HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

FIFTHTEENTH CONGRE:
Second Regular Session

. nae
HOUSE BILLNo. 9929

Introduced by Representative Neptali M. Gonzales I

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 student should be able to go to schools of their choice, whether public or private”
This policy 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 operation.’ 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 above 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, proprictary
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 (1) to
preserve the democratic choice of students; (2) to enable educational institutions to
improve their quality; and (3) to 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.

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

1285; 2008 Edition


Clearly, even during the drafting of the 1987 Constitution, the problem 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. In the said DO No. 137-87, it 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 been 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 was 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 gas not
been made operative even after 22 years from the effectively of the 1987 Constitution
which necessitates the passing of and enabling legislation that should have been done a
Jong time ago.

There is therefore the need for a law to be enacted to strengthen and recognize the
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 Interval
Revenue Code of the Philippines.

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

Neptali M. Gdgizales IT


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FIFTHTEENTH CONGRESS OF THE )
REPUBLIC OF THE PHILIPPINES )
Second Regular Session )

HOUSE OF REPRESENTATIVES

HOUSE BILL NO. 5825

Introduced by Representative 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 House of Representatives and Senate of the
Philippines in Congress assembled:

SECTION 1. Section 27(B) should be amended to read as such:

SEC. 27. Rates of Income tax on Domestic Corporations.

boos 1K 20K

B) Proprictary_Educational_tnstitutions—and Hospitals. — Proprietary

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 the 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 or performance by such educational
institution or hospital of its primary purpose or function. !
institution is—any—private—school_maintai

‘ducal Ht id her Education
(GHED),-oF-the-Technical Education-and Skills Development Authority FESDA),
as the case may be, in accordance with existing Jaws-and- regulations.

SECTION 2. Section 30(H) of the National Internal Revenue Code of the
Philippines should also be amended to read as:

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

(1)__Proprietary educational institutions. = Proprietary
educational institutions shall exempt from taxes and duties pertaining to all
revenues and assets used actually, directly and exclusively 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, 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 requlations.

{J)f1)-Government educational institution;
(K) fu) xxx XXX XXX

SECTION 3. Implementing Rules and Regulations. Within Ninety (90)
days from the effectivity of this Act, the Department of Finance and other
concemed agencies, shall promulgate the necessary rules and regulations to
effectively implement the provisions of this Act.

SECTION 4. Separability Clause. If any of provisions of this Act shall be
declared unconstitutional or invalid, the other sections and provisions not
affected thereby shall remain valid.

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

SECTION 6. Effectivity Clause. This Act shall take effect with 30 days
following its publication in a newspaper of general circulation.

Approved.