The Philippines has recognized the importance of building our human capital as a pathway for economic opportunity. In 2015, the Philippines, together with 192 other UN member states, committed to attaining the Sustainable Development Goals (SDGs) by 2030. The SDGs, also referred to as the Global Goals, consist of a set of goals including Quality Education based on underlying principles, including “education is a public good, of which the state is the duty bearer.”
Truly, the Philippine government is supportive of educational institutions. To show support, the government, through the Bureau of Internal Revenue (BIR), granted preferential tax rates and exemptions to educational institutions. For example, Section 30 of the Tax Code provides that a non-stock, non-profit educational institution whose income is directly and exclusively used for educational purposes is exempt from income tax. On the other hand, RA 11635 provides that a lower tax rate of ten percent (10%) applies generally to proprietary educational institutions and non-stock, non-profit educational institutions whose net income or assets accrue, inure, or benefit any member or specific person. Lastly, under Section 109 of the Tax Code, educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA), and those rendered by government educational institutions are exempt from value-added tax (VAT).
The preferential rates were retained even with the passage of various tax reforms in the past few years. The recent development on taxation is Republic Act 11976, also known as the Ease of Paying Taxes (EOPT), signed to further improve revenue collection and protect taxpayers’ rights through digitalization. The several changes introduced in the EOPT law and its IRR as implemented by the BIR were the timing of payment of VAT by sellers engaged in the sale of services, the substantiation of input VAT, and the deductibility of expenses not subjected to withholding taxes. Generally, these new rules do not affect educational institutions because their income (tuition fees, matriculation fees, and other school-related fees) from educational services, as mentioned, is exempt from preferential income tax and VAT. Nonetheless, like any other taxpayer, educational institutions are affected by several rules brought by EOPT. Here are the three relevant provisions:
1. Timing of withholding tax
Significant expenses for educational institutions are utilities, school and office supplies, security services, and janitorial expenses. Generally, these expenses are subject to withholding taxes, especially if the educational institution is a top withholding agent.
Under the old rule, the obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable, or legally enforceable.
Under the EOPT law, the obligation to withhold arises at the time an income has become payable. However, the BIR, in its IRR, interpreted that the obligation to deduct and withhold tax arises at the time an income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books or at the issuance by the seller of the sales invoices or other adequate document to support such payment, whichever comes first.
Based on the above, it seems that there was no change from the old rule when the BIR interpreted the term “payable.” RR 4-2024 has just added that in cases where the income has not been accrued or recorded as an expense or asset but the documents to support such payable have been issued by the seller, the buyer is already required to withhold the corresponding tax. However, in the case of most, if not all taxpayers, once the supporting documents have been received from the seller, the same is already recorded as an expense or asset, and hence withholding tax remittance is triggered. Thus, it is tricky on the part of the taxpayer to identify how the new rule under EOPT would change the current timing of tax withholding. We hope that the BIR should clearly differentiate the change in the timing of withholding under the old rule as against its implementing rules and regulations (IRR). The IRR is expected to simplify the compliance of taxpayers, as this is the spirit of EOPT.
For the moment, educational institutions should continue withholding the taxes at the earliest possible time once any of the conditions above are present. More specifically, expenses accrued at the end of the year for which supporting documents have not been received from the supplier should already be subject to withholding tax to avoid late remittance of withholding taxes.
2. Issuance of Non-VAT invoice
Previously, the principal document to be issued by sellers of goods were invoices, while sellers of services, such as educational institutions, issued official receipts (OR). Under the EOPT law, invoices are the principal document to be issued by the seller of services. The OR, which is a document different from an invoice, shall now be a supplementary document.
Under the transitory provision of the EOPT, taxpayers, such as educational institutions using Cash Register Machines (CRM) and Point-of-Sales (POS) Machines, may change the word “Official Receipt (OR)” to “Invoice” without the need to notify the Revenue District Office(s) since the reconfiguration shall be considered a minor system enhancement that shall not require the reaccreditation of sales software or system on the part of the software supplier, nor the reissuance of the Permit to Use (PTU) on the part of the taxpayer-user.
On the other hand, educational institutions that are using duly registered Computerized Accounting System (CAS) or Computerized Books of Accounts (CBA) with accounting records must revisit their systems to comply with the provisions of the EOPT Act. Since the system reconfiguration will have a direct effect on the financial aspect, it shall be considered an enhancement that will require taxpayers to update their system registration as if filing a new application. Based on these provisions, there were no exceptions provided for those service providers whose income is exempt from VAT or for entities where the change of OR to Invoice has no direct effect on the financial aspect.
Accordingly, even educational institutions whose income is exempt from VAT and whose financials are not dependent on whether the principal document is either an OR or Invoice, are expected to apply for an Acknowledgement Certificate (AC) or PTU on or before the deadline of June 30, 2024.
3. Period to preserve books of accounts and other accounting records reduced from ten (10) to five (5) years.
One of the EOPT rules that affected all taxpayers was the retention period to preserve the books of accounts and other accounting records. Under the old rule, all books of accounts and other accounting records shall be preserved for 10 years. Under the EOPT, the 10 years were reduced to 5 years for all types of books (taxpayers using manual and manual-bound loose leaf shall maintain in hard copies, and taxpayers using computerized books of accounts and other accounting records shall maintain in electronic copies).
However, if the taxpayer has any pending protest or claim for tax credit or refund of taxes and the books and records concerned are material to the case, the taxpayer is required to preserve the books of accounts and other accounting records until the case is finally resolved in support of their defenses and aid, even beyond the prescribed 5-year period. Hence, educational institutions that have been assessed but have not been resolved within 5 years should keep their records until the assessment has been resolved and they have proof of the closure and termination of such assessments.
Lastly, it was also highlighted under the IRR of EOPT that the Books of Accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liability, if any. Hence, educational institutions availing of income tax exemption should keep their records and documents proving that their income is actually, directly, and exclusively used for educational purposes. In the case of educational institutions availing of 10% income tax, they should be able to provide proof during audit that their gross income from unrelated activity does not exceed 50% of the total gross income derived from all sources.
Government and educational institutions are valuable contributors towards sustainable quality of education and development of communities. The Government undeniably extends supports through providing tax exemptions. Equally, the educational institutions are expected to ensure compliance with the other requirements of the BIR, such as proper withholding of taxes on its suppliers and keeping books of accounts to prove its income tax and VAT exemptions.
As published in The Manila Times, dated 22 May 2024
