Taxation of Educational Institutions in the Philippines

In the prior post, we shares the types of educational institutions in the Philippines. In this article, let us share some points on the taxation of educational institutions in the Philippines – income taxation, value added taxation, and real property taxation.

The Constitution of the Philippines provide for tax exemptions and privileges as follows:

“Article XIV, Section 4(3). All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

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 provision for reinvestment.”

Article XIV, Section 2(4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax

A. Income taxation

For tax income tax purposes, educational institutions are classified as follows:

1. Proprietary educational institution;
2.  Non-stock, non-profit educational institution
3. Government educational institution

Proprietary educational institutions

As a rule, proprietary educational institution is subject to a special income tax rate of ten percent (10%) on their taxable income except on certain passive incomes. Notably, this is much lower than the regular corporate income tax rate of 30% of taxable net income. However, they must dedicate their operations to providing educational services because if they do not, then, they will cease to enjoy the benefit of 10%. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources, they shall be taxed at 30% on the entire taxable income. ‘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. Income other than from its educational operations are not covered by the 10%.

Allowable deductions. It is allowed to claim from its gross income, allowable deductions in like manner as an ordinary taxpayer engaged in trade or business. In addition to the expenses allowable as deductions, it may at its option elect either:

(a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or

(b) to deduct allowance for depreciation thereof.

In other words, capital outlays which would have been normally considered as an asset subject to depreciation maybe claimed by proprietary educational institutions as an outright deduction from its gross income.

Non-stock and non-profit educational institutions

Section 30(H) of the Tax Code, as amended, provides an exemption from income taxation and hereunder we quote:

“Section 30. Exemptions from Tax on Corporations. – The following organizations shall not be taxed under this Title in respect to income received by them as such:

(H) A non stock and non profit educational institution;”

To avail of the income tax exemption, the tax authorities – Bureau of Internal Revenue (BIR) examines carefully its charter and operations as “non-stock” and “non-profit”. Non-stock relates to the characteristics of its registered entity with the Securities and Exchange Commission (SEC) with the following characteristics:

1. Membership based and not based on shares of stock;
2. Governed by Board of Trustees and not Board of Directors;
3. Does not declare and issue dividends;
4. In dissolution, assets normally goes to another non stock with similar import purpose of creation ;
5. Administrative expenses does not exceed 30%

Non-profit on the other hand relates to the manner of its operation.

 Government educational institutions

As we have said earlier, government educational institutions are special creations of the legislative body – Congress, by virtue of a law creating the school.

“Section 30. Exemptions from Tax on Corporations. – The following organizations shall not be taxed under this Title in respect to income received by them as such:

(I) Government educational institution;”

It is normally the law or charter creating the school that defines the taxability and funding of said school and they are almost always exempted from income tax with respect to such gross receipts or income from educational operations. Income of government educational institutions from other sources are taxable in like manner as the other two classifications above.

Income taxation of passive income

Finally, passive income of proprietary educational institutions is taxed in the same manner as ordinary corporations. Examples of passive income are interest income from Philippine bank deposits and royalties.

B. Value added taxation

Educational services is a sale of service. For value added tax purposes, Section 109(H) largely provide for the value added tax rules in the Philippines for educational institutions and we quote:

Section 109(H). Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) and Commission on Higher education (CHED), Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions;

Under the above, income or gross receipts (tuition fees, matriculation fees, and other school related fees) from educational services of  educational institutions are not subject to VAT. The simple reason of the rule is to avoid the effect of VAT on the cost of education that the general public could capably educate and that in turn, the government could fulfill its obligation to provide quality education among it citizens.

C. Real property taxation

As the constitution provides, and we quote hereunder:

“Article XIV, Section 4(3).

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.

Further, under Section 234(b) of the Local Government Code, and hereunder we quote:

Section 234. Exemptions from real property tax. – The following are exempted from payment of the real property tax:

(b). Charitable institutions, churches, parsonages or covenants appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes. (Emphasis supplied)

The above clearly provides for the exemption from real property taxation in the Philippines of lands, buildings, and improvements. What is required is that they should be actually, directly, and exclusively used for educational purposes. Properties not falling under such qualifications shall be subject to real property tax in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@ta************.org.)