RMC No. 78-2022: Clarifies the Income Tax treatment of the different classifications of educational insitutions and their tax obligations

Key points

1. Proprietary domestic corporations. Their income is subject to the ten percent (10%) preferential rate under Section 27(B) of the Tax Code, and the rate is one percent (1%) from July 1, 2020 until June 30, 2023. If gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of total gross income, the regular Section 27(A) rate applies to the entire taxable income.
2. Other proprietary institutions. Individuals, trusts or estates owning the school as sole proprietor are taxed under Sections 24 and 25. Resident foreign corporations are taxed under Section 28(A).
3. Government educational institutions. A government educational institution is exempt as its charter expressly provides. Without that provision, it is exempt from income tax on income received as such under Section 30(I).
4. NSNP institutions. Revenues and assets used actually, directly and exclusively for educational purposes are exempt, if the school is NSNP and no net income or asset benefits any member. The institution submits a detailed breakdown of expenses with its annual income tax return.
5. Donations and withholding. Donor deductions are capped at ten percent (10%) of taxable income for individuals and five percent (5%) for corporations, with exceptions under Section 34(H)(2)(c). Donor’s tax exemption applies if not more than thirty percent (30%) of gifts is used for administration. Newly organized NSNP institutions secure a Certificate of Tax Exemption within three (3) months from SEC registration.
6. Compliance duties. All educational institutions register with the BIR, issue receipts or invoices, file tax returns and secure a Certificate of Income Tax Exemption. Details are in the Circular.

Who is affected

• Proprietary educational institutions
• Government educational institutions
• NSNP educational institutions
• Donors to educational institutions

Deadlines and effectivity

• 1% rate from July 1, 2020 until June 30, 2023
• Certificate of Tax Exemption within three (3) months from SEC Certificate of Registration