/ 4 June 2021

SENATOR Juan Edgardo ‘Sonny’ Angara filed a bill seeking to amend a section of the National Internal Revenue Code to correct an erroneous interpretation on the tax imposed on proprietary educational institutions.

In filing Senate Bill 2272, Angara cited Revenue Regulation No. 5-2021 issued by the Bureau of Internal Revenue last April 8, 2021 on the implementation of Republic Act 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act  or CREATE, particularly on the provision that deals with the preferential tax treatment on proprietary educational institutions and hospitals.

In RR No. 5-2021, the BIR interpreted the provision of CREATE to mean that an educational institution should both be proprietary and non-profit to qualify for the preferential tax rate of one percent on their taxable income until June 30, 2023.

Angara explained in his bill that “being proprietary and non-profit is a legal impossibility” because the term proprietary generally means one that is privately owned and managed and run as a profit-making organization.

“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%,” Angara said.

“The 25% was not imposed on schools in the past. Schools are among the hardest hit institutions during this pandemic. We can be more sensitive in our policies. Dapat mas sensitibo tayo ngayon sa pangangailangan ng ating mga kababayan lalo na itong mga paaralan ay mahalagang institusyon sa ating lipunan at ka-partner ng gobyerno sa paghubog ng ating kabataan,” Angara added.

The chairman of the Senate Committee on Finance argued that the wording of Section 27 of the NIRC, as amended, may have contributed to the erroneous interpretation made by the BIR, as it creates an ambiguity as to whom the preferential tax rates apply to.

The said section of the law states that “Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent on their taxable income… Provided, that beginning July 1, 2020 until June 30, 2023, the tax herein imposed shall be one percent.”

Angara said the RR also contradicts the Constitution, particularly Article XIV, Sec. 4 which provides for the entitlement of exemption from taxes and duties, all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes.

The same provision of the Constitution also states that “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 on reinvestment.”

A lawyer himself, Angara noted that the provision on proprietary educational institutions under the Constitution clearly refers to for-profit educational institutions organized as stock corporations.

“The confusing and erroneous tax regulation, which contradicts the language and the intention of both the Constitution and our tax laws, will only serve to add to the already difficult circumstances being faced by the educational institutions in the country,” he explained.

Apart from penalizing, marginalizing and discriminating against these proprietary educational institutions, Angara said the unfeasibly higher taxes could lead to even more closures as they are already struggling to cope with the financial pressures brought about by the pandemic.

“This will lead to even more teachers and other school personnel losing their jobs and the loss of income for the extensive network of linked small and medium enterprises and livelihood activities of the host communities as well,” the senator said.