SENATOR NANCY Binay made an appeal over the weekend to the Bureau of Internal Revenue (BIR) to withdraw Revenue Regulation (RR) No. 5-2021 which would impose a 150% increase to the income tax of private schools. “Marami na nga sa ating mga private schools ang nagsara na dahil sa pandemya. Kung ipapatupad ang revenue regulation na ito, siguradong mas marami pa sa kanila ang tuluyan nang magsasara,” Binay said.
Under the regulation which was issued on April 8, 2021, income tax on so-called Proprietary Educational Institutions that are run by stock corporations would be increased to 25% from the current 10%. Binay said imposing additional taxes on private schools is contrary to the intent of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act which was passed to help ease the effects of the pandemic on businesses through lower corporate income taxes.
“Tingin namin sa Senado merong lihis sa pagkaka-interpret ng batas. We passed the CREATE Law to help businesses survive the effects of the pandemic through tax incentives. The law plainly states (Section 2, paragraph-d) the need to create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs. Wala sa intensyon ng batas dagdagan pa ng pasanin at pasakit ang mga eskwelahan,” Binay said. The senator said that the regulation is clearly against the spirit of the law, and asked the BIR to immediately rescind its issuance.
“Sa panahon ngayon, let’s be more sensitive to the struggles our kababayans are going through. Ito ang panahon ng pagtutulungan, at bilang mga kawani ng gobyerno, dapat nasa tamang pwesto ang mga puso natin para sa kapwa Pilipino,” Binay pointed out. Binay supports Senate Bill 2272 filed by Senator Sonny Angara. It seeks to amend a section of the National Internal Revenue Code (NIRC) that aims to correct an erroneous interpretation on the tax imposed on Proprietary Educational Institutions.
“Tulungan natin silang maka-survive. Wag na nating padapain pa lalo ang mga private school na nagpupumilit na makabangon,” she added. While the bill has yet to be passed, Binay reminded the BIR to be more circumspect in its interpretation of laws and applying additional taxes during a pandemic. “Hirap na hirap na nga lahat. Marami nang na-layoff na teachers; marami nang nagsarang schools; malapit nang bumigay ang mga academic institution–taxing private schools with 25% does not make any sense at all. Konting puso naman sana,” she added.
An effective tax administration system is one that is clear and unambiguous and can easily be followed by both the tax office and the taxpayer. Any ambiguity in our tax laws then should be addressed so that correct taxes may be collected from proper taxpayers. As currently worded, Section 27(? of the National Internal Revenue Code (NIRC) creates an ambiguity as to whom the preferential tax rates apply to. Specifically, as to the qualifications, i.e. proprietary and non-profit.
The first sentence of Section 27(?, as amended, provides: “(? Proprietary Educational Institutions and Hospitals. – Proprietary Educational Institutions and Hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That beginning July 1, 2020 until June 30,2023, the tax rate herein imposed shall be one percent (1%): Provided, further. That if the gross income from ‘unrelated trade, business or other activity’ exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income, x x x.” To add to the confusion, the tax office recently issued Revenue Regulation (RR) No. 5-2021 which interpreted the provision to mean that an educational institution should both be proprietary and non profit in order to qualify for the preferential tax rate. Being proprietary and nonprofit is a legal impossibility, as in its general sense, proprietary means privately owned and managed and run as a profit-making organization while nonprofit is one not conducted or maintained for the purpose of making a profit.
Thus, instead of shoring up proprietary educational institutions during the pandemic with the much needed reduction in the income tax rate from 10% to 1% sought under the CREATE Act, this erroneous regulation would instead subject them to the regular rate of 25%.
Contrary to the clear mandates of both the Constitution and the NIRC as recently amended by the CREATE Law, RR No. 5-2021 limits the application of the preferential tax treatment to Proprietary Educational Institutions that are “non-profit.” Art. XIV, Sec. 4(3), of the Constitution provides: “(3) 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. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.”
“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.” Clearly, the reference to Proprietary Educational Institutions above refers to for profit educational institutions which are organized as stock corporations as the Constitution allows “restrictions on dividends and provisions for reinvestment” as part of the limitations for the grant to them of preferential tax treatment.
This confusing and erroneous tax regulation, which contradicts the language and the intention of both the Constitution and our tax laws, especially during this deep economic recession, will penalize, marginalize and discriminate against Proprietary Educational Institutions with unfeasibly higher taxes that may force financially distressed schools to close down and trigger a radiating wave of economic disruption that will hit not just teachers and school personnel, but also the extensive network of linked small and medium businesses and livelihood activities of the host communities.
To remedy this apparent ambiguity and protect the Constitutional mandate of incentivizing proprietary educational institutions through a law passed by Congress, the Angara Bill seeks to amend Sec. 27 (? to clearly indicate that the preferential tax rate shall apply to: A. All Proprietary Educational Institutions, including those that are stock and for profit; and B. Non-Profit Hospitals.