Taxability of an Income or Surplus Balance of a Budget

June 6, 1988 BIR RULING NO. 248-88 24 002-88 248-88 Gentlemen : This refers to your letter dated January 27, 1988 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 as well as school supplies, rentals for lockers, lunch rooms and the canteen exempted from income tax? All such incomes are used exclusively in the operation of the school. "3) Is interest earned on our bank placements subjected to the 20% withholding tax? "4) Is our importation of books as well as computers used in our classrooms and on our accounting office subjected to customs duties and the compensating tax? "5) Are donations received by the school subjected to any tax? "6) As we have contracted janitorial services, are we exempt from Value Added Tax? "7) Is the purchase of books, school supplies and materials for repairs of our building exempt from VAT?" In reply thereto, please be informed that the exemption under paragraph 3, Section 4, Article XIV of the 1987 Constitution reading: "(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 exemption under Section 4(3), Article XIV of the 1987 Constitution refers to internal revenue taxes and customs duties, in appropriate cases, imposed by the national government on all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes . 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. They shall, however, be subject to internal revenue taxes on income from trade or 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. Moreover, revenues, derived from and assets used in the operations of cafeterias/canteens, dormitories, bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises (Department Order No. 137-87 dated December 16, 1987) 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. Profit derived by you from the sale of textbooks, school supplies, and operation of canteen are exempt from tax provided they are owned by you and operated as ancillary activities and are located within the school premises. Rentals from lockers and income from lunch rooms as well as your interest income from bank deposit or yield from deposit substitutes are also exempt from tax. cdt Likewise, your importation of books and computers to be used in your classrooms and Accounting Office shall be exempt from the value-added tax and customs duties, provided the following guidelines in addition to the usual import requirements are observed, viz: A. The importer shall, prior to the importation, apply with the Department of Education, Culture and Sports for duty and tax exemption executed under oath by a duly authorized representative of the institution and supported by the following documents: 1) A copy of the charter or other evidence of the character of the institution for which the articles are imported and the original of any order given by the institution to an importing agent/dealer for such articles, if imported by the latter; 2) An affidavit executed by the importer stating, among others, that the imported articles are to be used actually, directly and exclusively for educational purposes, and that the same will be installed/used in its buildings/premises located at ______________ used actually, directly and exclusively for educational purposes; and 3) Should the importation be made through a dealer or indentor, an affidavit of both the dealer or indentor and the ultimate consignee whose identity is indicated in the shipping documents. Such affidavit shall state the partly who placed the order, the number of items and their respective values and such other matters as are related to the transaction. B. The Department of Education, Culture and Sports shall verify and certify that the educational institution is non-stock, non-profit and that the imported articles are to be used actually, directly and exclusively for educational purposes and shall indorse the application for duty and tax exemption to the Department of Finance with appropriate recommendation: C. The Department of Finance, based on the recommendation of the Department of Education, Culture and Sports, may allow the tax and/or duty-free entry of articles referred to under Section 4(3), Article XIV of the New Constitution upon compliance with the requirements herein indicated. This does not, however, preclude the Department of Finance from requiring the submission of additional documents/undertakings should the need arise; and D. Articles entered tax and/or duty-free by educational institutions may not be sold, transferred or otherwise disposed of in any manner whatsoever to any person without the prior approval of the Department of Finance. Any transferee of said article should be deemed the importer thereof, and the same shall be assessed at its entered value without depreciation. (Department Order No. 137-07 supra ). Pursuant to paragraph 4, Section 4, Article XIV of the 1987 Constitution, all grants, endowments, donations, 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(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. Moreover, the contractor-agency and, not you is subject to the value-added tax of 10% on your payments for janitorial services rendered to your school if the gross receipts of said janitorial agency exceed P200,000.00 for the 12-month period. If its gross receipts do not exceed P200,000.00 during any 12-month period and the janitorial agency is not registered as a VAT entity, it is only subject to a tax equivalent to 2% of its gross quarterly sales or receipts pursuant to Sections 112 and 103(w) of the Tax Code, as amended and as amplified by Section 9(b)(18) of Revenue Regulations No. 5-87. However, if its gross receipts is less than P200,000.00 but opts to register as a VAT-entity pursuant to Section 107(d) of the Tax Code, as amended, it is subject to the value-added tax of 10%. cdtech Finally, unlike the sale of books which is exempt from the value-added tax pursuant to Section 103(f) of the Tax Code, the sales of school supplies as well as building materials are subject to the 10% value-added tax imposed under Section 100 of the same Code, as amended. Such tax payment may legitimately be passed on to customers, like you. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner