BIR Ruling [UN-150-95]

April 11, 1995 BIR RULING [UN-150-95] Panganiban Benitez Parlade Africa & Barinada Law Offices Suite 111, Pacific Bank Building Ayala Avenue, Makati, Metro Manila Attention: Atty . Joseph T . Cohon Senior Associate Gentlemen : This refers to your letter dated October 7, 1994 requesting in behalf of your client, The Manila Archdiocesan and Parochial Schools Association (MAPSA) for a ruling confirming your opinion that the exemption from all taxes and duties of every kind under Article XIV, Sec. 4(3) of the 1987 Philippine Constitution applies to all revenues as well as assets of education institutions, regardless of how the revenues were derived, provided only that these revenues and assets are being used actually, directly and exclusively, for educational purposes. It appears that BIR Ruling No. 047-89 dated March 27, 1989 states in part: "In connection therewith, please be informed that after a restudy, this Office is of the opinion as it hereby holds that while the interest income of the aforementioned schools derived from Philippine currency bank deposits are exempt from the 20% final withholding tax, the earnings or yield realized from their deposit substitute instruments, e.g., money market placements, treasury bills, etc., not being derived in pursuance of their purposes as educational institutions, are subject to the 20% final tax. "It must be emphasized that a non-stock, non-profit educational institution 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 its educational purpose or function. (Sec. 2.1, Department Order No. 137-87) "This ruling modifies the said BIR Rulings dated August 9, 1988 insofar as the exemption of the aforementioned schools from the 20% final withholding tax on earnings or yield realized from deposit substitute instruments is concerned. Likewise, the authority of the depository banks concerned to forego withholding of the 20% tax on the interest income on money market placements maintained by the schools with them is hereby revoked." that you wish to verify if the foregoing Ruling is still in force, in view of the fact that Article XIV, Sec. 4(3) of the 1987 Constitution 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 prescribed by law." that given the wording of the aforecited provision enshrined in the Constitution, which is self-evident and self-operative, it is your belief that the exemption from all taxes and duties of every kind, without distinction, applies to all revenues as well as all assets of said institutions, regardless of how the revenues were derived, provided only that those revenues and assets are being used actually, directly and exclusively for their educational purposes. In reply, please be informed that 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 to which is not related to the exercise or performance by such educational institution of its educational purpose or function." (emphasis supplied) While Section 1.6 and 1.7 of the aforesaid Department Order No. 137-87 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 education institution. Thus, this Office has in BIR Ruling dated November 22, 1990 (issued to College of 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. Accordingly, your opinion that the exemption from all taxes and duties of every kind, without distinction, applies to all revenues as well as all assets of said institutions, regardless of how the revenues were derived, provided only that these revenues and assets are being used actually, directly and exclusively for their educational purposes cannot be confirmed by this Office for lack of legal basis. cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service