What tax regulation was issued by the Bureau of Internal Revenue (BIR) which excluded for-profit educational institutions from availing of a 1% tax rate under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law? Which part of CREATE serves as reference for the controversial revenue issuance?
The BIR issued Revenue Regulations (RR) No. 5-2021 on April 8 to implement the new income tax rates pursuant to Republic Act No. 11534 or the CREATE law. Section 2 of the issuance defines proprietary educational institutions and nonprofit as follows:
The definition was in reference to Section 6 of the CREATE law:
How are proprietary educational institutions and hospitals which are nonprofit being taxed in the Philippines? If they aren't for profit, aren't they supposed to be exempted from income tax, like charitable organizations?
Pursuant to Section 27 of the tax code, proprietary educational institutions and hospitals which are nonprofit shall pay a tax of 10% on their taxable income. However, beginning July 1, 2020 until June 30, 2023, the preferential rate was further reduced to 1% under CREATE.
Pursuant to Section 30 (E) of the tax code, nonstock, nonprofit corporations or associations which claim to be charitable institutions entitled to income tax exemption must be organized and operated "exclusively" for charitable purposes and no part of its net income or asset shall belong to or be for the benefit of any member, organizer, officer, or any specific person.
Based on Revenue Memorandum Circular (RMC) No. 67-2012, charity is essentially a gift to an indefinite number of persons which lessens the burden of the government. In other words, charitable institutions provide free goods and services to the public which would otherwise fall on the shoulders of the government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes is compensated by appropriations from the Treasury.
Will the BIR heed the call of private schools and lawmakers to withdraw the alleged income tax hike? What is the recourse of private schools to avoid paying 25% and instead avail themselves of the reduced 1% preferential tax rate?
According to Internal Revenue Commissioner Caesar Dulay, the BIR is constrained to deny the request to amend RR 5-2021 "for lack of merit" as the law does not intend to provide tax incentives to stock and profit-oriented educational institutions, but only to nonstock and nonprofit educational institutions.
Despite the increasing number of lawmakers urging the BIR to revoke RR 5-2021 which allegedly increases to 25% from 10% the income tax rate on proprietary educational institutions, they seem unaware of the Supreme Court (SC) decision in GR Nos. 195909 and 196960 dated September 26, 2012, entitled Commissioner of Internal Revenue vs St. Luke's Medical Center, which was circulated by the BIR through the issuance of RMC 67-2012 on October 31, 2012.
RMC 67-2012 quoted the SC decision on the meaning of "proprietary" and "nonprofit" as applied to proprietary nonprofit educational institutions and proprietary nonprofit hospitals under Section 27(B) of the tax code, as amended:
Since CREATE did not substantially amend the definition of proprietary educational institutions and with the SC ruling as reiterated in RMC 67-2012, it's unlikely that the BIR will withdraw its regulation.
Although both Finance Secretary Carlos Dominguez III and BIR Commissioner Dulay signed RR 5-2021 and denied the request to withdraw it, private schools still have recourse, such as:
Mon Abrea, CPA, MBA, is the co-chair of the Paying Taxes-EODB Task Force. With the TaxWhizPH mobile app as his brainchild, he was recognized as one of the Outstanding Young Persons of the World, an Asia CEO Young Leader, and one of the Ten Outstanding Young Men of the Philippines because of his tax advocacy and expertise. Currently, he is the chairman and CEO of the Asian Consulting Group and trustee of the Center for Strategic Reforms of the Philippines – the advocacy partner of the Bureau of Internal Revenue, Department of Trade and Industry, and Anti-Red Tape Authority on ease of doing business and tax reform. Visit www.acg.ph for more information or email him at email@example.com and download the TaxWhizPH app for free if you have tax questions.