Taxwise Or Otherwise

Election day is fast approaching. On Monday, registered voters will be choosing executive and legislative officials who will be serving for the next three to six years. Taking heed of the old election slogan “Vote wisely,” my list includes candidates with education reform as part of their advocacy. As stated in this column by my colleague last year, education is unarguably one of the greatest pillars of a strong and stable nation. It’s of some relevance, then, to examine how our policymakers dealt with tax regulations on proprietary educational institutions (PEIs) when they issued Revenue Regulations (RR) No. 3-2022.

As a brief refresher: Congress recently passed massive tax reforms like the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. Among the changes introduced was the grant of a 1% preferential corporate income tax (PCIT) rate for PEIs and nonprofit hospitals, effective from July 1, 2020 to June 30, 2023. When the tax man released the implementing rules and regulations (RR No. 5-2021), PEIs were left distraught because the promised tax relief, in the form of the 1% PCIT, proved elusive. RR No. 5-2021 defined PEIs as nonprofit private schools, which is seemingly a contradiction — being proprietary logically means that such private schools operate for profit. As long as this ruling stood, PEIs were unable to avail of the 1% PCIT.

The controversy stemmed from the incorrect interpretation of Section 27(B) of the Tax Code, such that nonprofit was made applicable to both hospitals and PEIs. Thankfully, the tax man issued immediate corrective measures by suspending the implementation of the RR No. 5-2021 provisions relating to “nonprofit” PEIs.

To prevent further confusion, Congress passed Republic Act (RA) No. 11635 in December 2021 to further amend Section 27(B). Now worded, Section 27(B) applies to “hospitals which are nonprofit and proprietary educational institutions.” To this end, RR No. 3-2022 was issued as the implementing regulation for the amended Section 27(B).

Under the recent RR, PEIs refer to “any private school(s) maintained and administered by private individuals or groups, with an issued permit to operate from the Department of Education (DepEd) or the Commission of Higher Education (CHED) or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.” The definition of PEIs now excludes the word nonprofit, rightfully so, if I may add. It also reiterated that PEIs and nonprofit hospitals are subject to PCIT of 10% on their taxable income, or a lower rate of 1% beginning 1 July 2020 to 30 June 2023. The 10% (or 1%) PCIT is on the condition that the PEIs’ and nonprofit hospitals’ gross income from unrelated trade, business, or other activities does not exceed 50% of their total gross income from all sources. Otherwise, if the threshold is breached, the regular corporate income tax (RCIT) of 25% will apply to their entire taxable income.

While the conundrum over PEIs’ entitlement to PCIT has been finally and completely resolved under RR No. 3-2022, it is worth noting that other pronouncements of the RR created new areas of concern.

First, the coverage of the 10% (and 1%) PCIT was expanded to include nonstock nonprofit (NSNP) educational institutions whose net income or assets accrue/inure to or benefit any member or specific person (or with “income inurement” benefit). For several reasons, it is undue legislation of the Tax Code and RA No. 11635.

Section 27(B) specifically mentioned PEIs and nonprofit hospitals only. The expansion in coverage thus constitutes an undue delegation of legislative power, altering Congressional intentions of the law. Further, under Article XIV Section 4(3) of the 1987 Constitution, all revenue and assets of NSNP educational institutions in so far as they are used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. The entitlement to tax exemption depends on how the revenue is used. If the actual, direct, and exclusive use criteria are not met, the RCIT should apply to such revenue absent any other legislation providing tax exemptions or other tax incentives. Then, there is no authority or basis for the RR to extend the PCIT to NSNP educational institutions, even if such incentive is limited to those with income inurement benefit only. It also bears mentioning that nonstock nonprofit is inconsistent with income inurement. Under the Revised Corporation Code, to be a “nonstock” corporation, no part of its income must be distributed as dividends to its members, trustees, or officers. Following this, an NSNP educational institution cannot have an “income inurement” benefit, as the former negates the latter.

Second, RR No. 3-2022 states that if the ratio of gross income from unrelated trade, business, or other activity to total gross income exceeds 50%, the 25% RCIT applies to the entire taxable income. Whereas Section 27(B) of the Tax Code provides that, in such a case, the tax prescribed under Section 27(A) will apply. Under subsection (A), a lower RCIT rate of 20% is available to corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding land on which the office, plant, and equipment are situated. By explicitly mentioning the “25% regular corporate income tax rate prescribed under Section 27(A)”, it thus appears that the lower 20% RCIT is not made available to PEIs and nonprofit hospitals, exceeding the allowable gross income ratio.

Respectfully, I urge our tax authorities to revisit the above provisions of RR No. 3-2022, having modified or expanded the laws for their implementation.

On a positive note, with the release of RR No. 3-2022, PEIs may breathe easy and find solace that the PCIT, which they’re entitled to by legislative intent and declaration, can now be availed of without apprehensions. Nonetheless, it is with the hope that the tax man will likewise revisit the regulation to issue the necessary clarifications on the PCIT of NSNP educational institutions and the lower 20% RCIT for PEIs and nonprofit hospitals.

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.


Dorothy Jane Puguon is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network