DOF Order No. 137-87

December 15, 1987

DOF ORDER NO. 137-87 SUBJECT :

Rules and Regulations Implementing Section 4(3), Article XIV of the New Constitution —

Pursuant to Section 79(b) of the Revised Administrative Code, the following rules and regulations are hereby promulgated for the effective implementation of the provisions of the New Constitution, to wit: "Section 4(3), Article XIV — All revenues and assets of non-stock, non-profit educational institution used actually, directly and exclusively for educational purposes, shall be exempt from taxes and duties . . ."

SECTION 1.

Scope —

This set of guidelines shall govern the availment of exemption from the payment of internal revenue taxes and customs duties provided for under the National Internal Revenue Code, and the Tariff and Customs Code, both as amended. 1.1

Educational institution — means a non-stock, non-profit corporation/association duly registered under Philippine law, and operated exclusively for educational purposes, maintained and administered by private individuals or groups, and offering formal education, issued a permit, to operate by the Department of Education, Culture and Sports (DECS) in accordance with existing laws and regulations.

1.2.

Educational Activity Includes — 1.2.1. Instructing or training of individuals either through formal education. Formal education refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education.

1.3.

Utilization by Educational Institution — means 1.3.1. Any amount in cash or in kind (including administrative

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expenses) paid or utilized to accomplish one or more purposes for which it was created or organized, including grant of scholarship to deserving students and professorial chairs for the enhancement of professional course. 1.3.2. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the educational institution was created or organized, including the upgrading of existing facilities to support the conduct of the above activities. 1.3.3. Any amount in cash or in kind invested in an activity related to the educational purposes for which it was created or organized. 1.3.4. Any amount set aside for a specific project subject/ prior to approval of the Commissioner of Internal Revenue in writing. Application thereof must contain the following: (i)

the nature and purpose of the specific project and the amount programmed therefor;

(ii)

a detailed description of the project, including estimated costs, sources of any future funds expected to be used for completion of the project, and the location or locations (general or specific) of any physical facilities to be acquired or constructed as part of the project; and

(iii)

a statement by an authorized official of the corporation or association that the amount to be set aside will actually be disbursed for the specific project within two (2) years from the date of approval by the Commissioner of Internal Revenue, unless the nature of the project is such that the two (2) year period is impracticable.

1.3.5. Any amount set aside shall be evidenced by book entries and documents showing evidence of deposits or investments, including investment of the funds so set aside, or other documents that the Commissioner may require. Copyright 1994-2005

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1.4.

Non-Profit — means no part of the income inures directly or indirectly to any individual or member.

1.5.

Operated exclusively — means primarily engaged in activities which accomplish the educational purposes. To meet the operational test, an organization must be engaged in activities furthering "public purposes" rather than private interests. It must not be operated for the benefit of designated individuals or the persons who created it.

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.

1.8.

Assets — Any owned physical object (tangible) or right (intangible) having a money value; an item or source of wealth, expressed in terms of its cost, depreciated cost, or less frequently, some other value; hence, any cost benefiting a future period.

SECTION 2. Coverage of Exemption Under Section 4(3), Article XIV of the New Constitution — The exemption herein contemplated 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. 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 of performance by such educational institution of its educational purpose or function.

2.2.

Revenues derived from and assets used in the operations of cafeterias/canteens, dormitories, bookstores are exempt from

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taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. 2.3.

Revenues derived from and assets used in the operations of hospitals are exempt from taxation provided they are owned and operated by the educational institution as an indispensable requirement in the operation and maintenance of its medical school/college/institute.

SECTION 3. Non-Exemption from the Withholding Taxes. — Non stock educational institutions are constituted as withholding agents of the government to insure that the withholding tax liability of their employees, and other taxpayers to whom income payments are made, are complied with. SECTION 4. Filing of Return — Educational institutions shall file information return annually on or before the 15th day of the 4th month following the end of the taxable year. cdasia

SECTION 5. Examination of Books of Accounts, etc. — The books of accounts and other pertinent records of educational institutions shall be subject to examination by the Bureau of Internal Revenue, for the purpose of ascertaining whether such organizations or institutions have been complying with the conditions under which they have been granted tax exemption and their tax liability, if any, pursuant to Section 275 of the Tax Code, as amended. SECTION 6.

Availment of Duty and Tax-Free Entry of Imported Articles.

— In order to avail of the duty and tax-free entry of imported articles under Section 4(3), Article XIV of the New Constitution, the following guidelines are hereby prescribed in addition to the usual import requirements: 6.1.

The importer shall, prior to the importation, apply with the Department of Education, Culture and Sports for duty and tax exemption executed under oath by a duly authorized representative of the institution and supported by the following documents: 6.1.1. A copy of the Charter or other evidence of the character of the institution for which the articles are imported and the original of any order given by the importer.

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6.1.3. Should the importation be made through a dealer or indentor, an affidavit of both the dealer or indentor and the ultimate consignee whose identity is indicated in the shipping documents. Such affidavit shall state the party who placed the order, the number of items and their respective values and such other matters as are related to the transaction. cdt

6.2.

The Department of Education, Culture and Sports shall verify and certify that the educational institution is non-stock and non-profit and that the imported articles are to be used actually, directly and exclusively for educational purposes and shall indorse the application for duty and tax exemption to the Department of Finance with appropriate recommendation.

6.3.

The Department of Finance, based on the recommendation of the Department of Education, Culture and Sports, may allow the tax and/or duty-free entry of articles referred to under Section 4(3), Article XIV of the New Constitution upon compliance with the requirements herein indicated;

6.4.

This does not, however, preclude the Department of Finance from requiring the submission of additional documents/undertakings should the need arise;

6.5.

Articles entered tax and/or duty-free by educational institutions may not be sold, transferred or otherwise disposed of in any manner whatsoever to any person without the prior approval of the Department of Finance. Any transferee of said article shall be deemed the importer thereof, and the same shall be assessed at its entered value without depreciation. aisadC

SECTION 7. Institutions, etc. —

Applicability of Existing Rules of Exemption of Charitable

The existing rules and regulations on the exemptions from internal revenue tax and customs duties of religious and charitable institutions shall remain applicable to said institutions/organizations. SECTION 8. Copyright 1994-2005

Penalty. —

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The penalty provided for under existing laws shall be imposed for any violation of the provisions. cdtai

SECTION 9.

Appeal to the Department. —

All matters arising out of or in connection with the implementation of this Order may be brought on appeal to the Department for review. SECTION 10.

Repealing Clause. —

All orders, circulars, rules and regulations inconsistent herewith are hereby revoked or modified accordingly. SECTION 11.

Effectivity. —

This Order shall take effect upon approval. SECTION 12.

Approved. —

December 16, 1987, Manila, Philippines. (SGD.) VICENTE R. JAYME Secretary MEMORANDUM for — Secretary Jayme Thru-Undersecretary Fernando Re

:

Proposed Rules and Regulations Implementing Section 4(3) of Article XIV of the New Constitution —

Proposed rules and regulations have been revised to reasonably reflect the suggestions of the education sector, represented by Secretary Fabella, Atty. Padilla, and Sister Luz. Special Features — 1. The rules shall govern claims for exemption from internal revenue tax and customs duties. A separate set of guidelines is being prepared to cover real property tax and other local taxes imposed under the Local Tax Code. This is our arrangement with Director Carlos of our Bureau of Local Government Finance in order to simplify matters. Copyright 1994-2005

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2. Reflective of the views of the education sector are the provisions on the following, namely: a.

Provisions on school cafeterias, canteens, bookstores, dormitories and hospitals.

b.

Limitation of the definition of educational institution to mean only schools offering formal education. cdtai

We feel that the proposed regulations contain reasonable requirements for the effective implementation of Section 4(3) of Article XIV of the New Constitution. We recommend approval: COMMITTEE:

(SGD.) Collector TITUS VILLANUEVA (SGD.) Ms. ALICIA L. TOMACRUZ Bureau of Customs Bureau of Internal Revenue Member Member Atty. SISON JARAPA National Tax Research Center Member

(SGD.) Atty. ANTONIO P. BELICENA Department Service Chief Revenue Service Member

(SGD.) MARCELO N. FERNANDO Undersecretary Chairman

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