BIR Clarifies the Income Tax Treatment of the Different Classifications of Educational Institutions and their Tax Obligations

The Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Circular (“RMC”) No. 78-2022 to clarify the different classifications of educational institutions under the National Internal Revenue Code of 1997, as amended (“Tax Code”), the income tax treatment under each classification, the tax exemption and tax liabilities of specified class of educational institutions, the required withholding taxes on certain income payments, and their compliance requirements. 

Covered Educational Institutions and their Income Tax Treatment

1. Proprietary Educational Institution (“PEI”)
   
   PEI refers to any private school 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, in accordance with the existing laws and regulations. 
   
   The income of a PEI organized as a domestic corporation is subject to 10% preferential income tax rate under Section 27(B) of the Tax Code. Provided, that beginning July 1, 2020, until June 30, 2023, the tax rate imposed shall be 1%. Moreover, all domestic non-stock, non-profit (“NSNP”) educational institutions whose net income or assets accrue or inure or benefit any member or specific person shall likewise be subject to the said income tax rates.  
   
   If the gross income of the domestic corporation PEI including NSNP educational institution in the preceding paragraph insofar as its revenues or income not used actually, directly, and exclusively for educational purposes are concerned- from ‘unrelated trade, business or other activity’ exceeds 50% of the total gross income it derived from all sources, the regular corporate income tax prescribed in Section27(A) of the Tax Code shall be imposed on the entire taxable income of the said institution. 
   
   If an individual, trust, or estate owns the PEI as a sole proprietorship, the same is taxable under Section 24 and 25 of the Tax Code, and the applicable tax rates shall depend on the citizenship and residence of such individual, trust, or estate. If the PEI is a resident foreign corporation, it is taxable under Section 28(A) of the Tax Code.
   
   
2. Government Educational Institution (“GEI”)
   
   GEI is a public university or college that is fully owned and subsidized by the government. A GEI may be created through a charter, or a law passed by the Congress. If the GEI has a charter and the charter expressly provides that it is exempt from taxes, then such GEI is exempt from applicable taxes as may be provided in the aforesaid charter. If the GEI’s charter does not expressly provide that it is exempt from tax, it is nonetheless exempt from income tax on the income received as such pursuant to Section 30(I) of the Tax Code.
   
   
3. Non-stock and Non-profit Educational Institution 
   
   All revenues and assets of NSNP educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties pursuant to Paragraph 3, Section 4, Article XIV of the 1987 Constitution and as reiterated in Section 30 of the Tax Code, subject to compliance with the two requisites: (1) the school must be NSNP, and (2) the income is actually, directly, and exclusively used for educational purposes.
   

Other Applicable Taxes

1. Contribution or Gifts/Donations to Educational Institutions
   
   Contributions or gifts actually paid or made within the taxable year to domestic corporations organized and operated exclusively for educational purposes may be allowed as deduction from the gross income of the donor, in an amount not in excess of 10% if individual, and 5% if a corporation, of the donor’s taxable income; provided, that no part of the net income or asset of the donee corporation inures to the benefit of any individual or private stockholder; provided further, that if the conditions under Section 34 (H)(2)(c) of the Tax Code are complied with, the contributions or gifts may be deducted in full. 
   
   Certain gifts or donations in favor of an NSNP educational institution may be exempt from donor’s tax, if not more than 30% of said gifts shall be used by the donee institution for administration purposes. 
   
   
2. Withholding of Taxes
   
   An educational institution shall be constituted as a withholding agent for the government if it acts as an employer and its employee/s receive compensation income subject to withholding tax under Section 79(A) of the Tax Code, or if it makes income payments to individuals or corporations subject to withholding tax pursuant to Section 57 of the Tax Code. 
   
   In accordance with the Constitution, NSNP educational institutions shall not be subject to any creditable or final withholding tax on their revenues and assets used actually, directly, and exclusively for educational purposes. Existing NSNP educational institutions shall continue to present to withholding agents their duly issued certificate of income tax exemption or exemption rulings, and SEC registration. Newly organized NSNP educational institutions must secure their certificate of tax exemption within three (3) months from the issuance of their Certificate of Registration with the SEC.
   
   The income payments to PEI, including NSNP educational institutions, which are subject to preferential income tax under Section 27(B) are subject to creditable and final withholding taxes. The creditable withholding tax on the income payments to these institutions should not be more than the statutory income tax rate imposed on PEI under Section 27(B) of the Tax Code. 
   
   The income payments to educational institutions organized as sole proprietorships under Section 24(A)(2)(a) or Section 24(A)(2)(b) are also subject to creditable and final withholding taxes.
   

Compliance Requirements

1. Registration
   
   All educational institutions are required to be registered with the BIR using the Application for Registration Form (i.e., BIR Form No. 1903 or 1901) on or before the commencement of its operations. 
   
   The proper tax type must be determined based on the nature of the business activity of the taxpayer. Each type of internal revenue tax for which the corporation is obligated to file a return or pay taxes due thereon should be registered. Registration for withholding tax is also required if the educational institution is an employer and its employees receive compensation income under Section 79(A), or if it is expected to make income payments subject to expanded withholding tax under Section 57(B), of the Tax Code.
   
   Upon registering with the BIR, the registrant must comply with the primary (i.e., Pay Annual Registration Fee and Secure Certificate of Registration) and the secondary registration processes (i.e., Apply for Authority to Print Receipts/Invoices and Register Books of Accounts) which are all under BIR Form 1903/1901, except for registration of books of accounts which is under BIR Form 1905 and observe the prescribed periods therefor. Updates in registration information are also required to be registered by accomplishing and filing an Application for Registration Information Update (BIR form No. 1905) with the Revenue District Office where registered. 
   
   
2. Issuance of Receipts and Invoices
   
   In the regular conduct of business, all educational institutions shall issue duly registered receipts or sales/commercial invoices for each sale or transfer of merchandise or for services rendered valued at one hundred pesos (Php100.00) or more. The original of each receipt or invoice shall be issued to the purchaser, customer, or client and which shall show the name, business style, if any, and address of the latter. Where the purchaser is a VAT-registered person, the invoice or receipt shall further show the Taxpayer Identification Number of the purchaser. NSNP educational institutions shall issue official receipts with the words “Tax Exempt” printed prominently for all exempt revenues/receipts including donations received.
   
   
3. Filing of Tax Returns
   
   NSNP educational institutions whose assets or income are all used actually, directly or exclusively for educational purposes, shall file annual income tax returns under BIR Form No. 1702-EX, together with the required attachments. No monthly and quarterly VAT or percentage tax returns shall be required. 
   
   The revenues or income of NSNP educational institutions not used actually, directly, and exclusively for educational purposes shall be subject to 25% regular corporate income tax pursuant to Section 27(A) of the Tax Code. The NSNP educational institution shall file its annual income tax return under BIR Form No. 1702MX which shall be reflected under the column that will be subject to the regular income tax rate. 
   
   PEI other than NSNP, which is taxable under Section 27(B) of the Tax Code, with revenues from related, or from related and unrelated activities, where the gross revenues from the unrelated activities do not exceed 50% of the total gross revenues, shall file the annual income tax returns under BIR Form No. 1702MX. If the gross revenues from the unrelated activities exceeds 50% of the total gross revenues, the PEI’s total taxable income shall now be subject to the regular tax rate of 25% under Section 27(A) of the Tax Code, the income tax return form to be used is BIR Form No. 1702RT. 
   
   If the educational institution is organized as a sole proprietorship, which is taxable under Section 24 (A)(2)(a) or Section 24 (A)(2)(b), the income tax return form applicable is BIR Form Nos. 1701 and 1701A, respectively. 
   
   In case of sale, barter, exchange, or lease of goods and/or services other than educational services, both the corporation and sole proprietorship are required to file business tax returns, either VAT or Percentage tax returns using BIR Form Nos. 2550M/2550Q or 2551Q, respectively. 
   
   
4. Certificate of Income Tax Exemption
   
   To ensure that the exempt income of a NSNP educational institution is used actually, directly, and exclusively for educational purposes, the NSNP educational institution is required to secure a one-time certificate of income tax exemption or exemption ruling from the BIR, subject to the submission of applicable documents, pursuant to RMC No. 24-2016 and RMO No. 44-2016. Otherwise, the income of the NSNP educational institution shall be subject to applicable taxes under the Tax Code.