Education and taxes

The Bureau of Internal Revenue (BIR) has made it clear there are only two requisites for the
revenues of an educational institution (institution) to be exempt from taxes and duties:

(1) The educational institution must be non-stock and non-profit.

(2) The revenue or income is actually, directly and exclusively used for educational purposes.

Revenue Memorandum Order (RMO) No. 44-2016 now excludes these institutions from the
coverage of RMO No. 20-2013, to the extent that:

1. Applications for tax exemptions (application) shall be filed with the Office of the Assistant
Commissioner of Internal Revenue (ACIR), Legal Service, at the BIR National Office.

2. The resulting tax exemption ruling or certificate of exemption (certificate) shall remain valid and
effective, unless recalled for valid grounds.

Previously, an institution would have to file its application with the Revenue District Office (RDO)
having jurisdiction over it, and the RDO would make its evaluation of the application before
endorsing the same to the national office. This saves the institution valuable time with regard the
processing of its application.

Another change is that the resulting tax exemption ruling or certificate need no longer be
revalidated after three years. Of course, if there are any material changes in the character,
purpose or method of operation of the institution which are inconsistent with the basis for its
income tax exemption, the ruling or certificate can be recalled or revoked. And the primary
method by which the BIR may determine if there were any changes will be through an audit
investigation.

To prove that an institution is non-stock non-profit, and further, that its revenue is actually, directly
and exclusively used for educational purposes, the BIR still requires the following documents to
accompany the application:

a. Original copy of the application letter for issuance of a ruling or certificate.

b. Certified true copy of the Certificate of Good Standing issued by the Securities and Exchange
Commission.

c. Original copy of the certification under oath of the treasurer as to the amount of the income,
compensation, salaries or any emoluments paid to its trustees, officers and other executive
officers;

d. Certified true copy of the financial statements of the corporation for the last three (3) years.

e. Certified true copy of government recognition/permit/accreditation to operate as an educational

institution issued by the Commission on Higher Education(CHED), Department of Education
(DepEd), or Technical Education and Skills Development Authority (TESDA); Provided, that if the
government recognition/permit/accreditation to operate as an educational institution was issued
five (5) years prior to the application for tax exemption, an original copy of a current Certificate of
Operation/Good Standing, or other equivalent document issued by the appropriate government
agency (i.e., CHED, DepEd, or TESDA) shall be submitted as proof that the non-stock and
nonprofit educational institution is currently operating as such.

f. Original copy of the Certificate of Utilization of annual revenues and assets by the Treasurer or
his equivalent of the institution.

If you’re wondering what the Certificate of Utilization is, that’s actually required under RMO No. 20-
2013. It’s a breakdown of the use of the annual revenues and assets, which is submitted annually
to the BIR as an inclusion to the audited financial statements. Since RMO No. 44-2016
specifically mentions the requirements for filing the application, the institutions should likewise
abide by Revenue Memorandum Circular (RMC) No. 08-2014, which specifies the requirements
for filing a request for BIR rulin

Note, however, that RMO No. 44-2016 still refers to June 30, 2012 as a cut-off date for updating
the BIR’s records on rulings of this nature, and thus institutions with rulings or certificates of
exemption issued before June 30, 2012 are required to file applications (again).

Finally, let’s take this opportunity to go over the taxes that the institutions (non-stock non-profit, of
course) are exempt from:

Income tax. All income actually, directly and exclusively used for educational purposes. Further,
all revenues derived from assets used in the operation of cafeterias/canteens and bookstores
located within the premises of the institution are exempt from taxation provided they are owned
and operated by the institution as ancillary activities (BIR Ruling No. 201-2016, dated May 19).

Value-added tax (VAT). Section 109(H) of the Tax Code states that educational services rendered
by private educational institutions duly accredited by DepEd, CHED or TESDA, and government
educational institutions are exempt from the VAT. The BIR has qualified this with a restriction, to
the effect that the exemption from VAT exists so long as the institution will not engage in the
regular conduct or pursuit of a commercial or economic activity, including transactions incidental
thereto. Particularly, the sale of goods and services not in connection with the institution’s primary
purposes will be subject to VAT. Note that as a taxpayer exempt from the VAT, the VAT can still
be passed on to the institution by its suppliers.

Final withholding tax (FWT). Interest income from currency bank deposits and yield from deposit
substitute instruments used actually, directly and exclusively in pursuance of its purpose as an
educational institution, are exempt from the 20 percent final tax and 7 1/2 percent tax on interest
income under the expanded foreign currency deposit system. However, the institution must
submit the following requirements annually to the concerned RDO (together with the annual
information return and duly audited financial statements): (a) Certification from their depository
banks as to the amount of interest income earned from passive investment not subject to the
abovementioned final withholding taxes; (b) Certification of actual utilization of the said income (c)
Board resolution by the school administration on proposed projects to be funded out of the money
deposited in banks or placed in money markets, on or before the 14th day of the fourth month
following the end of its taxable year.

Please be reminded that donations to these institutions are exempt from donor’s tax, as long as
not more than 30 percent of the donations are used by the institutions for administration purposes
(Section 101[A][3], Tax Code). On the other hand, for the donor to be able to fully deduct the
donation, the institution has to be an accredited “donee” institution, which requires, among others,
accreditation with the Philippine Council for NGO Certification (PCNC).

The institutions with rulings/certificates issued prior to June 30, 2012, and those without existing
rulings/certificates should take note of these requirements and make sure that the BIR
addresses/identifies all the exemptions in the resulting ruling/certificate.

Andrew James Gerard Dulay Ruiz is a director from the tax group of KPMG R.G. Manabat & Co.
(KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has
been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax
transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the
International Tax Review.

This article is for general information purposes only and should not be considered as professional
advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent
the views and opinions of KPMG International or KPMG RGM&Co.
Tax benefits of nonstock and
nonprofit educational institutions
AS former South African President Nelson Mandela said, “Education is the
most powerful weapon which you can use to change the world.” In
general, education is the transfer of learning or knowledge from the
teacher to the students through teaching, training and mentorship.
Education can also be acquired informally through self-learning and
personal experiences.

Nonstock and nonprofit educational institutions are essential in providing

quality education to the Filipino youth and in preparing them toward their
path to become productive and competent individuals. These educational
institutions serve as the second home and secondary parents for the
students to nurture their talents, skills and potential.

The state recognizes the importance and role of these nonstock and
nonprofit educational institutions in nation-building. Thus, the state grants
them a preferential income-tax rate of 10 percent compared to the normal
income-tax rate of 30 percent for corporations. On top of that, the
educational institution is an exempt entity and, thus, it is not liable to
value-added tax or percentage taxes. It is also exempt from the payment
of real property taxes for as long as the property is being used directly
and exclusively for educational purposes. To avail itself of these privileges,
the educational institution must be accredited with the Commission on
Higher Education (CHED) or Technical Education and Skills Development
Authority (Tesda). It must also be ensured that the other income, which is
considered unrelated to their primary purpose, does not exceed 50
percent of its annual gross income. Otherwise, it will be treated as normal
corporation that is subject to regular income tax.

Good news is in store for those accredited and compliant educational

institutions. On July 25, 2016, Bureau of Internal Revenue Commissioner
Caesar R. Dulay issued Revenue Memorandum Order (RMO) 44-2016,
wherein educational institutions can apply for exemption of income taxes,
provided that these meet two criteria: first, the school must be nonstock
and nonprofit; and, second, the income is directly and exclusively used for
educational purposes. The said RMO is based on Section 30 of the 1997
Tax Code, which states that nonstock and non-profit educational
institutions are exempted from income tax.

Those qualified educational institutions must apply for tax exemption with
the Office of the Assistant Commissioner of the Legal Service. The RMO
enumerates the documentary requirements to accompany the tax
exemption application such as:

Application letter for tax exemption ruling.

 Certified true copy of Certificate of Good Standing issued by the
Security Exchange Commission.
Certification under oath of the treasurer as to the amount of income,
compensation, salaries or any emoluments paid to trustees,
officers and other executive officers.
Certified true copy of the financial statements for the last three
years.
Certified true copy of permit/accreditation issued by the CHED
and/or Tesda.
Certificate of utilization of annual revenues and assets by the
treasurer or his equivalent.

Other additional requirements or documents during the review of the tax-

exemption application, only if necessary.

The Certificate of Tax Exemption that the BIR may grant the nonstock and
nonprofit educational institution has no expiration and shall remain
effective without the need for revalidation unless recalled by the BIR.

The details of the said RMO is available online at the BIR official web
site [Link]
Taxwise Or Otherwise
(2019)

It is the activities of a non-stock, nonprofit corporation that entitle it to a tax exemption.

In a move to clarify the nature, character, and tax treatment of corporations under
Section 30 of the Tax Code, the Commissioner of Internal Revenue (CIR) issued
Revenue Memorandum Order (RMO) No. 38-2019 containing the new guidelines for
the processing and issuance of Certificates of Exemption (CTE).

The RMO is a reiteration of Revenue Memorandum Circular (RMC) No. 64-2016,

which provides parameters on which entities fall within the ambit of the so-called
“Section 30 corporations,” i.e., tax-exempt corporations.

Section 30 corporations include (1) labor, agriculture or horticultural organizations not

organized principally for profit; (2) mutual savings banks not having capital stock
represented by shares, and cooperative banks without capital stock organized and
operated for mutual purposes and without profit; (3) beneficiary society orders or
associations, operating for the exclusive benefit of the members; (4) cemetery
company, owned and operated exclusively for the benefit of its members; (5) non-
stock corporations or associations operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans; (6)
business leagues, chambers of commerce, boards of trade not organized for profit; (7)
civic leagues or those organized exclusively for the promotion of social welfare; (8)
non-stock and nonprofit educational institutions; (9) government educational
institutions; (10) farmers’ or other mutual typhoon or fire insurance companies, mutual
ditch or irrigation companies, mutual or cooperative telephone companies, or like
organizations of a purely local character; (11) as well as farmers’, fruit growers’
associations operated as a sales agent for the purpose of marketing the products of
its members.

The RMO shall apply to all tax-exempt corporations listed above except for non-stock
and nonprofit educational institutions which are covered separately by RMC 44-2016.
Mere registration with the Securities and Exchange Commission (SEC) as a non-
stock, nonprofit corporation does not automatically entitle an entity to the tax
exemption. It is a corporation’s activities that determine the true nature of the
organization and its taxability or exemption from taxes.

Thus, to determine whether a corporation qualifies for income tax exemption under
Section 30 of the Tax Code, the BIR provided two determinative tests: (1)
organizational test; and (2) operational test.

The organizational test requires that the corporation’s constitutive documents (i.e.,
SEC registration, Articles of Incorporation (AOI), and By-Laws) show that its primary
purpose(s) falls under Section 30 of the Tax Code. The operational test, on the other
hand, requires that the regular activities of the corporation be exclusively devoted to
the furtherance of such primary purpose.

Further, the earnings of a Section 30 corporation that chiefly come from donations,
grants, or contributions should not inure to the benefit of its trustees, organizers,
officers, members, or any specific person. As such, the RMO listed certain payments
to individuals that would be considered as inurement prohibitions.

However, realistically, Section 30 corporations need other sources of income to

survive and continue serving their purpose. Thus, in concurrence with the law, the
RMO recognizes that these corporations are allowed to engage in activities conducted
for profit without losing their tax exemption.

The RMO reiterated that the tax exemption granted to Section 30 corporations is not
absolute as it covers only the income received by corporations in furtherance of the
purpose for which they were established; hence, income of whatever kind and
character from any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition is subject to tax. Thus, interest
income from bank deposits, gains from investments, rental income from real or
personal properties shall be subject to income tax. Consequently, Section 30
corporations are required to file quarterly and annual income tax returns to report
such other income.

Furthermore, the exemption shall only be limited to income tax. It therefore excludes
withholding tax, value-added tax, or percentage tax. Thus, Section 30 corporations
have the responsibility to withhold taxes on the compensation income of their
employees, and on the payments to individuals or corporations subject to tax.
Likewise, their purchases of goods, properties, or services, and importations shall be
subject to the 12% VAT. As an indirect tax, it can be passed on to the purchaser.

Section 30 corporations who availing of the tax exemption are required to secure a
Certificate of Tax Exemption (CTE) or a tax exemption ruling. A CTE shall be valid for
three years from the date of its effectivity, unless sooner revoked or canceled.
However, it may be renewed or revalidated for another three years.

Nonetheless, to ease the process, the securing of CTEs has now been simplified
under the RMO. The request is filed with the Revenue District Office (RDO) where the
corporation is registered, and the CTE is subsequently issued by the Revenue
Region.

However, the RMO remains silent on how the CTE requirements apply to new Section
30 corporations. Specifically, since two of the mandatory requirements are the Income
Tax Returns or Annual Information Returns and Financial Statements of the
corporation for the last three years, a new company will not be able to provide such
documentary requirements. In that case, would the AoI and By-Laws be sufficient
documents for them to secure a CTE and consequently, be qualified for tax exemption
for the next three years? At the end of the day, a Section 30 Corporation does not
lose its character as such, and its consequent exemption from taxation merely
because it cannot submit certain documentary requirements.

While the BIR merely seeks to ensure that only qualified taxpayers are rightfully
availing of the exemption, and safeguard against tax evasion and abuse of
exemptions, it may be worthwhile to consider that the tax exemption granted to
corporations under Section 30 of the Tax Code is to compensate them for the services
they render to benefit the public. Thus, one would hope that more leniency and
flexibility is afforded to them as long as they comply substantially with the
requirements of the law.
Tax incentives await schools, firms in TESDA dual training
program

13 January 2012

Tax incentives await schools, firms in TESDA dual training program

Business establishments that will open their doors to technical vocational education and training
(TVET) students and trainees under the dual training system (DTS) of the Technical Education and
Skills Development Authority (TESDA) will enjoy tax break and other incentives.

The tax incentives, which were detailed in a new circular released by the agency, aim to encourage
greater private sector participation in the Dual Training System (DTS) that gives the trainees the
hands-on experience in the workplace.

“We would like the TVET students to gain actual workplace experience and at the same time help
employers in the skills development of their prospective workers,” Secretary Joel Villanueva, TESDA
Director General, said.

Under Republic Act 7686, the DTS brings together establishments and the educational institutions to
share the responsibility of providing the students with the best possible job qualifications, the former
essentially through practical training and the latter by securing an adequate level of specific,
general and occupation-related theoretical instruction.

Sixty percent of the students' education and training will be spent in actual work exposure in the
establishment and 40 percent of the time will be spent at the TVET institutions (TVIs).

Establishments that have been accredited by TESDA to participate in the DTS may avail the
following tax incentives, according to the guidelines:

a) Fifty percent deduction from their taxable income of the actual system expenses paid to the
Accredited Dual Training System Educational Institution for the establishment's trainees; Provided,
That, such expenses shall not exceed five percent of their total direct labor expenses but in no case
to exceed twenty five million pesos (Php25,000,000. 00) a year.
b) Donation, contribution, bequest, subsidy, or financial aid actually paid or made for the operation
of the system within the taxable year shall also be deductible for income tax purposes in an amount
not in excess of three percent (3%) of the taxable business income of the establishment computed
without the benefit of deduction. Considering that the Dual Training System Educational Program is
included in the list of National Priority Programs (NPP), then corporate contributions to the System
shall be deductible in full from its taxable business income for the taxable period when actually
made.

c) Exemption from Donor’s tax, provided, however, that not more than thirty percent (30%) of said
gifts shall be used by the System for. administration purposes.

The guidelines also stated that “essential equipment, apparatus and materials imported by
accredited dual training educational institutions shall be exempt from taxes (i.e. Value-Added Tax,
ad valorem, or excise tax) and duties.”

“One of our main focus is the industries’ involvement in the DTS to help trainees immediately find
employment after completing the program,” Villanueva said.

“Getting the industries into the loop in terms of helping train our students through actual work
exposure will also guarantee that we will produce graduates that the companies need, thereby
helping ease the job mismatch. And we are happy that we are gaining the industry's support to the
DTS,” the TESDA chief added.

Villanueva cited that the Philippine Chamber of Commerce and Industry has highlighted in their
resolution presented to President Aquino during the 38th Philippine Business Conference and Expo
the need to strengthen dual education and training in the country.

The European Chamber of Commerce and other foreign chambers, he said, are likewise strongly
supporting the dual training system.

This year, TESDA will be aggressively promoting the dual training system nationwide.

"In partnership with the association of schools and the chambers of commerce and other industry
associations, we hope we could increase the current number of institutions and establishments
accredited by TESDA." Villanueva said.

As of December last year, about 500 institutions and establishments have been actively
participating in the DTS. The biggest number of these are from the National Capital Region, Region
IV-A, VII and XII.
As the new school year begins, it is a good time to revisit the rules on the tax

exemptions enjoyed by nonstock, nonprofit educational institutions.

The 1987 Philippine Constitution guarantees that all revenues and assets of nonstock,

nonprofit educational institutions used actually, directly and exclusively for educational

purposes shall be exempt from taxes and duties (Paragraph 3, Section 4, Article XIV).

In relation to the above, Section 30 (H) of the Tax Code provides that a nonstock,

nonprofit educational institution is exempt from tax on all revenues and assets derived

in pursuit of its purpose as an educational institution and used actually, directly, and

exclusively for educational purposes (Bureau of Internal Revenue [BIR] Ruling No.

459-13 dated December 6, 2013).

Except as otherwise provided in the Tax Code, an income tax of 30 percent is imposed

upon the taxable income derived by domestic corporations during each taxable year

from all sources within and outside the Philippines.

Nevertheless, in the case of proprietary educational institutions and hospitals that are

nonprofit, they shall pay 10 percent tax on their taxable income except those covered

by Section 27 (D) (1) of the Tax Code relating to passive income, subject to different

tax rates.
Proprietary educational institutions are those private schools maintained and

administered by private individuals or groups with an issued permit to operate from the

Department of Education, Culture and Sports (DECS), the Commission on Higher

Education (CHED), or the Technical Education and Skills Development Authority

(TESDA), as the case may be. It should be noted, however, that if the gross income

from unrelated trade, business, or other activity exceeds 50 percent of the total gross

income derived by such educational institutions or hospitals from all sources, the tax

rate of 30 percent shall be imposed on the entire taxable income (Section 27 [B] of the

Tax Code of 1997, as amended).

In the case of St. Luke’s Medical Center, Inc. versus Commissioner of Internal

Revenue (G.R. Nos. 195909 & 195960 dated September 26, 2012), the Supreme Court

(SC) ruled on the tax exemption of the former. The medical establishment was

incorporated as a nonstock, nonprofit institution for charitable and social welfare

purposes. However, St. Luke’s failed to meet the requirements under Section 30 (E)

and (G) of the Tax Code to be completely tax-exempt from all its income. Nevertheless,

it remains a proprietary nonprofit hospital under Section 27 (B) of the Tax Code as long

as it does not distribute any of its profits to its members and such profits are reinvested

pursuant to its corporate purposes. As a proprietary nonprofit hospital, St. Luke’s is

entitled to the preferential tax rate of 10 percent on its net income from its for-profit

activities.

Despite the premises above, can a nonstock, nonprofit educational institution claim

automatic exemption under the tax rules of the BIR?

The BIR issued Revenue Memorandum Circular (RMC) No. 14-13, stating that,

proprietary nonprofit hospitals, or nonstock, nonprofit entities operating hospitals, must

secure a tax exemption ruling/certificate to confirm their tax-exempt status. The same

requirement is imposed under RMO 20-13, as amended by RMO 28-13, on

corporations and associations enumerated under Section 30 of the Tax Code.

In case of failure to secure a tax exemption ruling, RMO 34-14 provides that the

concerned nonstock, nonprofit entity must prove compliance with the conditions laid

down by the law and other pertinent administrative issuances in the event of a tax
investigation to be exempt from income tax. In addition, failure to secure a tax

exemption ruling shall also subject nonstock, nonprofit entities to withholding tax on

their transactions. This tax exemption ruling shall be valid for a period of three years

from the date of issue and may be renewed upon filing of a subsequent application for

Tax Exemption/Revalidation, unless sooner revoked or canceled.

It is interesting to mention that in 2014, a Regional Trial Court in Makati declared null

and void the requirement to renew the tax exemption status of nonprofit schools.

Despite the court decision, the BIR still issued RMC 24-16, reiterating the Department

of Finance Order (DFO) No. 149-95 requirement for nonstock, nonprofit educational

institutions to submit, on an annual basis, documents detailing their finances to the

Revenue District Officer (RDO) in order to determine whether they will be subject to

tax on income from trade, business, or other activity not related to the exercise or

performance of their educational purpose or function.

Consistent with the court decision, RMO No. 44-16 was issued, emphasizing that the

constitutional conferral of tax exemption upon nonstock and nonprofit educational

institutions should not be implemented or interpreted in such a manner that will

diminish the intent and language of the Constitution by streamlining the requirements.

For the constitutional exemption to be enjoyed, there are only two requisites: (1) the

school must be nonstock and nonprofit; and (2) its income is actually, directly, and

exclusively used for educational purposes.

It is a welcome development that based on RMO No. 44-16, nonstock, nonprofit

educational institutions are no longer required to renew or revalidate the tax exemption

rulings previously issued to them, that fewer documents will be submitted by the

applicant, and that the application process for securing a tax exemption certificate will

be shortened. Despite this, to update the records of the BIR and for purposes of a better

system of monitoring nonstock, nonprofit educational institutions, those with tax

exemption rulings or certificates of exemption issued prior to June 30, 2012 are still

required to apply for new rulings.

We hope this trend continues. The summer officially ends, and it’s school time again!
or tax income tax purposes, educational institutions are classified as follows:
 Proprietary educational institution;
 Non-stock, non-profit educational institution; or,
 Government educational institution.

In this Article, let us uncover how a proprietary educational institution is being subjected to income tax.

Definition

Under the Tax Code, 'proprietary educational institution' is any private school maintained and administered by
private individuals or groups with an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Income tax rates

As a rule, it is subject to a special income tax rate of ten percent (10%) on their taxable income except on
certain passive income. 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 does
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.

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.

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.

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