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Taxes to back schools

Taxes to back schools

by Walter L. Abela, Jr.

By today, around 2 million elementary and high school students are expected to troop to their respective private schools in addition to the estimated 17 million public school students who already started attending their classes last week. It may be an opportune time to note that private educational institutions, just like ordinary taxpayer corporations, are not exempted from adhering to tax laws and regulations. 

Among the primary concerns of private educational institutions is the qualification to avail of income tax exemption. As a critical segment of the private sector which continuously supports the government’s efforts to achieve social progress, it is but rightful that the proper tax incentives be extended to such institutions. Is the revenue attributable to the services of a private educational institution still subject to income tax? 

Our Constitution provides that “all revenues and assets of nonstock, nonprofit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties” (Article XIV, Section 4 [3]). Section 30 [H] of the 1997 Tax Code and the implementing regulations clarify that the income tax exemption does not extend to income of whatever kind or character from the properties, real or personal of a non-stock and non-profit educational institutions, or from any activity conducted for profit regardless of disposition made of such income. 

What, then, are considered exempt because they are “used actually, directly, and exclusively for educational purposes”? The Supreme Court, in one case, ruled that as long as the property or income is incidental to the educational purposes, the tax exemption may still subsist. Thus, the main building of an educational institution used both as classrooms for its students and residence of the school director did not lose its tax-exempt nature (Abra Valley College v. Hon. Juan Aquino, L-39086 dated June 15, 1988; Herrera v. Q.C. Board of Assessment Appeals, 3 SCRA 186). In Revenue Memorandum Circular No. 76-2003, the Bureau of Internal Revenue (BIR) also reiterated that the exemption extends to ownership and operation of cafeterias and bookstores that are located within the school premises. However, rental income from their buildings and premises shall be subject to regular taxes. 

Nonstock, nonprofit educational institutions are also exempt from the final withholding tax on interest income (20% or 7.5%) from bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes subject to some reportorial requirements.

These exemptions are not enjoyed by private educational institutions that are incorporated as stock corporations. Nevertheless, they still enjoy a preferential rate of 10% on their taxable income compared to the 35% regular rate. However, if their gross income from unrelated trade, business or other activity exceeds 50% of the total gross income, the 32% regular rate becomes applicable. The preferential rate of 10% at least indicates that the government does not want to impose the same tax burden on proprietary educational institutions as is imposed on ordinary corporations, in recognition of the former’s role in our society. 

Another area of concern of private educational institutions is the VAT passed to them by VATable sellers of goods and services. Educational services rendered by private educational institutions accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED) and the Technical Education and Skills Development Authority (TESDA) are exempt from VAT. However, the VAT, being an "indirect tax," can be shifted or passed on by the seller to the buyer. Hence, the VAT passed on by the seller of services or goods to a VAT-exempt private educational institution shall form part of the cost or purchase price and shall add up to its cost rendering educational services.

All educational institutions are, likewise, not exempt from withholding tax liabilities. Hence, they act as withholding agents of the BIR on income payments they make, such as the salaries of their employees. Non-compliance with the withholding of tax requirements will lead to either disallowance of the expenses or assessment for deficiency withholding taxes against the private educational institutions.

The above discussed tax issues are only some of the usual concerns of private educational institutions. Just like ordinary corporations, many private educational institutions are trying their best to keep abreast of requirements of tax laws and regulations, in addition to the enormous task of equipping with proper wisdom and training millions of students who will be our future leaders, business executives and entrepreneurs.   

(The author is a senior tax manager of Punongbayan & Araullo, member firm of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)