BIR Ruling No. 330-12

May 11, 2012 BIR RULING NO. 330-12 Section 4 (3), Article XIV, 1987 Constitution; DOF Dept. Order No. 137-87; BIR Ruling No. 065-99 Philippine Coconut Authority Elliptical Road, Diliman Quezon City Attention: Mr. Javier S. Tayag Deputy Administrator Corporate Service Branch Gentlemen : This refers to your letter dated 25 January 2011 requesting for an opinion on whether the tax exemption certificate issued to University of Santo Tomas ("UST" for brevity) on November 14, 1988 is still valid and/or includes the herein subject contract between Philippine Coconut Authority and UST. It is your representation that the Philippine Coconut Authority has awarded to UST a contract to conduct a research work on the " Study on the Effect of Virgin Coconut Oil on Human with Emphasis on Cholesterol". The total price of the aforesaid contract is Four Million Three Hundred Thousand Pesos (Php4,300,000.00). It is also represented that UST presented a tax exemption certificate granted on November 14, 1988. Quoting paragraph 4 of said tax exemption, which states, " such being the case, the University of Santo Tomas being a non-stock, non-profit educational institution is exempt from taxes e.g. 10% tax on its income and/or yield deposit substitute instruments and interest on its savings and time deposits; customs duties and value added tax on its importation of books and other educational materials and equipment to be actually, directly and exclusively used for educational purposes." To further support its claim, UST attached in its letter addressed to Mr. Carlos B. Carpio, BAC Chairman, Philippine Coconut Authority, dated 14 January 2011, a photocopy of Department Order No. 137-87 issued by the Department of Finance implementing Section 4 (3), Article XIV of the 1987 Constitution. ScaEIT In reply, please be informed as follows: The exemption of the University of Santo Tomas is provided for under Section 4 (3), Article XIV of the 1987 Constitution which states: "Sec. 4 (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. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment." On December 16, 1987, the Department of Finance issued Department Order No. 137-87 which laid down the rules and regulations in implementing the above cited Constitutional provision. The pertinent provisions of the Department Order are as follows: "1.1. Educational Institution means a non-stock, non-profit corporation/association duly registered under Philippine law, and operated exclusively for educational purposes, maintained and administered by private individuals or groups, and offering formal education, issued a permit to operate by the Department of Education Culture and Sports (DECS) in accordance with existing laws and regulations. (emphasis supplied) 1.2. Educational Activity Includes. 1.2.1. Instructing or training of individuals either through formal education. Formal education refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education." "SEC. 2. Coverage of Exemption Under Section 4 (3) Article XIV of the New Constitution. The exemption herein contemplated 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. 2.1 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, business or other activity the conduct of which is not related to the exercise of performance by such educational institution of its educational purpose or function. "(emphasis supplied) This Office had the occasion to rule on an issue similar to the issue on-hand as follows: "In reply, please be advised that Article XIV, Sec. 4 (3) of the 1987 Constitution states: xxx xxx xxx Such being the case, the Blessed Child Montessori Foundation, being a non-stock, non-profit educational institution is exempt from taxes and duties on all its revenues and assets used actually, directly and exclusively for educational purposes. However, it shall be subject to internal revenue taxes on its income from trade, business and other activity the conduct of which is not related to the exercise or performance of its educational purposes or functions. It must be emphasized that your tax exemption does not cover withholding taxes." BIR Ruling No. 065-99 Blessed Christ Child Montessori Foundation (emphasis supplied) Clearly, the Four Million Three Hundred Thousand Pesos (Php4,300,000.00) contract awarded to UST to conduct a research work on the " Study on the Effect of Virgin Coconut Oil on Human with Emphasis on Cholesterol" is not related to the exercise or performance of its educational purposes or function as defined in Department Order No. 137-87, hence, it is an income subject to internal revenue taxes, and consequentially to the applicable withholding taxes on government money payments. TSacCH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue