Nonprofit schools, hospitals to keep special tax rate

The Department of Finance (DOF) yesterday clarified that non-profit private schools and hospitals would retain their 10-percent income tax rate as long as they “adhere to high standards of service,” as proposed under the second package of the administration’s tax reform program.

The Tax Reform for Attracting Better and High-quality Opportunities, or “Trabaho” Act passed by the House ways and means committee “does not cover religious schools, which under the Constitution, are exempted from paying income tax provided they are organized as non-stock non-profit corporations and that no part of their net income shall belong or benefit any member, organizer, officer or person,” the DOF said in a statement.

Finance Undersecretary Karl Kendrick T. Chua explained that the bill, if passed into law, “would incentivize private hospitals and educational institutions to upgrade their quality of service in order to be granted [the current] special tax rate.”

Chua said that doing so would not result in higher tuition, contrary to claims from some legislators that the measure could hike education
expenses.

Under the Trabaho bill, the Commission on Higher Education (CHEd) and the Department of Education will put in place a performance criteria ensuring that schools provide quality education, Chua said.

The Department of Health will also establish a criteria for private hospitals “to assess their performance and their eligibility for the tax incentive,” Chua added.

“Schools and hospitals that are up to standard need not worry. We need to make sure that our children study in good schools and that we go to hospitals that provide quality medical care,” he said.

According to Chua, “the absence of a system to evaluate educational institutions and encourage them to improve their performance has made some of them very profitable.”

Without disclosing its identity, Chua cited one school whose financial statement showed that in 2015, it posted gross revenue of P1.4 billion and had a net income of P624 million.

“This means that under the 10-percent tax regime, the school paid taxes of only P61 million even though it did not meet any of the performance criteria set by CHEd and was able to pay dividends of P250 million,” Chua explained.

The example cited by Chuna, Finance Secretary Carlos G. Dominguez III said, meant that “half of the dividends were actually paid for by the public” or by taxpayers.

“Now, if they don’t meet the criteria, why should we subsidize them? Basically, we are supporting this school even though it is not helping the students,” Dominguez said.

Under the Trabaho bill, schools and hospitals will be given a transition period to improve their services before higher taxes will be slapped on those that will show no improvement, Chua said.

Based on CHEd data, only 37 percent of students in private non-sectarian higher
educational institutions (HEIs) passed licensure examinations.

As for faculty members, only about 50 percent in sectarian HEIs have graduate degrees, while the share was a lower 29 percent in private non-sectarian, non-profit schools.

As such, Chua said the number of passers in licensure exams and of faculty members with higher qualifications should be made a criteria in the extension of the tax perk.