Private schools groan under new tax rule

MANILA, Philippines — Many more private schools may be forced to close down or raise their tuition due to an “ill-timed” regulation by the Bureau of Internal Revenue (BIR) to raise their income tax rate by 150 percent, an officer of the schools’ association warned on Thursday.

Joseph Noel Estrada, managing director of the Coordinating Council of Private Educational Associations (Cocopea), explained that under BIR Revenue Regulation No. 5-2021 (RR 5-2021), income tax on so-called proprietary educational institutions that are run by stock corporations would be increased to 25 percent from the current 10 percent.

This will result in additional costs not just for the schools but also for parents and students, he said.

“If the school does not decide to shut down, then whatever additional cost will eventually be indirectly shouldered by parents and students because the operation of the school is funded by them. This is at no cost to the government,” Estrada told the Inquirer.

Cocopea is composed of around 2,500 private schools that are nonprofit and for profit, and sectarian and nonsectarian.

In a statement on June 1, the group urged the BIR to “rectify” the regulation as it was “ill-­conceived and insensitive to the realities of the private education sector.”

Cocopea had written BIR a series of letters on April 6, 22, 28 and May 14 requesting a revision and amendment of certain provisions in RR 5-2021.

Nearly 900 private basic education schools have temporarily closed because of financial problems triggered by the COVID-19 pandemic, displacing around 4,400 teachers and forcing nearly 500,000 students to transfer to public schools, according to data from the Department of Education (DepEd).

Some of these schools, Estrada pointed out, were already exempted from income tax rates but were still greatly affected by the pandemic and chose to shut down.

Estrada, a lawyer, said some provisions of the BIR’s regulation, which was issued on April 8, were inconsistent with the provisions of the Corporate Recovery and Tax Incentives for Enterprises Act (Create Act) passed on March 26, including the temporary reduction in the tax rate on private schools from 10 percent to 1 percent.

The National Internal Revenue Code of 1997 (Tax Code), he said, also had granted preferential tax treatment to private schools.

Estrada said the BIR regulation, which took effect on April 9, has caused “irreparable damage” to the private education sector and its stakeholders. “It’s ill-timed, I would say.”

Request denied

“The regulation would not only affect private schools but also informal industries that depend on the operation of schools,” Estrada said. “These include dormitories, uniform stores and restaurants hoping to rise from the economic crisis brought about by the pandemic.”

In a letter to Cocopea also dated June 1, BIR chief Caesar Dulay said the country’s biggest tax-collection agency was “constrained to deny [the] request to revise and amend certain portions” of its April 8 regulation “for lack of merit.”

Dulay said “the law does not intend to provide tax incentives to stock and profit-oriented educational institutions, but only to nonstock and nonprofit educational institutions” in accordance with the Constitution.

The income tax exemption and the preferential tax rate of 10 percent, which was dropped to 1 percent under Create, were intended only for nonstock and nonprofit schools.

If the revenues of such schools, regardless of source, were not used directly and exclusively for educational purposes, they will still be subject to the 1 percent tax rate under Create, but only if their income from activities unrelated to education does not exceed 50 percent of their total gross income, Dulay said.

Finance Secretary Carlos Dominguez III agreed with the BIR’s regulation, which he said, was based on Supreme Court rulings “in a number of landmark cases.”

No inconsistencies

He said the government could not provide another definition for schools that may be given tax exemptions because the Create Act did not substantially amend relevant provisions of the Tax Code.

In its letter to Cocopea, the BIR pointed out that there were no inconsistencies between RR 5-2021 and the Create Act, which also based its definition of proprietary educational institutions on the Tax Code.

But Estrada insisted that private schools had been exempted from the 25-percent income tax on corporations since 1968 due to their special role in society.

“Proprietary schools have never been taxed like ordinary corporations, in recognition of their vital partnership with the government in delivering an essential service, which is education,” he said.

The private sector, according to Estrada, plays a big part in the country’s education system. According to him, 25 percent of the nation’s 30 million learners are enrolled in private basic education schools, which cater to K to 12 students, while 55 percent go to private universities and colleges.

Since the BIR regulation could force some private schools to shut down, Estrada said this could result in the migration of students to public schools.

Enrollment drop

In school year 2020-2021, DepEd data showed that enrollment in private K to 12 schools dropped by over 900,000 compared with the turnout in the previous school year.

Estrada said a survey in April by the 195-member Philippine Association of Colleges and Universities showed that over 50 percent of respondents experienced a decline in enrollment.

“Public schools will be overcrowded, and the government will need more resources. The closure of private schools will be more costly on the national government,” Estrada noted.

For now, he said private schools were supporting Senators who had questioned the BIR’s regulation.

“Why are they doing this when the intentions of the

Create Act are clear? It intends to give tax relief to corporations, but why is the BIR going in another direction?” Estrada said.