TAXATION OF PROPRIETARY EDUCATIONAL INSTITUTIONS
By Euney Marie Mata-Perez on May 20, 2021
THERE is now confusion as to the taxation of educational institutions which are proprietary, stock or for profit.
Aside from decreasing the regular corporate income tax to 25 percent or 20 percent in certain cases, the Corporate Recovery and Tax Incentives for Enterprises (Create) Act or Republic Act (RA) 11534 reduced the special corporate income tax on “proprietary educational institutions and hospitals which are non-profit” from 10 percent to one percent under Section 27(B) of our National Internal Revenue Code, as amended, for a period of three years from July 1, 2020 to June 30, 2023.
In Revenue Regulations 5-2021, one of the regulations issued pursuant to the CreateAct, the Bureau of Internal Revenue (BIR) defined “proprietary educational institutions” as private schools which are “nonprofit”, as follows:
Proprietary Educations Institutions – refer to any private school, which are non-profit for the purpose of these Regulations, maintained and administered by private individuals or groups, with an issued permit to operate from the Department of Education (DepEd) or the Commission on Higher Education (CHED) or the Technical Education and Skill Development Authority (Tesda), as the case may be, under existing law and regulations.
The above definition, however, gives rise to an erroneous interpretation that all private educational institutions which are stock (and thus for profit) are unable to avail of the one percent special corporate income tax, but instead be subject to the reduced regular corporate income tax rate of 25 percent, a rate higher than the ten percent tax that they are currently enjoying.
A close reading of Section 27(B) of the Tax Code and a study of its history shows that it does not refer to non-stock or non-profit educational institutions; instead, it refers to educational institutions which are “proprietary” and thus, for profit. The term “which are not for profit” under Section 27(B) refers to “hospitals” only and not to the “proprietary educational institutions”. Stated differently, Section 27(B) speaks of two different institutions, namely:
- Proprietary educational institutions, with permits from CHED, DepEd, and TESDA;and
- Hospitals which are non-profit.
It is thus erroneous for the BIR to qualify the term “proprietary educational institutions” with the phrase “non-profit”, as both terms are contradictory. An institution that is proprietary is generally a stock corporation which is for profit. Non-profit means they are non-stock.
There is sufficient basis for this position:
1)Non-stock and non-profit educational institutions are expressly exempt from tax under Section 30(H) of the Tax Code; thus, they cannot be the subject matter of Section 27(B) of the Tax Code which covers the taxation of domestic corporations in general.
2) Legislative history shows that the 10 percent special corporate income tax rate applies to proprietary or stock educational institutions. The rate was introduced in 1968 when RA No. 5431 (1968) then amended Commonwealth Act 466 or our National Internal Revenue Code of 1939. The original language of the provision states: “Private educational institutions other than those exempt under Section twenty-seven(e) of this Code shall pay a tax of ten percent of their taxable net income.” This was further reiterated in Presidential Decree 1158 in 1977, which then expressed that either stock or non-stock educational institution can avail of the same, to wit:
“Sec. 24. Rates of tax on corporations. Xxx
“Private educational institutions, whether stock or non-stock shall pay a tax of ten percent of their taxable net income.”
However, when the 1987 Constitution was passed, it provided that 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. (Article XIV, Sec. 4[3]).
3) The phrase “hospitals which are nonprofit” was introduced only in 1997, by RA8424 (the Tax Reform Act of 1997), then amending our Tax Code. The word “proprietary” was also used instead of the term “private”. Further, the words “non-stock” or “stock” were removed. RA 8424, however, expressly added “nonstock and nonprofit educational institution” as an expressly exempt entity under Section 30(H). Thus, what remained subject to the 10 percent tax were “proprietary educational institutions” and “hospitals which are non-profit.”
4) The word “proprietary” before the words “educational institutions” indicates that these entities are for profit, and thus, stock corporations. The term “proprietary” generally means an entity which privately-owned and managed and run as a profit-making organization (https://www.merriam-webster.com/dictionary/proprietary). There is no such thing as a stock or proprietary educational institution which is “non-profit”.
The delineation between a non-stock, non-profit educational institution and a proprietary educational institution was elucidated by the Supreme Court in the case of Commissioner of Internal Revenue v. De La Salle University Inc. (G.R. 196596, Nov. 9, 2016), when the Supreme Court affirmed the tax exemption ofnon-stock, non-profit educational institutions.
Lastly, subjecting proprietary educational institutions, which have been enjoying the 10 percent special corporate income tax rate, to the higher tax of 25 percent defeats the objectives and purpose of the Create Act, which is to give reprieve to taxpayers who are financially burdened because of the Covid-19 pandemic.
While tax exemptions (including preferential rates) are strictly construed against taxpayers, they should be interpreted taking into consideration the intent of the law, with due consideration to legislative history. Thus, the BIR should re-examine its position with respect to the taxation of “proprietary educational institutions.”
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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and is the president of the Asia-Oceana Tax Consultants’ Association.