Back to school: A reminder on the taxation of educational institutions
Yesyesterday marked the end of beach days for students as they officially begin a new academic year. If the summer of 2022 may seem short, young people can very well look forward to face-to-face lessons. Zoom classes can be booked for now as students flock to schools for their first-ever in-person classes since the pandemic.
At the start of the pandemic, a drop was observed in the number of enrollees, especially in the 2020-2021 academic year, mainly due to economic and social factors related to the pandemic and a reluctance to pass to alternative ways of learning. Private schools took a hit as students transferred into the public school system or dropped out of school altogether. It is hoped that the 2022-2023 academic year will see an increase in enrolments; initial figures from the Department of Education (DepEd) appear positive.
With this optimism about increased enrollment comes tax implications, however. Along with the increase in enrollment and, subsequently, tuition fees, educational institutions are still subject to some form of taxation. So, all you educators and school principals, get your pens and papers (or your tablet, as the kids would say), it’s time for a refresher course on educational institution taxation.
LESSON 1: WHAT IS THE INCOME TAX RATE FOR EDUCATIONAL INSTITUTIONS?
Before discussing the taxation of school income, it is important to determine the school’s corporate structure, which will be used to classify it as either an Owner Educational Institution (IEP) or a not-for-profit non-grant-based educational institution (NSNP-EI), or a public educational institution (GEI).
PEI, commonly referred to as “private schools”, are managed and administered by individuals, groups or shareholders. IEPs may be registered as national corporations, partnerships, or other legally recognized entities, provided they are registered and comply with the rules and regulations of the DepEd, Commission on Higher Education (CHED), or Technical Educations and Skills Development. Authority (TESDA).
PEIs registered as domestic corporations are subject to a preferential tax rate of 10% based on net taxable income. The CREATE (Corporate Recovery and Tax Incentives for Enterprises) Act, however, gave IBOs a reprieve by lowering the tax rate to 1% of net taxable income between July 1, 2020 and June 30, 2023. The preferential tax rate is granted to IBOs, provided that income from commercial or other unrelated activities does not exceed 50% of total income for the tax year; otherwise, P.E.I. may be subject to ordinary corporate income tax on all taxable income. PEIs other than domestic corporations are still subject to regular tax rates depending on their structure. Thus, a P.E.I. held by a sole proprietorship may still be subject to ordinary income tax.
NSNP-EIs are also considered private schools, as they are operated by private groups of individuals, better known under corporate law as “trustees” or “members”. NSNP-EIs do not issue shares or dividends. Further, no income shall accrue to any director, member, director or officer of NSNP-EIs. These institutions are also required to register and follow the rules of DepEd, CHED and TESDA.
As expressly provided in the Constitution, and reaffirmed in Section 30(H) of the Internal Revenue Code, NSNP-EIs are exempt from income tax on their income and assets, provided that the income and assets are genuinely, directly and exclusively intended for education. purposes. However, untied income may still be subject to the appropriate income taxes.
To ensure that the income of NSNP-EIs is effectively, directly and exclusively used for educational purposes, NSNP-EIs are required to obtain a one-time tax exemption certification from the Bureau of Internal Revenue (BIR) in submitting applicable documents as required under Ordinance No. 44-2016 on Revenue Memorandum. This certification may be revoked by the BIR for any violation of any existing tax rules, or if there are material changes in the character, purpose or mode of operation of the NSNP-EI.
GEIs are schools that are supported, totally or partially, by the government. These institutions are usually incorporated by express provision of law and their tax exemptions are usually set out in their charter. Generally, GEIs are exempt from income tax under Section 29 (I) of the Tax Code.
LESSON 2: IS MY SCHOOL SUBJECT TO VAT ON INCOME OR INCOME RECEIVED?
Section 109(H) of the Internal Revenue Code provides that educational services rendered by private educational institutions and GEIs duly accredited with DepEd, CHED or TESDA are exempt from VAT. However, the exemption does not extend to input VAT on purchases made by schools. In this context, input VAT on purchases made by private schools can be claimed as a cost or an expense.
It should be noted, however, that the VAT exemption of private schools only extends to revenue from educational services such as tuition fees. In several BIR VAT rulings and tax appeals cases, gross receipts from other activities such as disposal of school vehicles and equipment for operational use and rentals received by IBOs or NSNP-EIs from dealerships canteens may still be subject to VAT. Thus, if the private school can be exempt from VAT on its tuition fees, it can still be subject to VAT on other areas.
Income from non-educational activities has been the subject of various administrative and court cases involving educational institutions – this is a matter to watch.
LESSON 3: DOES MY SCHOOL HAVE TO WITHHOLD TAX ON PURCHASES? Taxpayers such as NSNP-EIs or GEIs, who are exempt from paying income tax, are generally also exempt from withholding tax on income received. However, this does not exempt the school from withholding taxes on its purchases.
Common expenses such as rent, payments to professionals, management and technical consultants are all subject to certain withholding taxes under Taxation Regulation (RR) No. 02-1998, as amended by RR No. 11-2018. This means that on each payment made to suppliers, the school must withhold a certain net percentage of VAT.
Finally, schools considered primary withholding agents are required to withhold 1% from each purchase of goods or 2% from each purchase of services from regular vendors.
Benefiting from preferential tax rates and exceptions, schools must also invest in a strong regulatory compliance team in addition to having a strong faculty roster. Regulatory compliance by educational institutions is equally important as part of our collective goal to enrich the nation’s youth and improve our education and tax system.
Questions? If there is none, class returned!
Let’s Talk Tax is a weekly column from P&A Grant Thornton that aims to keep the public informed of various tax developments. This article is not intended to be a substitute for competent professional advice.
Joen Jacob G. Ramas is senior in charge of the Tax Advisory & Compliance division in the Cebu office of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.