December 15, 1987

DOF DEPARTMENT 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.

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 1.3. Utilization by Educational Institution means

1.3.1. Any amount in cash or in kind (including administrative

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.

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 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.

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
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 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
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

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 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.

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

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 SECTION 7. Applicability of Existing Rules of Exemption of Charitable
Institutions, etc.

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. Penalty.

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

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 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.

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 (SGD.) Atty. ANTONIO P. BELICENA

National Tax Research Center Department Service Chief
Member Revenue Service
Member

(SGD.) MARCELO N. FERNANDO

Undersecretary
Chairman

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