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There is an old saying that goes, “Education is the only inheritance which nobody can take away from you.” Our elders have always emphasized the importance of education in one’s life, no matter how dire one’s circumstances in life are. In our country, people put a premium on it to uplift one’s quality of life.

This old saying was never truer than when the COVID-19 pandemic broke out in the country. Students still continued with their studies despite economic and physical setbacks brought about by the pandemic.

During this time there was a notable number of private school students transferring to public schools. According to the data gathered by the Department of Education (DepEd), before the start of the academic year 2020 to 2021, it was estimated that 250,539 students transferred from private to public schools. During the school year opening in August 2020, DepEd reported that around 380,000 students made the choice to transfer from a private to a public school.

When asked about the increase of transferees, DepEd Secretary Leonor Briones said that private schools have been affected by the downturn of the economy because of the parents who lost their jobs and therefore cannot fund the studies of their children. This observation was echoed by Coordinating Council of Private Educational Associations (COCOPEA) Managing Director Joseph Noel Estrada who said, “The primary reason for this is the economic impact [of the pandemic] on families – parents losing jobs, losing businesses. As we all know, schools are fully tuition-funded, if many students do not enroll, many schools would definitely shut down. And many cannot enroll because many lost their jobs or closed down their businesses.”

As a result of this, enrollment in private schools plunged. For school year 2020 to 2021, the COCOPEA reported that enrollment in private schools declined by 50% (equivalent to 2 million students). COCOPEA Director Estrada feared that many schools will shut down due to this trend.

Fortunately for private schools, Republic Act No. 11534, otherwise known as the “Corporate Recovery and Tax Incentives for Enterprise Act” or CREATE Law had been passed into law. The CREATE Law is part of the tax reform program of the government aimed at lowering corporate income tax rates and to rationalize the grant of incentives for qualified businesses. One of the amendments introduced by the CREATE Law was the lowering of income tax rates of proprietary educational institutions and hospitals which are nonprofit from 10% to 1% for the period from 01 July 2020 until 30 June 2023. However, should there be more than 50 percent of the gross income of these entities come from ‘unrelated trade, business, or other activity,’ their total gross income will be subject to 25 percent. The law defines ‘unrelated trade, business or other activity’ as any trade, business or other activity, the conduct of which is not substantially related to the performance of the primary function of such schools and hospitals.

The CREATE Law was a welcome break for private schools who are trying to keep afloat because of the substantial loss of income due to the pandemic. After all, it was not only the educational institutions that were affected by sudden decrease in enrollment, but also the employees who depended on school enrollment such as the educators, non-teaching personnel, maintenance personnel, canteen concessionaires, and even the dormitories and establishments operating near the schools.

Unfortunately, the reassurance seemed to be short-lived. The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2021 which aimed to implement the CREATE Law. Section 2 of RR No. 5-2021 defined “proprietary educational institutions” as “private schools, which are non-profit for  purposes of these Regulations, maintained and administered by private individuals or groups, with an issued permit to operate from the Department of Education (DepEd) or the Commission on Higher Education (CHED) or the Technical Education and Skills Development Authority (TESDA), as the case may be”.

Many people reacted to RR No. 5-2021’s definition of a “private school.” Based on the RR, for a private school to be entitled to the 10 percent (currently pegged at 1% until 30 June 2023) tax rate, it was imperative that a private school meets two conditions: proprietary and non-profit. This definition effectively disqualified the majority of private schools from enjoying the tax benefits under the CREATE Law as most private schools operate for profit. The private schools that did not qualify under the two conditions imposed by RR No. 5-2021 were subjected to the regular 25 percent corporate income tax rate.

In order to deal with their already fragile situation, which was further exacerbated by RR No. 5-2021, it was reported that the COCOPEA and the Philippine Association of Colleges and Universities (PACU) lobbied extensively with the legislature in order to address the situation. The legislature responded by passing R.A. No. 11635, otherwise known as the “Act Amending Section 27(B) of the Tax Code.”

Section 1 of R.A. No. 11635 clarified the dilemma brought by R.R. No. 5-2021 by stating clearly the following: “Hospitals which are nonprofit and propriety educational institutions shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that beginning 1 July 2020 until 30 June 2023, the tax rate herein imposed shall be one percent (1%).”

Following the wording of R.A. No. 11635, the entities entitled to the lower tax rates of 10 percent (currently 1%) are nonprofit hospitals and proprietary educational institutions. There is no further need for private schools to be both proprietary and non-profit in order to enjoy the low tax rates. Majority of private schools are now qualified to enjoy the low tax rates as originally intended under the CREATE Law.

While it is the job of the tax authorities to be resourceful in finding ways to improve the government’s finances during this pandemic, it should not jeopardize those who are educating the youth. By helping the private educational sector survive during this pandemic, the government is also helping our youth survive by giving them more access to quality education.

Lynn Margarita O. Palis is a Tax Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.

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