2,400% tax hike on private schools

With the passage of Republic Act (RA) No. 11534 (also known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE) in March 2021, companies were given a breather from the substantial losses they sustained due to the pandemic. The legislation intends to cushion the devastating impact on businesses by reducing the tax rates from 30% to 25% (or 20% for small and medium enterprises who meet certain parameters).

To alleviate the losses sustained by schools, CREATE also reduced the tax rates for proprietary educational institutions to 1% (from the standard 10% rate) for three years, from July 2020 until June 2023. However, when the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2021 last April, the term “proprietary” schools led to confusion.

According to the BIR, only non-profit private schools can avail of the lower rate of 1%. Thus, profit-based private schools are subject to the 25% rate for businesses, denying them the benefit of the 10% preferential tax rate under the Tax Code. The disparity between the 1% and 25% rates is equivalent to a 2,400% hike.

Thankfully, on July 28, the BIR issued RR 14-2021, suspending the implementation of RR 5-2021, particularly the onerous provisions on the tax treatment of private schools. However, while the suspension is a welcome development, private schools cannot fully celebrate yet until the BIR issues another regulation revoking the contested provisions of RR 5-2021. Pending such an issuance, the following are some points that the BIR may consider in reversing its prior pronouncement on private schools.

One of the policy statements of CREATE is to “provide support to businesses in their recovery (from) unforeseen events such as an outbreak of communicable diseases or a global pandemic.” The legislative intent is to alleviate the losses encountered by businesses and accelerate their recovery rather than add further burdens.

RR 5-2021, however, appears to contradict this goal. Profit-based private schools have been singled out as subject to a rate hike, while other companies, which are likewise profit-oriented, enjoy reduced rates. Worse, their tax rate will increase from the current 10% to 25%, an onerous imposition that debilitates recovery efforts.

Several lawmakers from both chambers of Congress have expressed their objections through House Bill No. 9913 and Senate Bill No. 2272, both now under discussion. The bills seek to amend Section 27(B) of the Tax Code, allowing private schools to avail of the 1% preferential rate granted under CREATE.

The crux of the dilemma is that RR 5-2021 defines proprietary educational institutions as referring to non-profit private schools.  Under the law, private schools may be classified into two types, either: 1. proprietary (stock corporations) or 2. non-stock/non-profit. The classification is culled from Article XIV, Section 4(3) of the 1987 Constitution that states, “All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment.”

To define a proprietary educational institution as non-profit in nature is incongruous — one term contradicts the other. Thus, the BIR must ultimately revoke or amend RR 5-2021 to address this ambiguity.

The law takes precedence over administrative regulations in case of a conflict. The BIR cannot legislate by imposing conditions or requirements beyond the scope of the law, such as modifying term definitions, in this case. 

Ultra vires acts or those beyond one’s legal authority are invalid. In 2020, the Supreme Court declared as void Revenue Memorandum Circular (RMC) No. 65-2012, which imposed income tax and VAT on dues and other fees paid by condominium unit owners. The Supreme Court found the BIR to have exceeded its authority by expanding the list of taxable items under the Tax Code, which did not include association dues and other fees.

The High Court applied the legal principle that a law should not be construed as imposing a tax unless it states so clearly and expressly. In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.

If higher tax rates are imposed, private schools stand to suffer financial distress. Doing so in an economic recession may break the camel’s back, triggering their closure.

Although understandably, the BIR is trying to identify other sources to replace the revenue lost due to the decrease in corporate tax rates under CREATE, personally, it is unacceptable for private schools to become the sacrificial lambs. Not only because the government must prioritize education as one of its constitutional mandates, but also because increasing the tax rates for private schools is not a fair or “win-win” solution.

If more schools shut down due to the increased tax rates, teachers will lose their jobs, and students denied access to education. Also, if private schools increase tuition to cover taxes, financially hard-up parents may ask their children to drop out of school or transfer to already saturated public schools. As an academic partner of the government, private schools provide an alternative to public school education and enable substantial savings by diverting costs from the education budget. Likewise, if private schools close, tax collection is further reduced since the BIR will lose the taxes these establishments would have paid had they continued to operate. In all scenarios, business and economic recovery will not happen.

I hope the BIR soon issues a favorable and sustainable solution to this issue as soon as possible to save the private education sector, and especially the education of our children, the hope of the country.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Edmund James E. Opinio is a Senior Associate at the Client Accounting Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.


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