Tax exemption for nonprofit schools

Internal Revenue Commissioner Caesar R. Dulay deserves commendation for clarifying that “non-stock, non-profit educational institutions are constitutionally exempt from tax on all revenues derived in pursuance of [their] purpose as an educational institution and used actually, directly and exclusively for educational purposes.”

Only two requirements. Last July 25, within his first month in office, Commissioner Dulay issued Revenue Memorandum Order (RMO) 44-2016 excluding these nonstock, nonprofit schools (NNS) from the coverage of an earlier order (RMO 20-2013) issued on July 22, 2013.

RMO 20-2013 lumped these NNS with corporations and associations which are granted tax exemptions by the National Internal Revenue Code (NIRC). This RMO allowed them tax exemption “by reason of the privilege granted by law” and subjected them to very strict conditions, requirements and procedures.

In his recent RMO, Dulay correctly distinguished NNS from the other corporations and associations granted tax exemptions in the earlier RMO, saying that the NNS were given tax exemption directly by the Constitution and not merely by law, the NIRC.

Indeed, the Constitution granted NNS tax relief in these simple and unmistakable words: “All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.”

Consequently, to enjoy tax relief, all they need to show are two requisites: 1) they are organized as nonstock and nonprofit entities, and 2) their income or revenue is “actually, directly and exclusively used for educational purposes.”

Consequently also, they should not be lumped with, and required to undergo the same conditions, requirements and procedures as, those given tax exemption only by the ordinary legislation (like the NIRC) and not by the Constitution. The Bureau of Internal Revenue cannot add, much less vary, the two simple requirements of the Constitution.

Although Dulay segregated the NNS from other corporations and associations that are granted tax exemptions by ordinary statute (and not by the Constitution), still some critics bewail the documentary requirements imposed by the new RMO 44-2016 as too bureaucratic and burdensome.

But I believe that, compared with those imposed by the earlier RMO, these requirements are few and reasonable. They are needed to satisfy the two requisites earlier cited: 1) that the applicant-school exists and currently operates in good standing as certified by the Securities and Exchange Commission and the Commission on Higher Education, or the Department of Education or the Technical Education and Skills Development Authority, and 2) that the funds it earns are spent for educational purposes only, and not for any other purpose.

Assistance to state. The Constitution mandates the state to “establish and maintain a system of free public education in the elementary and high school level…” It adds that “elementary education is compulsory for all children of school age.”

Because of the foregoing mandate, the state allocates the biggest portion of the annual budget to education. And yet, the budget—huge as it already is—is not enough to educate all children of school age. Private nonstock, nonprofit schools fill the gap and relieve the state of this constitutional duty to educate all children of school age up to the elementary and high school levels.

If only for this, and for no other reason, the least the state can do is to exempt these schools from the burden of taxes. After all, the funds they receive, whether in the form of tuition or donations, really, directly and ultimately benefit the children, and indirectly, the state. In fact, I think the state should not only exempt them from taxes but should also financially assist them, especially those catering to basic education.

Religious schools. These NNS are operated mainly by the various Catholic dioceses and religious orders, like the Jesuits and Dominicans. But they could also be owned and operated by foundations, like the Tan Yan Kee Foundation, Metrobank Foundation and Angeles University Foundation.

Catholic schools are found all over the country. They are banded together in the 75-year-old Catholic Educational Association of the Philippines (CEAP). Founded in 1941, the CEAP counts 1,252 members, of which a big majority (about 700) are mission schools offering basic education to the poor and the marginalized.

It aims for “the total development of the human person” through a Catholic orientation consistent with the norms of the Church and the national development goals expressed in the Constitution.

On the other hand, the Association of Christian Schools, Colleges and Universities (ACSCU) unites the nonstock, nonprofit Protestant educational institutions affiliated with Christian churches or denominations. Organized in 1946, the ACSCU has 118 members, composed of six universities, three seminaries, 40 colleges and 69 basic education schools.

Although there is an Association of Muslim Schools in the world, I am not aware of any Philippine affiliate or, for that matter, of any local association of Muslim schools similar to the CEAP or the ACSCU.

In any event, RMO 44-2016 will benefit all religious schools, provided of course that they can document the two requisites of being nonstock and nonprofit and of the use of their income and assets actually, directly, and exclusively for educational purposes only.

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