Legal basis and constitutional policy
- Section 30 of the Tax Code of 1997 governs the income tax exemption of non-stock, non-profit corporations that are enumerated under that provision.
- Paragraph 3, Section 4, Article XIV of the Constitution limits the exemption of non-stock, non-profit educational institutions to internal revenue taxes imposed by the National Government on revenues and assets used actually, directly and exclusively for educational purposes.
- Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions are exempt from value-added tax when accredited as such by the Department of Education, Culture and Sports or by the Commission on Higher Education.
- Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88, governs the treatment of educational institutions’ income from activities not related to their educational purposes.
- The circular recognizes tax withholding rules under Section 79(A) and Section 57 of the Tax Code of 1997, implemented by Revenue Regulations No. 2-98.
Who qualifies for tax exemption
- Non-stock, non-profit corporations covered are those enumerated under Section 30 of the Tax Code of 1997.
- Non-stock, non-profit educational institutions covered are those whose exemption attaches to revenues and assets used actually, directly and exclusively for educational purposes, consistent with Paragraph 3, Section 4, Article XIV of the Constitution.
- Private educational institutions qualify for VAT exemption only when accredited by either the Department of Education, Culture and Sports or the Commission on Higher Education under Section 109(m) of the Tax Code of 1997.
- The circular distinguishes the exemption regime for non-stock, non-profit corporations from that for non-stock, non-profit educational institutions, especially for interest income and withholding taxes.
Income tax and other internal taxes
- Non-stock, non-profit corporations are exempt from income tax on the income received by them as such organization under Section 30 of the Tax Code of 1997.
- Non-stock, non-profit corporations remain subject to internal revenue taxes on income derived from any of their properties (real or personal) or any activity conducted for profit, regardless of disposition thereof; rental income (e.g., rental payment from their building/premises) is treated as income for taxation.
- Non-stock, non-profit corporations are subject to a 20% final withholding tax on:
- interest income from currency bank deposits;
- yield or any other monetary benefit from deposit substitute instruments; and
- interest income and royalties from sources within the Philippines.
- Non-stock, non-profit corporations are subject to 7½% final withholding tax on interest income derived from a depository bank under the expanded foreign currency deposit system, pursuant to Section 27(D)(1) in relation to Section 57(A) of the Tax Code of 1997.
- Non-stock, non-profit educational institutions are exempt from internal revenue taxes imposed by the National Government only for revenues and assets used actually, directly and exclusively for educational purposes under Paragraph 3, Section 4, Article XIV of the Constitution.
- For educational institutions, revenues from cafeterias/canteens and bookstores are exempt when:
- the facilities are owned and operated by the educational institution; and
- they operate as ancillary activities; and
- the same are located within the school premises.
- Educational institutions’ VAT exemption (for private educational institutions) is recognized under Section 109(m) of the Tax Code of 1997, but the exemption does not extend to their other activities involving sale of goods and services.
- Educational institutions are subject to internal revenue taxes on income from trade, business or other activity that is not related to the exercise or performance of their educational purposes or functions under Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88; rental income (e.g., rental payment from their building/premises) is treated as an example of income within this rule.
Interest-income treatment for educational institutions
- Unlike non-stock, non-profit corporations, educational institutions’ interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their educational purposes is exempt from:
- the 20% final tax; and
- the 7 A12% tax on interest income under the expanded foreign currency deposit system under Section 27(D)(1) of the Tax Code of 1997.
- The exemption for educational institutions’ interest income is subject to compliance with the requirement to submit, on an annual basis, to the Revenue District Office concerned, an annual information return and duly audited financial statement.
- Educational institutions must also submit:
- 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 A12% tax under Section 27(D)(1);
- a certification of actual utilization of the said income; and
- a Board Resolution approving proposed projects to be funded out of deposits in banks or placed in money markets, issued on or before the 14th day of the fourth month following the end of its taxable year.
Withholding taxes and registration duties
- The educational-institution exemption for internal revenue taxes does not cover withholding taxes.
- Educational institutions are constituted as withholding agents for:
- withholding tax on compensation income of their employees under Section 79(A); and
- withholding tax on income payments to persons subject to tax under Section 57 of the Tax Code of 1997.
- Non-stock, non-profit corporations are also required to act as a withholding agent when they:
- act as an employer and any employee receives compensation income subject to withholding tax under Section 79(A), as implemented by Revenue Regulations No. 2-98; or
- make income payments to individuals or corporations subject to withholding tax under Section 57, also as implemented by Revenue Regulations No. 2-98.
- Both non-stock, non-profit corporations and educational institutions must maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997 to monitor the activities conducted.
- Both institutions must pay an annual registration fee of P500.00 under Section 236(B) of the Tax Code of 1997.
- Both institutions must issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered not directly related to the activities for which they are registered, under Section 6(C) in relation to Section 237 of the Tax Code of 1997.
Implementation guidance and adoption
- Internal revenue officers are guided to apply these rules in administering taxes and exemptions of non-stock, non-profit corporations and non-stock, non-profit educational institutions.
- Compliance requirements and withholding-agent obligations are treated as integral to maintaining tax-exempt status for the covered exempt incomes and uses.
- The Commissioner adopts the circular on November 14, 2003 and issues it for information and guidance of internal revenue officers and others concerned.