Private schools petition tax court to stop rate hike

MANILA, Philippines — Two of the country’s largest associations of private schools, along with 31 colleges and universities, have petitioned the Court of Tax Appeals (CTA) to stop the Bureau of Internal Revenue (BIR) from increasing their corporate income tax by 150 percent, saying the move violated both the Tax Code and the Constitution.

The 81-page petition filed on Monday and made public on Wednesday said the BIR and the Department of Finance (DOF), which oversees the revenue agency, committed “grave abuse of discretion” when they altered the National Internal Revenue Code of 1997 (Tax Code) and raised the income tax on private schools from 10 percent to 25 percent through several questionable tax regulations.

The Coordinating Council of Private Educational Associations (Cocopea) last week warned that imposing the 25-percent tax rate in the middle of the COVID-19 pandemic would force many private schools to shut down, leading to more students migrating to the already overburdened public schools and adding to the large number of unemployed.

TRO on BIR sought

The petitioners asked the CTA to issue a temporary restraining order and a writ of preliminary injunction to prevent the BIR and the DOF from implementing the new tax regulations.

According to the petitioners led by Cocopea and Philippine Association of Colleges and Universities, BIR Revenue Regulation No. 5-2021 (RR 5-2021) issued on April 8, inserted the word “nonprofit” in the definition of the term “proprietary educational institution” in the Tax Code.

They also said BIR Revenue Memorandum Circular (RMC) Nos. 67-2012 and 62-2021 both identified proprietary educational institutions as among those exempted from the 25-percent corporate income tax if they were nonprofit entities.

But the petition said these regulations altered the wording of the Tax Code, which did not contain the term “nonprofit” in reference to private schools.

“The delineation between a nonstock and nonprofit educational institution and a proprietary educational institution shall now forever be blurred,” the petitioners said.

“RR 5-2021 and RMC 62-2021 illegally amended the statutory definition of proprietary educational institution to include an unfounded or an uncalled for term ‘nonprofit,’” they said.

As a result, proprietary educational institutions were categorized into “nonprofit,” which would continue paying 10 percent income tax, and for-profit, which would be slapped the 25-percent tax.

Nonstock, nonprofit

In its June 1 letter to Cocopea, the BIR said corporations, including private schools, may only be granted the reduced 10-percent income tax if these were nonstock and nonprofit.

Section 27(B) of the Tax Code defines a proprietary educational institution as any private school “maintained and administered by private individuals or groups” with permits to operate issued by the Department of Education, the Commission on Higher Education or the Technical Education and Skills Development Authority.

Under the same section, the law grants preferential tax treatment to “proprietary educational institutions and hospitals which are nonprofit.”

‘Legal conundrum’

Preferential tax treatment reduced the income tax rate on private schools from 25 percent to 10 percent as a recognition of their complementary role with public schools in the Philippine education system, according to Cocopea.

This treatment had been granted to private schools since 1968 in recognition of their special role in society.

The petitioners argued that the exclusion of “nonstock” and “nonprofit” schools from the 25-percent tax rate under RR 5-2021 and RMC 62-2021 created a “legal conundrum” because it changed the coverage of Section 27(B) of the Tax Code, as amended by the Corporate Recovery and Tax Incentives for Enterprises Act (Create Act) passed on March 26.

“Based on the wording of the law itself, it intended to apply the preferential corporate income tax rate to proprietary educational institutions without qualification as to whether these are nonprofit or for-profit,” they said in their petition.

They sought the CTA’s review of Section 27(B) of the Tax Code and wanted a clarification as to whether the term “nonprofit” referred both to proprietary educational institutions or to hospitals alone.

But they maintained that the term used in that provision was intended only for hospitals.

“To construe otherwise would lead to an absurd application of the provision by creating a juridical entity that contradicts itself, proprietary and yet nonprofit, and one that does not exist in law,” they said.

“For emphasis, a juridical entity cannot be both stock and nonprofit at the same time since the two concepts are mutually exclusive of each other,” the petitioners added.

Grave abuse

The petitioners said that in implementing RR 5-2021, both the BIR and the DOF acted with grave abuse of discretion because their administrative issuances “cannot supersede, alter, amend or repeal the Constitution, the fundamental law of the land.”

They cited Section 4(3), Article XIV of the 1987 Constitution, which states that proprietary educational institutions “may likewise be entitled to such exemptions” from income tax.

They said RR 5-2021, RMC 67-2012 and RMC 62-2021 “should be struck down for being unconstitutional.”