A House of Representatives panel on Monday approved the consolidation of measures defining the tax rates for proprietary schools in a manner that allows them to avail of the 10-percent discount preferential rate on taxable income and extends to them the same relief granted to non-profit schools.
The House Committee on Ways and Means approved the draft substitute bill that would allow the income tax exemption and the 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, to be applied to for-profit private schools.
Albay Rep. Joey Salceda, committee chair, said the measure is meant to intervene in the implementation of the new regulation of the Bureau of Internal Revenue (BIR) increasing the tax rate of private educational institutions to 25 percent from 10 percent.
He said he 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.
“So, it’s a clean slate legally, and lower taxes moving forward,” he said.
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.
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.