Philippines – A Taxing Issue: Higher Tax Rates On For-Profit Private Schools.

16 July 2021

 

The BIR issued Revenue Regulations (RR) No. 5-2021 last April 8 to implement the new income tax rates pursuant to Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, excluding for-profit proprietary educational institutions from availing of lower taxes, and effectively raising their tax rates from 10 percent to 25 percent.
 

In Section 2 of RR5-2021, proprietary educational institutions refer to any private schools, which are non-profit for the purpose of the regulations, maintained and administered by private individuals or groups, with an issued permit to operate from the Department of Education (DepEd) or the Commission on Higher Education (CHED) or the Technical Education and Skills Development Authority (TESDA), as the case may be. “Non-profit” means that no net income or asset accrues to or benefits any member or specific person, with all the net income or assets devoted to the institution’s purposes and all its activities conducted not for profit.
 

This definition is in reference to Section 6 of the CREATE law, which amended Section 27 of the National Internal Revenue Code (Tax Code) of 1997, as follows:

 

SEC. 27 (B) Proprietary Educational Institutions and Hospitals. – Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be one percent (1%): Provided, further, That if the gross income from ‘unrelated trade, business or other activity’ exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.
 

In the illustration provided in RR 5-2021, a non-profit private educational institution with an issued permit to operate from CHED, and maintained and administered by a private domestic corporation, will be subject to an income tax rate of 1 percent if its gross income from unrelated activities do not exceed 50 percent of its total gross income.
 

Related to this, the Supreme Court in the case of Commissioner of Internal Revenue vs St. Luke’s Medical Center (G.R. No. 195909, September 26, 2012) ruled that Section 27(B) of the Tax Code does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G), which provides that “nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person” and “civic league or organization not organized for profit but operated exclusively for the promotion of social welfare” shall not be taxed under Section 30.
 

It ruled that the effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10 percent preferential rate under Section 27(B) instead of the ordinary 30 percent corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
 

Section 27(B) of the NIRC imposes a 10 percent preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. “Proprietary” means private, following the definition of a “proprietary educational institution” as “any private school maintained and administered by private individuals or groups” with a government permit. “Non-profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. The court however was quick to point out that “non-profit” does not necessarily mean “charitable.” 
 

Therefore, only proprietary educational institutions accredited as non-profit by the DepEd, CHED and the TESDA may be subjected to the lower preferential tax rate of one percent from July 1, 2020 to June 30, 2023.
 

This prompted a group of private schools to issue a statement calling for the amendment of BIR RR 5-2021, which excluded for-profit educational institutions from availing of the reduced rate. In its view, “non-profit” was not a requirement found in the CREATE law.
 

We have yet to see how the saga unfolds but one thing is for sure: the effect of the increased taxes on the schools’ investment in education, on the job security and employment of school staff, and affordability of tuition and other fees must be balanced with the need to raise government revenue.  After all, quality education is crucial to our nation’s future if we are to move forward with success from the challenges of this pandemic.