Published 18 July 2022, The Daily Tribune
In our article last year entitled “A taxing issue: Higher taxes on for-profit private schools,” published on 9 July 2021, we discussed the conundrum faced by private schools with the issuance of Revenue Regulation 5-2021 of the Bureau of Internal Revenue (BIR), which limited the lower preferential tax rate of one percent from 1 July 2020 to 30 June 2023 to nonstock, nonprofit (NSNP) educational institutions and hospitals.
Just recently on 9 June 2022, the BIR issued another regulation, Revenue Memorandum Circular (RMC) 78-2022, to clarify the income tax treatment of the different classifications of educational institutions and their other tax obligations, as well as compliance requirements.
Some of the notable concerns previously raised refer to the limitation of the lower preferential tax rate of one percent from 1 July 2020 to 30 June 2023 to NSNP educational institutions.
Proprietary educational institutions (PEI) are private schools, other than NSNP, maintained and administered by private individuals or groups. The BIR has clarified in the subject RMC 78-2022 that the income of a PEI that is established as a domestic corporation is subject to the preferential tax rate of one percent, beginning 1 July 2020 until 30 June 2023.
However, domestic PEI with revenues from related, or from related and unrelated activities, are subject to the regular corporate income tax under Section 27 (A) of the Tax Code if more than 50 percent of the total gross income derived from all sources are not used actually, directly and exclusively for educational purposes. The term “unrelated trade, business or other activity” means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function.
The income payments to PEI, which are subject to preferential income tax, are subject to creditable and final withholding taxes. Resident foreign corporation educational institutions are taxable under Section 28(A) of the Tax Code and subject to regular corporate income tax rate, as amended.
A domestic NSNP educational institution may be exempt from income taxes if it is able to factually prove that its income or revenues are used actually, directly and exclusively for educational purposes, and that no net income or asset accrues to the benefit of any member of the corporation.
The NSNP educational institution is required to secure a one-time certificate of income tax exemption or exemption ruling from the BIR, subject to the submission of applicable documents. Note that it is required to file annual income tax returns under BIR Form 1702-EX. Such BIR Form is filed by a corporation, partnership or other non-individual taxpayer exempt under the Tax Code or other special laws, and with no other taxable income. This is commonly filed by foundations, cooperatives, charitable institutions, NSNP educational institutions.
On the other hand, all domestic NSNP educational institutions whose net income or assets accrue/inure to or benefit any member or specific person shall likewise be subject to the one percent preferential tax rate beginning 1 July 2020 until 30 June 2023.
The revenues or income of NSNP educational institution that are not used actually, directly and exclusively for educational purposes shall be subject to the 25 percent regular corporate income tax pursuant to Section 27 (A) of the Tax Code, as amended, using the income tax return for mixed special preferential/rate (BIR Form 1702-MX). Such income which shall be reflected under the column that will be subject to the regular income tax rate.