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











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Philippines is a largely educated population and the best English speaking country, as we claim it! Do you subscribe to this the way we do?

Do not get us wrong and we do not intend to argue on that point. We subscribe to that anyway because as a matter of policy, primary and secondary education is mandatory and English is taught all throughout until college. Nevertheless, this article would tend to share the different broad classifications of educational institutions in the Philippines preparatory towards better appreciation of the applicable tax rules.

For tax tax purposes, educational institutions are distinguished from one another based on the nature of its structure or the charter that creates the same. Here are the broad classifications:

Proprietary educational institution

Proprietary educational institution is one registered with the Securities and Exchange Commission (SEC) as a private stock corporation to engage in maintaining and administering a school – pre-school, kindergarten, primary, secondary, tertiary or college, pst-graduate studies, technical and vocational education. It is a profitable venture of a private school governed by a Board of Directors, owned by stockholders, and which issued dividends based on the results of its operations.  It operates like any other domestic stock corporation in the Philippines except that it has to strictly adhere to the rules and regulations applicable to educational institutions based on the permit to operate duly issued by Department of Education (DepEd), Commission on Higher Education (CHED), and Technical Education Skills Development Authority (TESDA).

Non-stock, non-profit educational institution

Non-stock non-profit educational institution is one registered with the Securities and Exchange Commission (SEC) as a non-stock corporation to engage in maintaining and administering a school – pre-school, kindergarten, primary, secondary, tertiary or college, pst-graduate studies, technical and vocational education based on the permit to operate duly issued by DepEd, CHED, TESDA. This is not operated for profit so the governing body is Board of Trustees, the owners are members, and that no dividends are issued. In short, no income shall inure to the benefit of its members, directors and officers, though, they could be provided reasonable per diems and salaries for acting as employees.

Government educational institution

Finally, government educational institution is one created by the legislative body – the Congress of the Philippines pursuant to a particular law for the purpose. The specific law or legislation itself would provide for its structure, management, operations, funding, and other matters. State colleges and universities falls under this and hereunder are some examples.

• University of the Philippines;
• Polytechnic University of the Philippines;
• Eastern Samar State University
• Eastern Visayas State University

Summary

In short, the above two educational institutions are private corporations formed by private individuals. To determine its classification is to simply look at how the school or educational institution is constituted. Private and non-stock, non profit educational institutions are required to be issued permit to operate from the Department of Education (DepEd), Commission on Higher Education (CHED), and Technical Education Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. Registering such private educational institutions and non-stock, non-profit educational institutions with the Securities and Exchange Commission would require an endorsement with DepEd, CHED, and/or TESDA, whichever is applicable.

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











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