“Tax perks for better education” by Lee Celso R. Vivas and Betheena C. Dizon (Jun 14, 2010)

SUITS THE C-SUITE By Lee Celso R. Vivas and Betheena C. Dizon
Business World (06/14/2010)

Of all juridical entities in the Philippines, educational institutions are probably one of the most favored by law — and with compelling reason. Schools are repositories of knowledge and are at the forefront in the quest for new ideas for a better society. Schools educate and nurture the young to become productive citizens and partners in nation-building.

The Constitution mandates the State to give priority to education, and to protect and promote the right of all citizens to quality education at all levels.

To provide impetus to this mandate, the Constitution grants nonstock, nonprofit educational institutions tax exemption on all their revenues and assets actually, directly, and exclusively used for educational purposes. This privilege has been interpreted to mean exemption from all forms of taxes.

The Constitution grants the tax exemption only to nonstock, nonprofit educational institutions, and not to private schools organized as stock corporations.

Our Corporation Code defines a stock corporation as a juridical entity the capital stock of which is divided into shares, authorized to distribute dividends to shareholders on the basis of the shares held. Ergo, corporations, the capital stock of which is not divided into shares, are nonstock corporations.

The same principle applies to educational institutions. The requirement that educational institutions must be nonstock and nonprofit to qualify for the tax exemption is a constitutional safeguard, because as held by the Court of Tax Appeals (CTA) in the 1995 Southeast Asian Regional Center for Graduate Study and Research in Agriculture v CIR case, “the moment a stock corporation is formed, there is an expectation of profits.”

On the other hand, a proprietary educational institution that is not qualified for the constitutional tax exemption is nonetheless entitled to a preferential income tax rate of 10% on its net taxable income, as long as its gross income from unrelated trade, business, or other activity does not exceed 50% of its gross income derived from all sources.

In 2004, the Bureau of Internal Revenue (BIR) assessed Ateneo de Manila University, Inc. (ADMU) for deficiency income tax and value-added tax (VAT) on the concession fees it derived from concessionaires in its cafeterias.

In a decision promulgated last March, the CTA cancelled the deficiency tax assessment, confirming that ADMU’s concession fees are tax-exempt.

In deciding for ADMU, the CTA said that the university had presented sufficient testimonial and documentary evidence that the concession fees it had received were actually, directly, and exclusively for educational purposes.

This follows the earlier decision of the Supreme Court in Commissioner of Internal Revenue vs. Court of Appeals and Young Men’s Christian Association (YMCA) (G.R. No. 124043, October 14, 1998) where the Supreme Court clarified that the bare allegation that an establishment is a nonstock, nonprofit educational institution is insufficient to justify its exemption from income tax. In this case, the Court gave two requirements to be eligible for exemption: first, it falls under the classification nonstock, nonprofit educational institution; and second, the income it seeks to be exempted from tax is used actually, directly, and exclusively for educational purposes.

More significantly, the CTA struck down the BIR’s contention that, to be exempt from income tax and VAT, the cafeterias must be owned and operated by ADMU and not by concessionaires. In effect, the Court refused to apply the provision in Department of Finance Circular No. 137-87 and Revenue Memorandum Circular No. 76-03) requiring canteens, dormitories, and bookstores to be owned and operated by the educational institution, since this requirement has no basis in the Constitution.

Thus, by refusing to apply this requirement, the Court reiterated its decision in the YMCA case that the crux for the tax exemption of nonstock, nonprofit educational institutions is that the income must be actually, directly and exclusively used for educational purposes — which is as it should be.

As stated by the Rev. Fr. Joaquin Bernas, S.J. in his book, titled: The Intent of the 1986 Constitution Writers, the constitutional tax exemption is intended to preserve the democratic choice of students, enable educational institutions to improve their quality, and make quality education more affordable to students in the form of more affordable tuition fees.

Unfortunately, the sad reality is that quality education is still not within the reach of many Filipinos. Therefore, there is a need to actively and aggressively help and support educational institutions that are committed to honing well-rounded individuals who will be the country’s next crop of leaders and decision makers. After all, education, for many, is their only hope to break away from the cycle of poverty.

(Lee Celso R. Vivas is a Tax Director and Betheena C. Dizon is a Tax Senior Associate of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.