Curious Tykes Early Childhood Development Center

March 11, 2009 BIR RULING [NSNP-(S30H-038) 198-09] Sections 30 & 109 (H); BIR Ruling No. 149-95, 027-03, DA-283-04 & S30-040-02 Curious Tykes Early Childhood Development Center 77 Ermin Garcia Street Cubao, Quezon City Attention: Mr. Jonathan Emmanuel S. Sison Treasurer This refers to your letter dated August 11, 2008 requesting confirmation of your opinion that Curious Tykes Early Childhood Development Center is exempt from income and value-added taxes pursuant to Article XIV of the 1987 Constitution and Section 109 (H) of the Tax Code, as amended. IATHaS As represented, Curious Tykes Early Childhood Development Center ("Curious Tykes" for brevity) is a non-stock, nonprofit educational institution duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199812080. It is a holder of Government Recognition (NCR) No. 029 Series 2001 issued by the Department of Education, Culture and Sports (now Department of Education) granting it authority to operate Nursery and Kindergarten courses. In reply, please be informed that 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 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 (BIR Ruling No. 248-88 dated June 6, 1988). Likewise, in recognition of the foregoing provision of the Constitution, Section 30 (H) of the Tax Code of 1997, as amended, specifically exempts a non-stock, non-profit educational institution from income tax. As a non-stock, non-profit educational institution, Curious Tykes, therefore, is exempt from tax on all revenues derived in pursuance of its purpose as an educational institution. However, Curious Tykes is 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 of its educational purposes or functions (Section 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88). Under Department Order No. 149-95 dated November 24, 1995 amending Department Order No. 137-87, as amended, interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of its 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 1997 Tax Code subject to compliance with the conditions that as a tax-exempt educational institution it 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: 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 by Sec. 27 (D) (1) of the 1997 Tax Code, as amended; 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 the 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; ENPS-012-98 dated November 25, 1993; BIR Ruling No. 46-00 dated September 26, 2000; and BIR Ruling No. DA-283-04 dated May 24, 2004) HSAcaE Curious Tykes's gross receipts from operations as a non-stock, non-profit educational institution are exempt from VAT pursuant to Section 109 (H) of the Tax Code of 1997, as amended. However, this exemption does not extend to other activities involving sale of goods and services which are subject to VAT imposed under Section 106 of the same Code. Hence, as long as Curious Tykes will not engage in the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, Curious Tykes will remain exempted from VAT (BIR Ruling No. 248-88 dated June 6, 1988; BIR Ruling No. DA-040-02 dated March 7, 2002; and BIR Ruling No. S30-027-2003 dated November 21, 2003). On the other hand, Curious Tykes's purchases, i.e. , materials for repairs of its facilities, are subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended. Such tax payment may legitimately be passed on to customers like non-stock, non-profit educational institutions (BIR Ruling No. 248-88 dated June 6, 1988). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, or that the requirements herein stated are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service