Tax Treatment of Gross Income from Unrelated Trade Exceeding 50% of the Total Gross Income Derived by Any Educational Institution

September 7, 1992 BIR RULING NO. 247-92 24 50 (b) 000-00 247-92 A.M. Sison, Jr. & Associates 14th Floor, Pacific Bank Bldg., 6776 Ayala Ave., Makati, Metro Manila Attention: Atty . Nelson D . Empalmado Gentlemen : This refers to your letter dated March 24, 1992 stating that Systems Technology Institute (STI) is a private educational institution duly issued a permit to operate by the Department of Education, Culture and Sports; that STI operates computer training centers; that STI has also granted, under Licensing Agreements, other independent entities (Licensees) non-transferable privileges to use the name "Systems Technology Institute" and/or the initial "STI" and to utilize STI courseware programs, methods and systems in operating computer training centers; that STI for each computer training center established by Licensees, provides Licensees with assistance and educational services listed in Annexes "B" and "C" respectively of the Licensing Agreement, viz: ANNEX B "1. Provide regular visits to the LICENSEES' Training Centers, at the expense of STI Central Office: cdll "1.1 Director-in-Charge; "1.2 TC Support Services Staff; "1.3 Finance Staff; and "1.4 Faculty Staff "2. Provide guidance in the preparation and implementation of marketing and promotional programs; "3. Disseminate periodic information bulletins, reports, memos and other similar documents pertaining to new trends and developments in the data processing field, on-going programs undertaken by STI central office and such other activities which will have an effect on the operations of the LICENSEE's Training Center; "4. Assist in developing a placement program for the On-the-job Service (OJS) trainees and Guaranteed Hire Program (GHP) qualifiers in the Training Center's Territory. In the event the OJS is done in Metro Manila by the trainee and he qualifies for the GHP, STI shall arrange his job placement; ANNEX C EDUCATIONAL SERVICES "1. Conceptualize courses; determine course duration, distribution of lecture and laboratory hours, students to machine ratio for machine requirements; and provide LICENSEE, based on the schedule of release provided by the Courseware Department, with all or any of the applicable and relevant courseware; "2. Produce course materials to be used by instructors and students; "3. Conceptualize and produce student textbooks, learning guides, examples, exercises, case studies, quizzes and exams; "4. Maintain library of books, periodicals and software to serve courseware development, instructors training and student reading requirements; "5. Determine Training Centers library requirements; "6. Produce newsletter on technology information; "7. Hire, train and assign instructors to training centers to teach regular and special courses and conduct career orientation; "8. Provide continuous in-service training to instructors; "9. Audit of training facilities/equipment; "10. Provide the use of its mini and main frame computers to serve the program compilation and execution requirements of the training centers' student." that STI undertakes national advertising and promotion for the benefit of all computer training centers using the "Systems Technology Institute; and/or the initial "STI"; that LICENSEES are also authorized to initiate tie-ups with any educational institution and/or company; and that LICENSEES shall pay STI the following: 1. License fee; 2. Royalty fee; 3. Reimbursements for the cost and expenses of the educational services listed in Annex "C" of the Licensing Agreement; 4. Reimbursement of LICENSEES' share in the advertising and promotional expenses; 5. A percentage of the revenues generated by a tie-up initiated by the LICENSEES with any educational institution and/or company. In connection therewith, you now request opinion on the following: "1. Are the foregoing payments to STI by the LICENSEES considered gross income of STI from trade, business or other activity which is not substantially related to the exercise or performance by STI of its educational purpose or function? "2. Are the said payments subject to withholding tax, and if so, at what rate?" In reply thereto, I have the honor to inform you that private educational institutions, whether stock or non-stock, shall pay a tax of 10% on their taxable income except interest income from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements; and royalties, derived from sources within the Philippines, which shall be subject to a tax of 20%. Provided, that if the gross income from unrelated trade, business, or other activity exceeds 50% of the total gross income derived by any educational institution from all sources, the entire taxable income of the educational institution shall be subject to a tax of 35%. The term "unrelated trade, business or other activity" means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function. Moreover, a private educational institution is any "private school" maintained and administered by private individuals or groups issued a permit to operate by the Department of Education, Culture and Sports (DECS) in accordance with existing laws and regulations. (Section 24(b), Tax Code, as amended). The license fee, the percentage of the revenue received by STI generated by a tie-up initiated by the licensees with any educational institution and/or company are considered as gross income derived by STI in the exercise or performance of its educational purpose or function. Moreover, the reimbursement for the cost and expenses of the educational services listed in Annex "C" of the Licensing Agreement as well as the reimbursement of the licensees' share in the advertising and promotional expenses received by STI are also considered as gross income derived by STI in the exercise or performance of its educational purpose or function. However, said costs and expenses shall be allowed as deductions in computing the taxable income of STI. (Section 29(a)(1)(A), Tax Code, as amended) Furthermore, the royalty fee paid by Licensees to STI for the non-transferable privileges to use the name "Systems Technology Institute" and/or the initial "STI" and to utilize STI courseware programs, methods and systems in operating computer training centers shall be subject to a tax of 20% pursuant to Section 24(e) of the Tax Code, as amended. Under Revenue Regulations No. 6-85 as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended, only payments to persons enumerated therein are subject to the expanded withholding tax. Considering, that the aforementioned payments by licensees to STI are not among those payments specified in said Regulations, said payments are not therefore, subject to the expanded withholding tax. However, STI is subject to the 1% expanded withholding tax on its gross payments to advertising agencies including the share allocated to licensees exclusive of the amount paid or payable to media pursuant to Section 1(e)(1)(2)(h) of Revenue Regulations No. 6-85 as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations Implementing Section 50(b) of the Tax Code, as amended. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue