Competence. Integrity. Commitment.

CLARIFICATION ON THE INCOME TAX TREATMENT OF DIFFERENT CLASSIFICATIONS OF EDUCATIONAL INSTITUTIONS (Revenue Memorandum Circular No. 78-2022, June 8, 2022)

• Proprietary Educational Institution 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 existing laws and regulations.
• Income from proprietary educational institutions which are domestic corporations is subject to ten percent (10%) preferential income tax. Provided that beginning July 1, 2020 until June 30, 2023, the tax rate shall be one percent (1%)
• Moreover, the same tax rate shall be applicable to a domestic educational institution which is also a non-stock, non-profit (NSNP) whose net income or assets accrue/inure to or benefit any member or specific person.
• If the revenue or income not used actually, directly and exclusively for education purposes exceeds fifty percent (50%) of the total gross income derived from all sources, the regular corporate income tax shall be imposed on the entire taxable income of the institution.
• Applicable tax on other proprietary educational institutions:
  • Individual - income of an individual, trust, or estate that owns the proprietary educational institution as a sole proprietor, is taxable under Sections 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.
  • Other Corporations - The income of a corporation, as defined under Section 22(B) of the Tax Code, that is not organized as domestic corporation but is classified as resident foreign corporation, is taxable under Section 28(A) of the Tax Code.
• Contributions or Gifts/Donations to Educational Institutions
  • Individuals – an amount not in excess of 5% of their taxable income.
  • Corporation – an amount not in excess of 10% of their taxable income
  • 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 in an amount provided that no part of the net income or asset of the done corporations inures to the benefit of any individual or private stockholder.
  • The amount may be deductible in full if the conditions under Section 34(H)(2)(c) of the Tax Code are complied with.
  • Certain gifts or donations in favor of an NSNP educational institution may be exempt from donor's tax, subject to the condition that not more than thirty percent (30%) of said gifts shall be used by the donee institution for administration purposes
• Withholding Tax:
  • An educational institution shall be constituted as withholding agent if he acts as an employer or makes payments to individual or corporations subject to withholding tax pursuant to Section 57 of the Tax Code.
  •  NSNP educational institutions are not subject to creditable final withholding taxes on their revenues and assets used actually, directly and exclusively for educational purposes.
  • Income payments to proprietary educational institutions, including NSNP education institutions, which are subject to preferential income tax are subject to creditable and final withholding tax.
  • Educational institutions organized as sole proprietorships under Sec. 24 (A)(2) (a or b) are also subject to creditable and final withholding taxes.
• NSNP educational institutions are required to secure a one-time certificate of income tax exemption or exemption ruling from the BIR. Otherwise, the income of the NSNP educational institution shall be subject to applicable taxes under the Tax Code.