit with such trustee bank of cash equivalent to fifty per centum (50%) of the gross pre-need price of the plan at the time of purchase or thirty per centum (30%) of the annual gross collection, whichever is higher on or before the one hundred five (105) days after the end of every calendar year or on an earlier date as may be required by SEC; that this reserve including its assigned earnings shall be used only to pay the tuition fees and such other standard school fees (as defined in the SFA) of the nominees and beneficiaries; and that under the SFA, a sum equivalent to all the payments made and received by CAP on the gross price which is not allocated to the Scholarship Reserve shall be reasonable reimbursement for the company's overhead and administrative cost of acquisition. Based on the foregoing representations, you request a ruling on the following queries: "1. Should CAP be classified as an independent contractor taxable under Section 205 of the National Internal Revenue Code, or as an entity not subject to percentage tax under Section 192(2) of the National Internal Revenue Code? "2. For tax purposes, should the 'gross receipts' of CAP exclude the reserve fund equivalent to 50% of the gross price of the educational plans? "3. Should the reserve fund and its income be considered part of the revenue of CAP for income taxation purposes?" In reply, I have the honor to inform you as follows: Re: Questions 1 & 2 Section 187(r) of the Tax Code as amended provides that a "dealer in securities" includes all persons who for their own account are engaged in the sale of stock, exchange, bullion, coined money, bank notes, promissory notes, or other securities as licensed by SEC. (see also Rev. Regs. Nos. 12-80 and 11-80) Section 2(a) of B.P. Blg. 178, otherwise known as the Revised Securities Act likewise provides that securities include among others, pre-need plans , pension plans, life plans, joint venture contracts, and similar contracts and investments where there is no tangible return on investments plus profits but an appreciation of capital as well as enjoyment of particular privileges and services. Such being the case, for engaging in the business of setting pre-need educational plans, CAP is dealer in securities within the contemplation of Section 187(r) of the Tax Code and Batas Pambansa Blg. 178; hence, as such, it is not subject to the 3% contractor's tax but to a fixed annual tax of P100 imposed by Section 192(1) of the Tax Code and to 5% tax on its gross income pursuant to Section 209 of the same Code as amended by P.D. No. 1730. Re: Question No. 3 Under Section 29(b) of the Tax Code as amended by B.P. Blg. 155, 'Gross Income' includes gains, profits , and income derived from professions, vocations, trades, business , commerce , sales , or from dealings in property, whether real or personal, or growing out of the ownership or use of property or any interest therein; and from interest, rents, dividends, securities , or the transactions of any business carried on for gain or profit, or gains, profits and income of whatever kind and in whatever form derived from any source. Accordingly, if as represented, the reserve fund including its income/assigned earnings shall be used only to pay the tuition fees and such other standard school fees of the nominees or beneficiaries as defined in the SFA, the same shall not be considered part of CAP's taxable income for income tax purposes. aisadc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner