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

OSU 2013

Sixteenth Congress it ra fh

First Regular Session

1062

HOUSE BILL NO.

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, it is
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.”

It is 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 non-stock, non-profit or proprietary schools, colleges and
universities.

As a result of the aforementioned thrust, Art, XIV, Sec. 4(3) of the
1987 Constitution provides that “(a)Il 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

* Bernas, Joaquin G., S.J, “The 1987 Constitution of the Republic of the Philippines: A Commentary” p. 1285;

2009 Edition.



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.

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 non-stock, 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.

As a 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 non-stock, 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. [ALES II


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

Sixteenth Congress
First Regular Session

1062

HOUSE BILL NO.

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. 1158 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. -
soot cad 7K

B) Proprietary—Educational—tInstitutions—and Hospitals. —
Proprietary—Educational—Inetitutions—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 edueationalinstitutiens—er hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be


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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 or performance by such
educational—institution—er hospital of its primary purpose or

function. A—Proprietaryeducational_insti pr
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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:

(B) 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,
facilities 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),

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BRUNE

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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.

{J)@) Government educational institutions;

(K)f8) 2200 2008 200%

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 shall 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 amended accordingly.

SEC. 6. Effectivity Clause. - This Act shall take effect fifteen (15)

days after its publication in any newspaper of national circulation.

Approved,