DOF open to amending tax code for private schools

MANILA, Philippines — The Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) support the amendment of a provision of the Tax Code pertaining to the tax treatment of private schools and hospitals, provided that no refunds will be made.

During the hearing of the House committee on ways and means yesterday, Finance Assistant Secretary Dakila Napao said the department supports legislation to clarify the language in the contested Section 27 (B) of the Tax Code to state that all proprietary educational institutions and non-profit hospitals shall continue to enjoy a 10 percent tax rate and will be eligible for temporary reduction of tax rate to one percent for the next three years.

However, it opposes a retroactive provision in the consolidated bill if it will mean that tax refunds will have to be made, citing the administrative problems this will cause the BIR.

“The DOF is not against the measure which aims to subject all proprietary educational institutions to 10 percent preferential tax rate,” said Napao.

“The DOF, however, is not keen on supporting the retroactivity provision of the bill because we believe the current position of the BIR is supported by jurisprudence… We believe it would be a challenge administratively for the BIR to process and refund. Not to mention the impact of this retroactivity provision on existing audits by the BIR on proprietary educational institutions.”

Napao said this is because 62 percent of private schools in the country have already been paying the regular corporate income tax rate of 30 percent prior to the passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE).

Only 38 percent of private schools have been paying income tax using the 10 percent rate.

Yesterday’s committee hearing consolidates four bills amending Section 27 (B) of the Tax Code authored by Reps. Jose Francisco Benitez, Rufus Rodriguez and Joey Salceda, who chairs the committee.

It was agreed that Salceda’s House Bill No. 9596 would be used as the base bill when the measure is submitted for first reading at the opening of regular session in July.

Considering the inputs of stakeholders, regulators and lawmakers, the measure for consolidation proposes that all proprietary educational institutions and non-profit hospitals shall pay a tax of 10 percent on their taxable income.

However, beginning July 1, 2020 until June 30, 2023, the tax rate to be imposed shall be one percent.

The definition of “proprietary” was also added to mean “a private hospital or any private school established as a stock for profit corporation, or as a cooperative.”

It also states that “proprietary educational institutions as defined herein may avail of the preferential rate for their taxable income beginning taxable year 2012.”

This retroactive provision was put in place to reflect the year of the Supreme Court ruling on the tax treatment of private hospitals, which was cited by the BIR as basis for the contested Revenue Regulation (RR) 5-2021.

Lastly, the bill states that “schools shall not be entitled to a refund.” Lawmakers noted that enabling a refund would also affect government coffers.

This means that private schools that have paid the 10 percent tax in the past will be deemed compliant with the law and those that have paid 30 percent will not be entitled to a refund.

“We at the BIR abide by the position of the Department of Finance. We agree with the proposed bill to put clarity on the taxation of proprietary education institutions but we have reservations on the retroactivity if it will cause refund,” said BIR Deputy Commissioner Marissa Cabreros.

“But if it will have a provision that no refund shall be granted, then the BIR will not have any reservations.”

Private schools have asked the Court of Tax Appeals to review and stop the implementation of a revenue regulation that can significantly raise the tax take from proprietary educational institutions.

BIR commitment

Salceda said he was able to “secure from the BIR a commitment of support for the revision by legislation of the ambiguities in the new law,” the CREATE Act.

The BIR expressed willingness to rectify an alleged erroneous policy imposing additional taxes on private schools.

“One, they will be able to avail of the one percent tax rate up to 2023; and two, they will not be held liable for the regular tax rate of 30 percent which the BIR says they were constrained by the Supreme Court to implement,” the Albay congressman said. “So, it’s a clean slate legally, and lower taxes moving forward.”

In an aide memoire to Speaker Lord Allan Velasco, he pointed out that the income tax increase – “if made effective” – represents 5.72 percent of schools’ compensation income, which may force the private education sector to “shed another 21,661 jobs.”

“On the other hand, applying the CREATE rate 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 (2022),” Salceda said.

He explained that the tax rate will help private schools hire more teachers and keep existing staff: “Ultimately, the principle is that because education is constitutionally recognized as a value of the State, we cannot unduly burden schools with taxes.”  – Delon Porcalla