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Republic of the Philippines js” RECEIVED
HOUSE OF REPRESENTATIVES [" oyic JUL, 08 2p

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Quezon City, Metro Manila TIME

Eighteenth Congress
First Regular Session

HOUSE BILL NO. 1612

Introduced by Honorable Neptali M. Gonzales II

EXPLANATORY NOTE.

The fundamental constitutional policy of education is that it is the duty of the State to
make quality education available while the same time affordable to as large a segment of the
population as possible. Further, itis the fundamental democratic policy that students should
be able to go to schools of their choice, whether public or private.' This policy is summed up in
Article XIV, Section 1; “The State shall protect and promote the right of all citizens to quality
education at all levels of education and shall take appropriate steps to make education
accessible to all.”

Tis a known fact, however that quality education is a rare commodity in the
Philippines and that the State itself is not able to maintain mass quality education. Much less is
the State able to give subsidy to private schools which much therefore rely on their income to
support their operations. The Constitutional Commission therefore found it necessary to at
least provide for a significant tax relief to private educational institutions, whether nonstock,
non-profit or proprietary schools, colleges and universities.

Asa result of the aforementioned thrust, Art. XIV, Sec. 4(3) of the 1987 Constitution
provides that “(a)ll revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall exempt from taxes duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law. Likewise, proprietary educational
institutions, including those cooperatively owned, may likewise be entitled to such exemptions,
subject to the limitations provided by law, including restrictions on dividends and provisions
for reinvestment.”

The constitutional provision thus has a threefold rationale. It is intended to (1)
preserve the democratic choice of students; (2) enable educational institutions to improve their
quality; and (3) make quality education affordable to students.

" Bernas, Joaquin G., SJ., “The 1987 Constitution of the Republic of the Philippines: A Commentary” p. 1285;
2009 Edition.


These points were emphasized during the deliberations of the 1986 Constitutional
Commission where Commissioners Gascon, Nolledo, Bacani and Ople highlighted the need to
grant tax exemptions to educational institutions, not only to keep them financially viable but
also to make education truly affordable and available to a greater number of Filipinos.

Clearly, even during the drafting of the 1987 Constitution, the problems of private
educational institutions, whether nonstock, non-profit or proprietary schools, colleges and
universities have already been highlighted and as a result of said realization, several
Constitutional provisions have been formulated providing financial support through tax
exemptions.

However, the Department of Finance issued Department Order No. 137-87 dated
December 16, 1987 outlining the rules and regulations for educational institutions to avail of
the subject constitutional tax exemption. This department order provided that in order to avail
of the exemption, all revenues and assets aside from being actually, directly and exclusively used
for educational purposes must also be derived in pursuance of their primary purpose.

Asa result of the above department order, the constitutional tax exemption granted to
educational institutions, whether non-stock, non-profit or proprietary schools, colleges and
universities pursuant to the Constitution has weakened, diluted and denied. This should not
be the case because Article XIV, Sec. 4(3) does not take into account how these assets and
revenues are sourced. They could be derived from donations, school operations and other
modes of income generation. There is nothing in the deliberations of the Constitutional
Convention pertaining to the manner of acquiring these assets and revenues given any
relevance.

Moreover, the mandate of the Constitution to likewise entitle proprietary educational
institutions, including those cooperatively owned, to such exemption has not been made
operative even after the 22 years from the effectivity of the 1987 Constitution which
necessitates the passing of an enabling legislation that should have been done a long time ago.

‘There is therefore the need for a law to be enacted to strengthen and recognize
constitutional tax exemption granted to nonstock, non-profit educational institutions pursuant
to Art. XIV, Sec. 4(3) of the 1987 Constitution and to extend the same to, subject to the
limitations provided in this proposed legislation, to proprietary schools, colleges and
universities, by amending Sec. 27(B) and Sec. 30 (H) of the National Internal Revenue Code of
the Philippines,

In view of the foregoing, the passage of this bill is earnestly sought.

NEPTALI M. GONZALES IL


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

Eighteenth Congress
First Regular Session

HOUSE BILL NO. 1612

Ss
Introduced by Honorable Neptali M. Gonzales II

—

AN ACT
RECOGNIZING AND STRENGTHENING THE TAX EXEMPTIONS
GRANTED TO EDUCATIONAL INSTITUTIONS PURSUANT TO ART.
XIV, SECTION 4(3) OF THE 1987 CONSTITUTION BY AMENDING
SEVERAL PROVISIONS OF PRESIDENTIAL DECREE NO. 1 158 AS
AMENDED BY REPUBLIC ACT NO. 8424 OTHERWISE KNOWN AS
THE NATIONAL INTERNAL REVENUE CODE OF THE PHILIPPINES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SECTION 1. Section 27(B) of the National Internal Revenue Code of the
Philippines is hereby amended to read as follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. —

xxx 0% nox

B) Proprietary Educational Institutions and Hospitals. - Proprietary
Educational Institutions and Hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income except those covered by Subsection (D)
hereof: Provided, that if gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof

shall be imposed on the entire taxable income. For purposes of this Subsection, the


term ‘unrelated trade, business or other activity’ means any trade, business or other
activity, the conduct of which is not substantially related to the exercise ot
performance by such educational institution or hospital of its primary purpose or
function. A ‘Proprietary educational institution’ is any private school maintained and
administered by private individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), 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.

SEC. 2. Section 30 (H) of the National Internal Revenue Code of the Philippines is
hereby amended to read as follows:
SEC. 30. Exemptions from Tax on Corporations. — The following
corporations shall not be taxed under this Title in respect to income received by

them as such:

(H) A nonstock and nonprofit educational institution pertaining to
all revenues and assets used actually, directly and exclusively for

educational purpose regardless of whether or not the same is
derived in pursuance of the primary purpose.

Proprietary educational institutions. — Proprietary educational

institutions shall exempt from taxes and duties pertaining to all

revenues and assets used actually, directly and exlusively for

educational purposes regardless of whether or not the same is

derived in pursuance of primary purpose and subject to the



limitations provided by law, including restrictions on dividends

and provisions for reinvestment. Provided, that the proprietary

schools, colleges and universities shall still determine the

amount equal to ten percent (10%) of their net income that

could have been subject to income tax if they were not exempt

from said income tax. Provided further, that the amount so

determined shall be strictly utilized in the following manner:

seventy percent (70%) for increases in salaries of employees;

twenty percent (20%) for additional scholarship grants to

students and ten percent (10%) for improvement of equipment,

facil

ies and/or buildings. A “Proprietary educational

institution” is any private school maintained and administered

by private individuals or groups with 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.

(DA Government educational institutions;
(K)G} 00 xxx xxx
SEC. 3. Implementing Rules and Regulations, - Within Ninety (90) days from the
effectivity of this Act, the Department of Finance and other concerned agencies shall
promulgate the necessary rules and regulations to effectively implement the provisions of this
Act.
SEC. 4. Separability Clause. ~ If any provisions of this Act shalll be declared
unconstitutional or invalid, the other sections and provisions not affected thereby shall

remain valid


SEC. 5. Repealing Clause. ~ All laws, presidential decrees, executive orders,
proclamations and rules and regulations which are inconsistent with this Act is hereby
repealed and mended accordingly.

SEC. 6. Effectivity Clause. - This Act shall take effect fifteen (15) days after its
publication in any newspaper of national circulation.

Approved,