As the new school year begins, it is a good time to revisit the rules on the tax exemptions enjoyed by nonstock, nonprofit educational institutions.
The 1987 Philippine Constitution guarantees that all revenues and assets of nonstock, nonprofit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties (Paragraph 3, Section 4, Article XIV).
In relation to the above, Section 30 (H) of the Tax Code provides that a nonstock, nonprofit educational institution is exempt from tax on all revenues and assets derived in pursuit of its purpose as an educational institution and used actually, directly, and exclusively for educational purposes (Bureau of Internal Revenue [BIR] Ruling No. 459-13 dated December 6, 2013).
Except as otherwise provided in the Tax Code, an income tax of 30 percent is imposed upon the taxable income derived by domestic corporations during each taxable year from all sources within and outside the Philippines.
Nevertheless, in the case of proprietary educational institutions and hospitals that are nonprofit, they shall pay 10 percent tax on their taxable income except those covered by Section 27 (D) (1) of the Tax Code relating to passive income, subject to different tax rates.
Proprietary educational institutions are those private schools maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be. It should be noted, however, that if the gross income from unrelated trade, business, or other activity exceeds 50 percent of the total gross income derived by such educational institutions or hospitals from all sources, the tax rate of 30 percent shall be imposed on the entire taxable income (Section 27 [B] of the Tax Code of 1997, as amended).
In the case of St. Luke’s Medical Center, Inc. versus Commissioner of Internal Revenue (G.R. Nos. 195909 & 195960 dated September 26, 2012), the Supreme Court (SC) ruled on the tax exemption of the former. The medical establishment was incorporated as a nonstock, nonprofit institution for charitable and social welfare purposes. However, St. Luke’s failed to meet the requirements under Section 30 (E) and (G) of the Tax Code to be completely tax-exempt from all its income. Nevertheless, it remains a proprietary nonprofit hospital under Section 27 (B) of the Tax Code as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. As a proprietary nonprofit hospital, St. Luke’s is entitled to the preferential tax rate of 10 percent on its net income from its for-profit activities.
Despite the premises above, can a nonstock, nonprofit educational institution claim automatic exemption under the tax rules of the BIR?
The BIR issued Revenue Memorandum Circular (RMC) No. 14-13, stating that, proprietary nonprofit hospitals, or nonstock, nonprofit entities operating hospitals, must secure a tax exemption ruling/certificate to confirm their tax-exempt status. The same requirement is imposed under RMO 20-13, as amended by RMO 28-13, on corporations and associations enumerated under Section 30 of the Tax Code.
In case of failure to secure a tax exemption ruling, RMO 34-14 provides that the concerned nonstock, nonprofit entity must prove compliance with the conditions laid down by the law and other pertinent administrative issuances in the event of a tax investigation to be exempt from income tax. In addition, failure to secure a tax exemption ruling shall also subject nonstock, nonprofit entities to withholding tax on their transactions. This tax exemption ruling shall be valid for a period of three years from the date of issue and may be renewed upon filing of a subsequent application for Tax Exemption/Revalidation, unless sooner revoked or canceled.
It is interesting to mention that in 2014, a Regional Trial Court in Makati declared null and void the requirement to renew the tax exemption status of nonprofit schools. Despite the court decision, the BIR still issued RMC 24-16, reiterating the Department of Finance Order (DFO) No. 149-95 requirement for nonstock, nonprofit educational institutions to submit, on an annual basis, documents detailing their finances to the Revenue District Officer (RDO) in order to determine whether they will be subject to tax on income from trade, business, or other activity not related to the exercise or performance of their educational purpose or function.
Consistent with the court decision, RMO No. 44-16 was issued, emphasizing that the constitutional conferral of tax exemption upon nonstock and nonprofit educational institutions should not be implemented or interpreted in such a manner that will diminish the intent and language of the Constitution by streamlining the requirements. For the constitutional exemption to be enjoyed, there are only two requisites: (1) the school must be nonstock and nonprofit; and (2) its income is actually, directly, and exclusively used for educational purposes.
It is a welcome development that based on RMO No. 44-16, nonstock, nonprofit educational institutions are no longer required to renew or revalidate the tax exemption rulings previously issued to them, that fewer documents will be submitted by the applicant, and that the application process for securing a tax exemption certificate will be shortened. Despite this, to update the records of the BIR and for purposes of a better system of monitoring nonstock, nonprofit educational institutions, those with tax exemption rulings or certificates of exemption issued prior to June 30, 2012 are still required to apply for new rulings.
We hope this trend continues. The summer officially ends, and it’s school time again!
The author is a senior manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.