La Naval Academy, Inc.

February 25, 2009 BIR RULING [NSNP-(S30H-032) 149-09] 27 (D) (1); ENPS-006-98 La Naval Academy, Inc. 17 Ignacio St. Navotas, Metro Manila Attention: Dr. Antonio J. Naval, MD President Gentlemen : This refers to your letter dated September 21, 2006 requesting for a certificate of tax exemption pursuant to Section 4 (3), Article XIV of the 1987 Philippine Constitution. DHIETc It is represented that La Naval Academy, Inc. is a non-stock, non-profit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 156872 dated November 17, 1988; and that it is duly recognized by the Department of Education, Culture and Sports to operate Nursery, Kindergarten, Complete Elementary and Secondary Courses in accordance with Government Permit Nos. P-031 Series of 1993, E-028 Series of 1993 and S-002 Series of 1999. In reply thereto, please be informed that paragraph 3, Section 4, Article XIV of the 1987 Constitution provides, viz. : "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." A non-stock, non-profit educational institution is 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 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. It 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 institutions of their educational purposes or functions. (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Such being the case, La Naval Academy, Inc. being a non-stock, non-profit educational institution, is exempt from taxes 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 by such educational institution of their educational purposes or functions. It may not be amiss to state that under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purpose as an educational institution, are exempt from the 20% final tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27 (D) (1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: CADSHI (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 1/2% tax on interest income under the expanded foreign-currency deposit system imposed under Section 27 (D) (1) of the Tax Code of 1997; (b) Certification of actual utilization of the said income; and (c) Board Resolution by the school administration on proposed projects ( i.e. , construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of money deposited in banks or placed in money markets, on or before the 15th day of the fourth month following the end of its taxable year (Sec. 4, Finance Department Order No. 137-87). Moreover, revenues derived from assets used in the operation of cafeterias/canteens and 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. It must be emphasized that its tax exemption does not cover withholding taxes. As an educational institution, it is constituted as a withholding agent for the government required to withhold the tax on compensation income of its employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. Under Section 235 of the Tax Code of 1997, any provision of existing general or special law to the contrary notwithstanding, the Revenue District Officer shall conduct an audit of annual information return filed, the books of accounts and other pertinent records of La Naval Academy, Inc. to determine compliance with the conditions set forth in the certificate of tax exemption and tax liabilities, if any. IDAEHT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service