Do you know that all incomes of Educational Institutions are subject to corporate income tax in the Philippines? However, not all educational institutions are all subject to corporate income tax. One of these is proprietary educational institutions. Learn this corporate income tax update.
In this article, it will include the definition, income tax rate, allowable deductions, and passive income. You will learn also why income from unrelated activities of educational institutions is subject to tax. Let’s start by knowing the meaning of proprietary educational institutions.
Definition of Proprietary Educational Institutions
Under the Tax Code, ‘proprietary educational institution‘ is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. For more details about corporate income tax click this link https://www.bir.gov.ph/index.php/tax-code.html#title2
Do you know this corporate income tax update? As a rule, it is subject to a special income tax rate of ten percent (10%) on their taxable income except on certain passive income. Notably, this is much lower than the regular corporate income tax rate of 30% of taxable net income. However, they must dedicate their operations to providing educational services because if they do not, then, they will cease to enjoy the benefit of 10%.
If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources, they shall be taxed at 30% on the entire taxable income.
Definition of Unrelated trade, business or other activity. It means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function.
Allowable deductions on Educational Institutions
It is allowed to claim from its gross income, allowable deductions in like manner as an ordinary taxpayer engaged in trade or business. In addition to the expenses allowable as deductions, it may at its option elect either:
(a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or
(b) to deduct allowance for depreciation thereof.
In other words, capital outlays which would have been normally considered as an asset subject to depreciation may be claimed by proprietary educational institutions as an outright deduction from its gross income.
Finally, the passive income of proprietary educational institutions is taxed in the same manner as ordinary corporations. Examples of passive income are interest income from Philippine bank deposits and royalties. Learn more updates about passive income that is subject to new withholding tax rates.
Despite its non-stock and non-profit nature, an educational institution is liable for assessed deficiency tax on income derived from the operation of a canteen and income from the rental of its facilities, says the CTA.
To qualify for tax exemption, the following requisites under the Philippine Constitution and the Tax Code must exist:
1. First, it is a non-stock, non-profit educational institution; and
2. The income seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes.
In this case, the school was not able to show that all of its income and revenues were actually, directly, and exclusively used for educational purposes. While it claimed that all its revenues are pooled into the General Fund, its AFS for 2004 and 2005 did not show that the proceeds received from the canteen operator were co-mingled with the General Fund.
Moreover, its expenditures, such as retirement contribution, entertainment, amusement, and recreation, are not directly related to the main function of a non-stock, non-profit educational institution. For more updates click this link 13 Approved TRAIN Tax Law Reform in 2018