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House tax panel intervenes to aid private schools with corrected corporate tax rate

June 14th, 2021

House tax panel intervenes to aid private schools with corrected corporate tax rate; to allow schools to avail of 1% tax on income under CREATE, to create 12k new jobs, save 21k others

House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) presided over the regular meeting of the House tax panel today to consolidate bills that would allow for-profit private schools to be applied taxes at the preferential tax rate of 10% applicable to “proprietary schools” and 1% from July 2020 to 2023.

Salceda had the meeting called in response to a request from the Coordinating Council of Private Educational Associations of the Philippines (COCOPEA), the country’s umbrella organization for private schools. COCOPEA appealed for Salceda’s intervention on the applicable tax rate for for-profit private schools.

COCOPEA asked Salceda to intervene in the implementation of the new regulation of the Bureau of Internal Revenue (BIR) increasing the tax rate of private educational institutions.

“We appeal to you, Mr. President, to make our tax laws consistent with your vision and the constitutional mandate of ensuring access to education for all Filipinos. Specifically, Revenue Regulation (RR) 5-2021 unilaterally and illegally inserted the wording inconsistent with both Section 27 (B) of the Tax Code as amended by the Corporate Recovery and Tax Incentives for Enterprises (Create) Law, and the constitution,” the group said in a statement.

In response, Salceda says that during the meeting, he was able to “secure from the BIR a commitment of support for the revision by legislation of the ambiguities in the law so that, one, they will be able to avail of the 1% tax rate up to 2023; and two, they will not be held liable for the regular tax rate of 30% which the BIR says they were constrained by the Supreme Court to implement.”

“So, it’s a clean slate legally, and lower taxes moving forward,” Salceda added.

In an aide memoire to the Speaker of the House, Salceda warned that without action, “these schools will be applied a rate of 25% or the regular CIT rate, from the 10% some of them have complied with previously. They will also be unable to avail of the tax relief (1% CIT from July 2020 to June 30, 2023) applied under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. They can also be held liable for taxes paid since 2016, when a Supreme Court decision on the tax rate of such schools was issued.”

Tax panel to approve legislation in principle

The Supreme Court interprets the qualifier “which are non-profit” to both proprietary educational institutions and hospitals. The interpretation of the Court in CIR vs. De la Salle University is such that “a proprietary educational institution is entitled only to the reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity does not exceed 50% of its total gross income.”

The Court also observed that “[w]hile a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations).”

“The Bureau of Internal Revenue cannot tax proprietary educational institutions in a manner that is contrary to this unambiguous view of the Court. The Bureau, given this Court opinion, was constrained to issue Revenue Regulation No. 5-2021 (RR 5-2021), under which income tax on so-called proprietary educational institutions that are run by stock corporations would be increased to 25 percent from the current 10 percent,” Salceda explained.

The tax panel’s proposed amendment would subject for-profit private schools to the preferential CIT rate of 10%, allow them to avail of the CREATE tax relief rate of 1% from July 2020 to June 2023, and expunge the liability to pay the regular corporate income tax from 2016, when the Supreme Court issued the decision.

Safeguards and job impact

“There will still be reasonable safeguards. For example, their revenues have to be mostly from education. So, if the school earns from, say, a merchandise shop or rental income, that should not exceed their income from actually teaching,” Salceda explained.

Salceda explained that the tax rate will help private schools hire more teachers and keep existing staff.

“Private schools represent some 378,637 jobs . The income tax increase, if made effective, represent about 5.72% of compensation income , which could force the already dwindled private education labor force to shed another 21,661 jobs due to the tax rate adjustment alone.”

“On the other hand, applying the CREATE rate until 2023 would allow these schools to save an equivalent of 3.43% of compensation expenses, which could help them rehire at least 12,996 teachers at the start of the next school year.”

“But ultimately, the principle is that because education is constitutionally recognized as a value of the State, we cannot unduly burden schools with taxes,” Salceda added.

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