Taxing education
When the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) was passed into law in March of this year, it was considered a timely measure to ease the financial hardships experienced by many companies due to the pandemic.
The government describes the law as a time-bound and tailor-made set of corporate and tax reforms to counter the effects of COVID-19 on the Philippine economy as it reduces the financial burden on foreign and domestic companies through various tax incentives. Aside from providing transparent tax provisions and further increase the country’s competitiveness, the tax measure intends to grant relief for companies in financial need.
While it appears that the CREATE Act grants relief to corporations in general by reducing the corporate income tax rate from 30% to 20%, the Department of Finance, through the Bureau of Internal Revenue, applies the law contrary to its laudable purpose of granting tax relief to corporations in distress.
The private education sector has suffered the effects of the prohibition of face-to-face classes. Amid the pandemic, several private schools decided to close their doors to their students, while some even have permanently shut down their operations. The closures resulted in the displacement of teachers and other workers and forced many students to enroll in public schools due to a lack of financial means.
The passage of the CREATE Act, which promises a reduction of the corporate income tax rate for proprietary educational institutions from 10% to 1%, is supposedly a silver lining for most private schools whose enrollment was reduced by an incredibly significant number. Much to the dismay of the education stakeholders, the Department of Finance has effectively denied this tax relief. Instead, it has slapped educational institutions with the regular corporate income tax rate of 25% while imposing the reduced preferential tax rate of 1% on non-stock, non-profit educational institutions whose revenues and assets are guaranteed by the Constitution to be exempted from taxation.
Under the CREATE Act, the special corporate income tax on “proprietary educational institutions and hospitals which are non-profit” was reduced to 1% for a period of three years from July 1, 2020 to June 30, 2023, with the clear intention to ease the current financial burdens among schools and non-profit hospitals. Congress did not change anything under Section 27 (B) of the Tax Code, as amended, except for the tax rate from 10% to 1%. With its issuance of Revenue Regulations 5-2021, the Department of Finance tinkered the law by giving a new definition to “proprietary educational institutions.” Under the questioned regulation, “proprietary educational institutions” now refer to private schools as “non-profit”.
The regulation sows confusion rather than clarity. It corrupts an otherwise pure intention of granting relief to the sufferings of the many, as it utterly disregards a consistent legislative history of the preferential tax treatment for educational institutions.
The 1987 Constitution provides that all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. (Article XIV, Sec. 4[3]) Thus, the Tax Code explicitly provides that non-stock and non-profit educational institutions are exempt from tax. Legislative history and previously issued regulations apply the preferential tax rate of 10% (now 1%) to educational institutions organized as stock corporations, not to those organized as non-stock and non-profit.
While it has always been an oft-repeated doctrine in taxation that taxes are the lifeblood of the country, Revenue Regulations 5-2021 cannot be justified under this doctrine as the said regulation militates against the laudable intention of the CREATE Act. It must be immediately rectified as it usurps the legislative powers of Congress.
True, the power to tax involves the power to destroy. But the destruction referred to in this statement is the consequence of a lawful exercise of the taxing power. Congress intended the CREATE Act to rebuild an economy devasted by the pandemic and give a beacon of hope to private educational institutions to continue to carry on as partners of the government in educating the Filipino people. Aside from ‘killing the hen that lays the golden egg’, this unprecedented regulatory issuance ushers in the darkest years of the country’s already problematic education system.