Education foundations exempt from taxes

JAKARTA (JP): The Directorate General of Taxes has eased the tax obligation of educational foundations, exempting their profits from the income tax for the next four years.

"However, the income tax relief is effective only when all the profits are invested in buildings and other educational facilities," Tax Director General Fuad Bawazier announced over the weekend.

Fuad stipulated in Decree No.87/1995 dated Oct.10 that if the profits are not used or invested by the end of the four-year grace period, those earnings will be subject to the income tax at the prevailing rates.

The profits which are not invested in educational facilities after the four-year grace period will also be subject to fines because the income taxes on those profits are considered tax arrears.

The income tax exemption is granted only to foundations who run formal education programs.

Complaints

The income tax relief was granted apparently in response to strong complaints from the operators of formal educational facilities upon learning that the new income tax law revoked the tax exemption for foundations.

The ruling stipulated that foundations intending to make use of the tax relief facility need only to report their investment programs to local tax officials.

The educational facilities recognized under the ruling include land plots, buildings, dormitories, houses for teachers and other educational staff, laboratories and their facilities, libraries and their contents, sports facilities and office inventories.

If a foundation builds its educational facilities with loan funds, for instance, the foundation can count the interests of the loans as operating costs, the ruling says.

The ruling also stipulates that buildings and other educational facilities funded by the profits which are exempted from the income tax can not be depreciated.

"By this ruling, we want to ensure that all incomes generated by educational foundations will be used for educational matters and not for other purposes," Fuad said.

Commercial

"The enforcement of the ruling will make it clear which foundations really strive for social interests and which foundations run for commercial purposes only."

The ruling, however, defines that the income tax exemption is valid for formal educational foundations only. It does not apply to informal educational foundations like those which offer various vocational courses to the public.

The ruling was issued after the directorate general had inter- department meetings with the directorate general of high education, the directorate general of elementary and secondary education -- all at the education and culture ministry -- and with representatives of private universities.

Before the introduction of the new tax law early this year, educational institutions were exempt from income taxes because they were classified as non-profit institutions. (rid)