Corporate tax reform bill to provide incentives to well-performing schools, hospitals

August 16, 2018

Non-profit private schools and hospitals that perform well and adhere to high standards of  service will continue to enjoy the current low income tax rate of 10 percent under the proposed corporate income tax (CIT) reform bill pending in the House of Representatives, the Department of Finance (DOF) said Thursday.

Finance Undersecretary Karl Kendrick Chua said the bill, dubbed the “Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Act, would “incentivize” private hospitals and educational institutions to upgrade their quality of service in order to be granted this special tax rate, as he sought to correct misapprehensions about the measure supposedly resulting in higher tuition payments.

The bill does not cover religious schools,  which under the Constitution, are exempted from paying income tax provided they are organized as non-stock non-profit corporations and no part of their net income shall belong or benefit any member, organizer, officer or person.

Chua said the TRABAHO bill aims to ensure that students are able to go to schools that provide quality education, through a set of performance criteria to be determined and evaluated by the Commission on Higher Education (CHED) and the Department of Education (DepEd).

The Department of Health (DOH), meanwhile, will establish the criteria for private hospitals to assess their performance and their eligibility for the tax incentive, he said.

Chua said the absence of a system to evaluate educational institutions  and encourage them to improve their performance has made some of them "very profitable," citing as an example a school with  a gross revenue of P1.4 billion in 2015 and a net income of P624 million. This means that under 10 percent tax regime, the school paid taxes of only P61 million even though it did not meet any of the performance criteria set by CHED,  and was able to pay dividends of P250 million, Chua added.

Finance Secretary Carlos Dominguez III pointed out that this example shows that "half of the dividends were actually paid for by the public" or the country's taxpayers.

"Now, if they don't meet [the criteria] why should we subsidize [schools which] don't meet the criteria," Dominguez said. "Basically, we are supporting this school even though it is not helping the students."

“Schools and hospitals that are up to standard need not worry.  We need to make sure that our children study  in  good schools and that we go to hospitals that provide quality medical care,” Chua said.

Chua said the TRABAHO bill provides for a transition period for schools and hospitals to improve the quality of service they render, before the subpar institutions are taxed a higher rate.

“There would be no change if the performance of the school is good. For example, what is good performance? First, they have to reach at least Level 1 accreditation. Let’s cite the ones with the highest like the University of the Philippines, Ateneo and La Salle, these are Level 4. Only eight percent of schools are at least Level 1, the majority have no accreditation at all),” Chua said.

Data gathered by the DOF from the CHED show that  among private higher educational institutions , more than 50 percent of the faculty in sectarian institutions  have graduate degrees, while with private non-sectarian, non-profit schools   only 29 percent have faculty members with graduate degrees.

Only 102 or eight percent of non-sectarian HEIs have at least one study program accredited (at least level 1) with the CHED.

Among non-sectarian HEIs, the portion of students passing licensure examinations averaged only 37 percent as of 2016.

Chua said by evaluating schools through a set of performance criteria and encouraging them to improve by granting them low income tax rates, the bill would, in effect, help ongoing efforts to upgrade the quality of education, especially tertiary learning, in the country.

Among the criteria cited by Chua is the school’s number of passers in licensure examinations and the number of faculty members with pertinent qualifications.

"If the performance is not good, they will gradually pay the)  15 or 20 percent (tax)  This is still lower than the) regular 30 percent (corporate income tax rate),”  Chua said.

The TRABAHO bill seeks to amend Section 27 of the National Internal Revenue Code by providing among others, a 10 percent income tax rate on “proprietary educational institutions and hospitals which are non-profit,” provided that “they comply with established performance criteria to be determined and evaluated” by the CHED and DepEd, and the DOH.

More than 40 lawmakers led by Representatives Dakila Carlo Cua, Aurelio Gonzales and Raneo Abu have co-authored the TRABAHO bill, the consolidated version of 12 measures proposing to  slash the CIT rate and modernize the country’s system of providing investment incentives to private corporations.

Based on  data from the  Securities and Exchange Commission (SEC), Chua said  that out of  around 25,000  private schools. 18,000 are  exempted from paying the income tax because they are  non-stock and non-profit, while  about  6,000 pay the current rate of 10 percent.

Chua said the TRABAHO bill also provides the earmarking of funds for universal health care and the grant of student vouchers so that revenues would go directly to helping those in need.

“We prefer to give the assistance directly to the beneficiary through vouchers for students and universal health coverage for those who need medical treatment,” Chua said.

Dominguez said he was also planning to discuss with CHED this possibility of directly giving the subsidies to students to enable them to choose the college or university where they want to study. DMS