Yesterday marked the end of beach days for students as they officially start a new academic year. While summer 2022 might have been momentary, the youth can very well look forward to the implementation of face-to-face classes. Zoom classes can take the side road for the meantime while students flock back to schools for their first-ever in-person classes since the pandemic.
At the onset of the pandemic, a plunge was seen in the number of enrollees especially in academic year 2020-2021, mainly due to pandemic-driven economic and social factors and a hesitancy to transition to the alternative modes of learning. Admittedly, private schools took a hit as students transferred to the public-school systems or stopped school altogether. Hopefully, academic year 2022-2023 could pose an increase in enrollees, though initial numbers from the Department of Education (DepEd) prove to be optimistic.
This optimism for increased enrollees, however, does come with its tax effects. Along with the increase in enrollees and subsequently, tuition fees, educational institutions are still subject to some form of tax. So, to all educators and school administrators, grab your pen and papers (or your tablet, as what the kids would say), it’s time to take a refresher course for the taxation of educational institutions.
Lesson 1: What’s the income tax rate of educational institutions again?
Before we discuss the income taxation of schools in the Philippines, it is important to determine the corporate structure of the school, which will be used to classify it either as a proprietary education institution (PEI), a non-stock, non-profit educational institution (NSNP-EI), or a government educational institution (GEI).
PEIs, commonly known as “private schools”, are educational institutions which are managed and administered by private individuals, groups or stockholders. PEIs may be registered as domestic corporations, partnerships, or other recognized entities under the law, provided that they are registered and adhere to the rules and regulations of either the DepEd, Commission on Higher Education (CHED), or the Technical Educations and Skills Development Authority (TESDA).
PEIs that are registered as domestic corporations are subject to a preferential income tax rate of 10% based on net taxable income. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, however, granted reprieve to PEIs by lowering the tax rate to 1% of net taxable income from July 1, 2020 to June 30, 2023. The preferential tax rate is given to PEIs, provided that incomes received from unrelated business or other activities do not exceed 50% of the total revenues for the taxable year; otherwise, PEIs may be subject to the regular corporate income tax on the entire amount of taxable income. PEIs other than domestic corporations are still subject to the regular income tax rates depending on their structure. As such, a PEI owned by a sole proprietorship may still be subject to the regular income tax.
NSNP-EIs are also considered as private schools, as these are managed by private groups of individuals, better known under corporate law as “trustees” or “members”. NSNP-EIs do not issue shares of stock or dividends. Further, no income shall inure to the benefit of any trustee, member, directors, or officers of NSNP-EIs. These institutions are required to register and adhere to the rules of DepEd, CHED, and TESDA as well.
As expressly provided in the Philippine Constitution, and further reiterated under Section 30(H) of the Tax Code, NSNP-EIs are exempt from income tax on their revenues and assets, provided that the revenues and assets are actually, directly, and exclusively for educational purposes. Unrelated income, however, may still be subject to the appropriate income taxes.
To ensure that the income from NSNP-EIs are actually, directly and exclusively used for education purposes, such NSNP-EI is required to secure a one-time tax exemption certification from the Bureau of Internal Revenue (BIR) through the submission of applicable documents as required under Revenue Memorandum Order No. 44-2016. Such certification may be revoked by the BIR for any violation of any existing tax rule, or if there are material changes in the character, purpose or method of operation by the NSNP-EI.
GEIs are schools that are supported, either fully or partially, by the government. These institutions are commonly formed by express provision of law and their tax exemptions are usually stated in their charter. Generally, GEIs are exempt from income tax under Section 29(I) of the Tax Code.
Lesson 2: Is my school subject to VAT on income or revenue received?
Section 109(H) of the Tax Code states that educational services rendered by private educational institutions and GEIs duly accredited with either the DepEd, CHED, or TESDA are exempt from VAT. However, the said exemption does not extend to the input VAT on purchases made by the schools. In connection with this, input VAT on purchases made by the said private schools may be claimed as part of cost or expense.
It must be noted, however, that the VAT exemption of private schools only extends to receipts from educational services such as tuition fees. In several BIR VAT rulings and tax appeals cases, gross receipts from other activities such as the disposal of school vehicles and equipment for operational use and rentals received by PEIs or NSNP-EIs from canteen concessionaires may still be subject to VAT. Thus, while the private school may be exempt from VAT on its tuition fees, it may still be subject to VAT on other areas.
Revenues received from non-educational activities have been the subject of various administrative and judicial cases of educational institutions—this is one to watch.
Lesson 3: Does my school need to withhold taxes from purchases?
Taxpayers, such as NSNP-EIs or GEIs, who are exempt from payment of income tax, are generally exempt from withholding tax on income receipts as well. However, this does not absolve the school from withholding taxes from its purchases.
Common expenses such as rentals, payments to professionals, management, and technical consultants are all subject to certain withholding taxes under Revenue Regulation (RR) No. 02-1998, as amended by RR No. 11-2018. This means that on every payment made to suppliers, the school must withhold a certain percentage therefrom net of VAT.
Lastly, schools that are considered as top withholding agents are required to withhold one percent (1%) on every purchase of goods or two percent (2%) on every purchase of service from regular suppliers.
Blessed with preferential tax rates and exceptions, schools must also invest in a robust regulatory compliance team aside from having a strong roster of faculty members. Of equal importance is regulatory compliance of educational institutions as part of our collective aim of enriching the country’s youth and improving our educational and tax system.
Any questions? Hearing none, class dismissed!
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 23 August 2022