June 20th, 2021
Salceda sees “clarity” on educational institutions’ tax rate, as BIR and DOF manifest support for measure lowering CIT for private schools in Senate tax panel hearings
House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) says the measure lowering the tax rate of proprietary schools to a preferential tax rate of 10 percent, which was dropped to 1 percent under the Corporate Recovery and Tax Incentives for Enterprises (Create) Law from July 2020 to 2023, is on stronger ground with the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) expressing its support for the measure during a hearing by the Senate Committee on Ways and Means today.
Salceda, who negotiated the commitment of the BIR and the DOF on June 10, and whose committee then approved its own substitute bill on June 14, said that the reiteration of the agencies’ supportive position strengthens the chances that the bill will be approved by opening of session on July 26.
“If the Senate acts on this quickly, as the House intends to do, we will clear this issue by the first week of August, which of course, is the start of the school year for many private schools,” Salceda said.
“Seeing that support for my proposal is across the aisle in both the Senate and the House, I believe we will have this bill passed with very little friction,” Salceda added.
“I am thankful that the BIR and the DOF reiterated the commitments they first issued to the House tax committee when we convened them. Now there’s clarity that this is the intent of both houses of the legislature,” Salceda said.
The DOF, represented by Assistant Secretary Dakila Napao, said that the Finance Secretary “sees its proper to change the legislation” to clear the issue.
“We think that having the court withdraw its interpretation will be a longer route. The filing of the ITR for schools is still April 2022, so there is enough time for passing this measure,” Napao said during the hearing.
Commitment from BIR secured, support in both houses
Salceda earlier convened representatives from the DOF, the BIR, and the private schools in a meeting on June 10. During the meeting, Salceda was able to secure from the BIR a “commitment of support” for the revision by legislation of the ambiguities in the CREATE law so that the private schools would be able to avail of the 1-percent tax rate up to 2023, and they would not be held liable for the regular tax rate of 30 percent from 2016, which the BIR said they were constrained by the Supreme Court (SC) to implement.
In an aide-memoire to Speaker Lord Allan Velasco, Salceda warned that without action, these schools will be applied a rate of 25 percent or the regular corporate income tax rate, from the 10 percent some of them have complied with previously.
Salceda noted that the SC interprets the qualifier “which are non-profit” to both proprietary educational institutions and hospitals.
The interpretation of the high court in the Commissioner of Internal Revenue vs. De la Salle University case is such that “a proprietary educational institution is entitled only to the reduced rate of 10-percent corporate income tax”, which is only applicable if it is non-profit and its gross income from unrelated trade, business, or activity does not exceed 50 percent 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).”
He stressed that the BIR cannot tax proprietary educational institutions in a manner that is contrary to this unambiguous view of the SC.
“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,” he said.
Failure to pass measure could kill 21k jobs
Salceda said 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, represents about 5.72 percent 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,” he said.
He further noted that applying the reduced 1 percent preferential rate under CREATE until 2023 would allow these schools to save an equivalent of 3.43 percent 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 said.