How to help Philippine Education tax effectively

While the current administration has given the Education department the largest allocation in the budget, the country will still need know help to improve the quality of education. Here’s a few ways to do it.

From BusinessWorld Philippines

July 11, 2012

Promoting education through tax perks

Ignorance is servitude, because as a man thinks, so he is; a man who does not think for himself and allowed himself to be guided by the thought of another is like the beast led by a halter. — Dr. Jose Rizal
This profound statement of Dr. Jose Rizal clearly emphasizes that freedom can never be achieved unless we overcome our ignorance. It is because of our ignorance that our country has been under the servitude of foreign colonizers for centuries.

He wanted to inculcate in the minds of the Filipinos the value of education and knowledge if we really desire to achieve true freedom.

Education is a weapon towards achieving social and economic growth and development. Thus, the right of every Filipino to education had been entrenched in our 1935 Constitution and later in our 1987 Constitution, particularly in Article XIV, Section 1 thereof which states, to wit: “The State shall protect and promote the right of all citizens to quality education at all levels.”

The Philippine government has since supported the development of Philippine education. To ensure that this right is protected, government has made basic education accessible to all Filipinos, especially the underprivileged.

The creation of numerous public schools giving free elementary and secondary education to the poor has been one of the major educational programs of the government.

Moreover, the recent introduction and implementation of the K12 program into our educational system demonstrate the government’s serious effort to raise the level of quality of Philippine education making it at par with the educational system of other countries.

Article XIV, Section 5(5) of the 1987 Constitution further requires the State to assign the highest budgetary priority to education. In recognition of this mandate, the Department of Education (DepEd) has received the largest slice in the 2012 national budget amounting to P238.8 billion, which is a 15.2% increase from the 2011 budget.

Various tax incentives and privileges have likewise been granted to educational institutions to ensure their viability and efficiency in dispensing their important mandate of educating our citizens.

The following discussions summarize tax privileges involved.

NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS

Under Article XIV, Section 4(3) of the 1987 Constitution, revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties.

The same Article also exempts from tax subject to certain conditions, all grants, endowments, donations or contributions used actually, directly, and exclusively for educational purposes. Educational institution refers to a “school, seminary, college or educational establishment.” (Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 124043, Oct. 14, 1998).

The term “exclusively used” also includes incidental use, as clarified in several court rulings. The tax exemption under this provision does not extend to income derived from trade, business or other activity, the conduct of which is not related to the exercise or performance by educational institutions of their educational purposes or functions. (Sec. 2 Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88).

Section 30 (H)and (I) of the 1997 Tax Code, as amended, also exempts from income tax non-stock and non-profit educational institutions and government educational institutions on income received by them as such institutions.

Similarly, the tax exemption does not extend to income of whatever kind and character of said educational institutions from any of their properties, real or personal, or from any of their activities conducted for profit.

PROPRIETARY EDUCATIONAL INSTITUTIONS

On the other hand, proprietary educational institutions are subject to a preferential income tax rate of 10% on their taxable income (excluding passive income) provided their gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income derived by then from all sources.

Unrelated trade or activity refers to any trade or activity, the conduct of which is not substantially related to the performance of such educational institutions of their primary purpose or function.

Non-compliance with this condition will subject the taxable income of the educational institutions to the 30% regular corporate income tax.

VAT EXEMPTION ON EDUCATIONAL SERVICES

Under Section 109 (H) of the Tax Code, educational services rendered by private educational institutions duly accredited by the DepEd, the Commission of Higher Education and Technical Education and Skills Development Authority are considered value added tax (VAT)-exempt.

The same VAT exemption applies to educational services rendered by government educational institutions.

VAT exemption under this provision does not cover activities involving the sale of goods or services or purchase of goods or services which are not in any way connected to the primary purpose of educational institutions.

DONATIONS TO EDUCATIONAL INSTITUTIONS

Gifts, donations or contributions in favor of educational institution are also exempt from the payment of donor’s tax under Section 101 (A) (3) of the Tax Code provided not more than 30% of said gift shall be used for administration purposes.

Moreover under Section 34(H) of the Tax Code, contributions or gifts actually paid or made to accredited domestic corporations or associations organized exclusively for educational purposes may be allowed as a deduction from gross income in an amount not exceeding 10% in the case of an individual, and 5% in the case of a corporation, of the taxpayer’s taxable income derived from trade, business or profession as computed without the benefit of the deduction.

Full deductibility is granted in the case of donations made to accredited nongovernment organizations organized and operated exclusively for educational purposes.

IMPORTED EDUCATIONAL MATERIALS

Department Order No. 057-11 of the Department of Finance exempts from customs duties and VAT imported educational, scientific and cultural books and materials not published for advertising purposes in compliance with the Florence Agreement to which the Philippines is a signatory.

ADOPT-A-SCHOOL ACT OF 1998

In 1998, Republic Act No. 8525 was enacted which provided for the establishment of an — Adopt-a-School Program” and granted corresponding incentives.

The program was aimed at encouraging the private sector to support and help in the upgrading and modernization of publics schools in the country, whether elementary, secondary or tertiary, particularly those in poverty-stricken provinces.

The program provided for the grant of various tax and non-tax incentives to a pre-qualified adopting private entity. Tax incentives included a deduction from the adopting entity’s gross income of the amount of contribution/donation actually, directly and exclusively incurred for the program, subject to the limitations, conditions and rules provided in Section 34(H) of the Tax Code, plus an additional amount equivalent to 50% of such contribution/donation subject to certain conditions. Any assistance given to the Program is likewise exempt from the payment of donor’ tax.

The tax benefits and incentives conferred by the government seek to pursue the ideals and vision of achieving a better, world-class Philippine educational system.

However, growth does not end with the government. Filipinos should also step up to the challenge by supporting these programs and openly embracing the changes in our educational system, for every change opens an opportunity for progress.

The author is a consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mailclarmanette.sulay@ph.pwc.com for questions or feedback. Views and opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.

Article location : http://www.bworldonline.com/content.php?section=Economy&title=Promoting education through tax perks&id=55001

2 thoughts on “How to help Philippine Education tax effectively

  1. how about a school who does not pay income tax since the commencement of the SEC reg. what are the non trade that subject to 50% tax

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