Exemption from Income Tax on Income Received by a Religious Organization

August 24, 1989 BIR RULING NO. 180-89 24 (b) 047-89 180-89 Gentlemen : This refers to your letter dated July 20, 1989 stating that the twenty-eight (28) Catholic Schools named in an attached list are owned and managed by the Congregation of the Augustinian Recollect Sisters (Congregation for short); and requesting for "a certificate of exemption of the Congregation of the Augustinian Recollect Sisters, Inc. from the 20% final withholding tax on its interest and/or yield on deposit substitute instruments and interest on its savings and time deposits to be actually directly and exclusively used for its educational purposes; and the revenues and assets used in the operation of the association." In reply, please be informed that under Section 26(e) of the Tax Code, as a religious organization, the Congregation is exempt from income tax on income received by it as such. However, the income of whatever kind and character derived by the Congregation from any of its properties, real or personal, or from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to the corresponding tax imposed under the National Internal Revenue Code. Such being the case, the Congregation is subject to the 20% final withholding tax on interest income from its savings and time deposits; and on earnings or yield realized from its deposit substitute instruments, e.g., money market placements. On the other hand, if the abovementioned schools are non-stock, non-profit and issued a permit to operate by the Department of Education, Culture and Sports (DECS), 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, the schools are exempt from the 10% tax on their income as educational institutions. However, while their interest income from Philippine currency bank deposits are exempt from the 20% final withholding tax, earnings or yield realized from their deposit substitute instruments, e.g., treasury bills, money market placements, etc. having been derived from an activity, the conduct of which is not related to the performance by such educational institutions of their educational purpose or function, are subject to the 20% final tax. It is understood, however, that if the Philippine currency bank deposit substitute instruments of the Congregation and the schools are one and the same, the interest income and/or yield and earnings derived therefrom shall be subject to the 20% final withholding tax. Finally, as tax-exempt educational institutions, they shall file annual information returns on or before the 15th day of the 4th month following the end of their taxable year. (Sec. 4, Finance Department Order No. 137-87) Very truly yours, (SGD.) JOSE U. ONG Commissioner