BIR Ruling [UN-133-95]

March 31, 1995 BIR RULING [UN-133-95] The Sisters of Mary 1000 Cordillera Street Bacood, Sta. Mesa M a n i l a Attention: Sr . Maria Cho Treasurer Gentlemen : This refers to your letter dated January 30, 1995 and to the letter of Senator Jose D. Lina, Jr. dated November 16, 1994 requesting for reconsideration of BIR Ruling Nos. ENPS 019-94 dated August 18, 1994 and UN 266-94 dated September 26, 1994 relative to the denial of this Office of your request for exemption from the 20% final withholding tax on interest of your bank deposits. cdi It is contended that the 1987 Constitution provides that "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. . . ." (Art. XIV, Section 4, par. 3); that it is settled that The Sisters of Mary of Banneux, Inc. (SMBI), is a non-stock, non-profit educational institution and that all its income, revenues and assets are actually, directly and exclusively used for educational purposes and to no other else; that following the argument of this Office, interest on bank deposits, are income not derived from trade, business and other activity of SMBI; that the principal deposits of SMBI are exempted from taxes pursuant to the above-cited constitutional provision; that it follows that the interest on the said deposits are also exempted from whatever taxes simply because these are not being used for any trade or business but being used actually, directly and exclusively for educational purposes; that it is illogical to exempt the principal amount deposited but impose taxes on the interest on the deposits; that there are reportedly other educational and charitable institutions which are in the same situation as SMBI presently enjoying exemptions from the final 20% withholding tax on bank deposits interests; that these are the Don Bosco School, the Ramon Magsaysay Foundation, Inc., the University of Negros Occidental-Recoletos, and the University of San Carlos Recoletos, to name a few; that SMBI is one of the well-respected religious institutions in the country rendering free but high standard educational services to poor students; that it offers an absolutely free live-in high school education to indigent and destitute boys and girls; and that apart from these, it gives free vocational/technical training in dressmaking, industrial sewing machine operation, steno-typing and bookkeeping, basic computer systems, auto mechanics and driving, electric technology, refrigeration and air conditioning and sewing machine repair and maintenance. In reply, please be informed as follows: 1. Section 2.1 of Department Order No. 137-87 [Rules and Regulations Implementing Section 4(3), Article XIV of the New Constitution (1987 Constitution)] provides, viz: "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 or performance by such educational institution of its educational purpose or function." (Emphasis supplied) In consonance to this, Sections 1.6 and 1.7 of the aforesaid Department Order provides, viz: "1.6. Actually, Directly and Exclusively Used shall refer to the purpose for which the property is principally utilized for educational purposes. "1.7. Revenues refer to income derived in pursuance of its purpose as an educational institution." It is clear from the aforequoted provisions of Department Order No. 137-87 that in order for the revenues of an educational institution to be exempt under Section 4(3), Article XIV of the 1987 Constitution, such revenues must have been derived by the educational institution concerned in pursuance of its purpose as an educational institution. Thus, in BIR Ruling dated November 22, 1990 (issued to College of the Immaculate Conception, Cabanatuan City), ruled that interest income from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitute and trust fund and similar arrangements, not being derived by the educational institution in pursuance of its purpose as an educational institution, are subject to the 20% final tax imposed under Section 21(e)(1) of the Tax Code, as amended. 2. The fact that the principal bank deposits of SMBI are exempted from taxes does not follow that the interests on the said deposits shall also be exempt. The Tax Code merely imposes taxes on interest income earned and not on the source of income, thus, Sec. 24(e)91) of the Tax Code, as amended, states, viz: "(e) Tax on certain incomes derived by domestic corporations. "(1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, and royalties. Interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic corporations, shall be subject to a 20% tax." 3. As we have previously stated, all tax exemptions from the 20% final withholding tax on bank deposit interests by educational and charitable institutions have been revoked by BIR Ruling dated November 22, 1990. Accordingly, your request for reconsideration of BIR Ruling Nos. ENPS 019-94 dated August 18, 1994 and UN 266-94 dated September 26, 1994 on the denial of your request for exemption from the 20% final withholding tax on interest of your bank deposits is hereby denied for lack of legal basis. cdtech This constitutes the final decision of this Office on the matter. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Asst. (Legal)