Proprietary schools: Surviving COVID-19 and the ‘BIR-21 variant’

Unless Congress, the courts or Malacañang will come to their aid against BIR RR No. 5-2021, most proprietary schools that are now financially in the “Intensive Care Unit” due to the present pandemic will certainly fold up and cease operations. Of all business corporations, proprietary schools were singled out by the BIR from the recovery package under Republic Act 11534. While the income tax rate for domestic corporations was reduced from 32 percent to 25 percent, the tax rate for proprietary schools under the BIR revenue regulation was increased from 10 percent to a ridiculous 25 percent, instead of decreasing it to just 1 percent as provided in the law.

Late last year, the DepEd reported that more than 700 private schools suspended their operations because of COVID-19. Now, the “BIR-21 variant” will surely knock out cold these schools, with more to follow. All because of an apparent misinterpretation of the law, which the BIR does not want to rectify. Sanamagan!

Republic Act 11534, also known as The Corporate Recovery and Tax Incentives for Enterprises Act or CREATE, was enacted purposely to give relief to enterprises adversely affected by the COVID-19 pandemic. Its policy statement categorically provides that “the State shall improve the equity and efficiency of the corporate tax system by lowering the rate,” which is necessary “to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic.” The obvious intent of Congress is to create an opportunity for recovery and never to increase the burden on enterprises already on their knees because of the pandemic.

In recognition of the complementary roles of private institutions in the educational system, the Constitution exempts all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes from taxes and duties. On the other hand, proprietary educational institutions may likewise be entitled to such exemptions, subject to the limitations provided by law. There is no doubt that the proprietary educational institutions mentioned in the Constitution include stock corporations that are operated for profit, which is the opposite of the tax-exempt non-stock, non-profit corporations.

Instead of providing the same exemption enjoyed by non-stock, non-profit schools, the National Internal Revenue Code (NIRC) imposed a preferential income tax rate of only 10 percent on proprietary educational institutions. Section 27(B) of the Code reads: “Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent.” Prior to the “BIR-21 variant,” the word “non-profit” in Section 27(B) was used only to qualify hospitals because a proprietary educational institution under the Constitution is necessarily a stock corporation operated for profit.

This interpretation, which is consistent with the Constitution, is manifest from the fact that the BIR, for the longest time, had been collecting only 10 percent tax from proprietary schools, without qualification. This tax privilege is obviously to encourage participation of private entities in providing quality education to the citizenry, a task the State cannot handle solely on its own because of budgetary limitations.

The CREATE law adopted exactly the same wordings used in the NIRC, but injected the tax relief provision, to wit: “Provided, That beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be one percent (1 percent).” What then caused the seeming confusion? Unfortunately, even the interpretation of the law appears prone to mutation, as the dreadful “BIR-21 variant” now qualifies proprietary schools into “non-profit” and “for-profit.” Apparently due to the lack of a comma, the word “non-profit” now also qualifies proprietary educational institutions so that only proprietary schools that are “non-profit” may avail of the reduced 1 percent rate.

As a consequence, proprietary schools operated for profit, which used to enjoy the preferential 10 percent rate, shall now be taxed 25 percent. But there is no proprietary school that is “non-profit.” The classification of private schools in the Constitution into “non-stock, non-profit” on one hand, and “proprietary” on the other, only means that the proprietary institutions are stock corporations or those owned by business partnerships or individuals. The stocks represent the ownership interest of stockholders in a corporation. If there are shares of stocks, there should be dividends to stockholders.

By definition therefore, all stock corporations are necessarily operated for profit and there is no such thing as a “stock, non-profit” corporation. For the guidance of all, can the BIR give one educational institution in the Philippines owned and operated by a stock corporation, that is therefore proprietary but non-profit? For whose benefit is the reduced 1 percent tax rate then, if all those previously taxed 10 percent will now pay 25 percent?

It does not make any sense to tax proprietary educational institutions 25 percent from the usual 10 percent, while lowering the tax rates for all business corporations. This is actually absurd as there is no logical and rational basis for a different treatment of proprietary educational institutions. Are not schools one of the hardest hit industries during this pandemic? To impose the regular corporate income tax rate of 25 percent instead of the 1 percent preferential rate is to kick them while they are down. This is contrary to the very purpose of the law to hasten corporate recovery.

At least for private hospitals, the situation is a lot better since they actually profited and flourished during the pandemic. But it is the exact opposite for schools now beleaguered by a substantial decrease in enrolment and the need to infuse additional investment to meet the requirements of Online Distance Learning. The preferred status of proprietary schools in the Constitution should allow a liberal construction on tax exemptions or lower tax rates in their favor as an exception to the general rule.

Even a review of the history of pertinent tax issuances would show that proprietary schools have traditionally enjoyed preferential treatment. And it is also basic in statutory construction that when the material words are capable of two constructions, the one which will not defeat or impair the policy sought to be implemented must be adopted. The title of the law itself is very clear, it is for corporate recovery and tax incentives.

The BIR RR 5-2021 has instead created a variant similar to a virus afflicting proprietary educational institutions that will certainly lead to corporate ruin due to an unconscionable tax imposition. For the fastest remedy, the President must intervene. Abangan!