Tax Alert No. 28 [Revenue Memorandum Circular (RMC) No. 78-2022 dated 08 June 2022]

Clarifying the Income Tax Treatment of the Different Classifications of Educational Institutions and Their Tax Obligations 

The Commissioner of Internal Revenue has issued RMC No. 78-2022 to clarify the income tax treatment of the revenues earned by the different classifications of educational institutions, to wit:

If the gross income of the proprietary and NSNP educational institutions – insofar as its revenues or income not used actually, directly and exclusively for educational purposes are concerned – from ‘unrelated trade, business or other activity exceeds 50% of the total gross income they derived from all sources, the regular corporate income tax prescribed in Section 27(A) of the Tax Code shall be imposed on their entire taxable income. 

This RMC also discusses the other applicable taxes to educational institutions and to some of their transactions:

1. Donations to educational institutions may be deducted from the gross income of the donor, in an amount not in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the donor’s taxable income; provided, that no part of the net income or asset of the donee inures to the benefit of any individual or private stockholder. Donations to accredited non-government institutions may be deductible in full subject to conditions.  
   
2. Certain donations in favor of an NSNP educational institution may be exempt from donor’s tax, subject to the condition that not more than 30% of the gifts shall be used by the donee institution for administration purposes.
   
3. An educational institution shall be constituted as a withholding agent on the compensation income paid to its employees or if it makes income payments to individuals or corporations subject to withholding tax.
4. The following rules shall apply to the withholding taxes on income received by educational institutions:
   • NSNP educational institutions shall not be subject to any withholding tax on their revenues and assets used actually, directly and exclusively for educational purposes as provided under the Constitution.For this purpose, they shall present to withholding agents their duly issued certificate of income tax exemption or exemption rulings, and Securities and Exchange Commission’s (SEC) registration. Newly-organized NSNP educational institutions must secure their certificate of tax exemption within 3 months from the issuance of their Certificate of Registration with the SEC.
   • The income payments to proprietary educational institutions, including NSNP educational institutions, which are subject to preferential income tax under Section 27(B) are subject to withholding taxes.The creditable withholding tax on the income payments to these institutions should not be more than the statutory income tax rate imposed on proprietary educational institutions under Section 27(B) of the Tax Code.
     
   • The income payments to educational institutions organized as sole proprietorships under Section 24(A)(2)(b), are also subject to withholding taxes.
     

You may access the full version of the RMC through the BIR website.