The DOF open to changing the tax code for private schools

MANILA, Philippines – The Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) support amendment of a provision in the Tax Code relating to the tax treatment of private schools and hospitals, provided that no refund is made .

During the House Ways and Means Committee hearing yesterday, Deputy Finance Secretary Dakila Napao said the ministry supports legislation to clarify the wording of the contested section 27 (B) of the Code. taxes to declare that all exclusive educational institutions and non-profit hospitals will continue to benefit from a 10 percent tax rate and may benefit from a temporary reduction in the tax rate to one percent for the next three years.

However, she opposes a retroactive provision in the consolidated bill if this implies that tax refunds will have to be made, citing the administrative problems that this will pose to the BIR.

“The DOF is not against the measure which aims to subject all private educational institutions to a preferential tax rate of 10 percent,” Napao said.

“The DOF, however, does not wish to support the retroactivity provision of the bill as we believe the current position of the BIR is supported by case law… We believe it would be an administrative challenge for the BIR to process and reimburse. Not to mention the impact of this retroactivity provision on existing BIR audits on owner educational institutions.

Napao said this was due to the fact that 62% of private schools in the country were already paying the normal corporate tax rate of 30% before the adoption of the Law on Business Recovery and Tax Incentives for Businesses ( CREATE).

Only 38 percent of private schools paid income tax using the 10 percent rate.

Yesterday’s committee hearing consolidates four bills amending Article 27 (B) of the tax code drafted by representatives Jose Francisco Benitez, Rufus Rodriguez and Joey Salceda, who chairs the committee.

It was agreed that Salceda’s Bill 9596 would be used as the basic bill when the measure goes through first reading at the opening of the ordinary session in July.

Taking into account contributions from stakeholders, regulators and lawmakers, the consolidation measure proposes that all proprietary educational institutions and non-profit hospitals pay a 10% tax on their taxable income.

However, from July 1, 2020 until June 30, 2023, the tax rate to be imposed will be one percent.

The definition of “owner” has also been added to mean “a private hospital or any private school established as a for-profit corporation or as a cooperative”.

It also states that “exclusive educational institutions as defined herein may benefit from the preferential rate for their taxable income as of the 2012 tax year”.

This retroactive provision was put in place to reflect the year of the Supreme Court ruling on the tax treatment of private hospitals, which was cited by the BIR as the basis for the contested tax settlement (RR) 5-2021.

Finally, the bill specifies that “schools will not be entitled to reimbursement”. Lawmakers noted that activating a refund would also affect government coffers.

This means that private schools that have paid the 10 percent tax in the past will be deemed to comply with the law and those that have paid 30 percent will not be entitled to a refund.

“At BIR, we respect the position of the Ministry of Finance. We agree with the bill to clarify the taxation of private educational institutions, but we have reservations about retroactivity if it results in a refund, ”said BIR Deputy Commissioner Marissa Cabreros.

“But if there will be a provision that no refund will be given, then the BIR will have no reservations.”

The private schools have asked the Tax Appeal Court to review and stop the implementation of income regulations that can dramatically increase tax levies on owner educational institutions.

BIR commitment

Salceda said he was able “to obtain from the BIR a commitment to support the legislative review of the ambiguities of the new law”, the CREATE law.

The BIR has expressed its willingness to rectify an allegedly flawed policy imposing additional taxes on private schools.

“First, they will be able to benefit from the 1% tax rate until 2023; and second, they will not be held accountable for the regular 30% tax rate that the BIR says it was forced by the Supreme Court to implement, ”the Albay congressman said. “So it’s a clean slate legally and lower taxes in the future. “

In an aide-memoire to President Lord Allan Velasco, he pointed out that the increase in income tax – “if effective” – ​​represents 5.72% of schools’ compensation income, which could force the private education sector to “cut an additional 21,661 jobs”.

“On the other hand, applying the CREATE rate until 2023 would allow these schools to save the equivalent of 3.43% of compensation expenses, which could help them to rehire at least 12,996 teachers at the start of the next school year. (2022) ”, Salceda mentioned.

He explained that the tax rate will help private schools hire more teachers and retain existing staff: “Ultimately, the principle is that because education is constitutionally recognized as a value state, we cannot unduly tax schools. – Delon Porcalla

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