Due to health concerns posed by the COVID-19 pandemic, schools were prohibited from conducting face-to-face classes and subsequently shifted to other means such as online classes or modular distance learning. Early this year, the Department of Education (DepEd) commenced the progressive expansion phase, where selected public and private schools were allowed to conduct limited face-to-face classes. Considering that the number of recent daily cases significantly decreased compared with those recorded during the previous years, the authorities are now eyeing the resumption of full face-to-face classes for the upcoming School Year 2022-23.

As much as we are excited to bring back face-to-face classes, this shouldn’t mean that things will be the same as before. The safety of the students, teachers, and all affected personnel must still be our priority. With that, numerous questions must be addressed to convince everyone that we are now ready for this new normal.

In the same way, various questions were also raised with regard to the taxation of educational institutions. Hence, the Bureau of Internal Revenue (BIR) has recently issued Revenue Memorandum Circular No. 78-2022 to clarify the different classifications of educational institutions referred to under the National Internal Revenue Code of 1997, as amended (Tax Code), the income tax treatment under each classification, and the tax exemption and tax liabilities of a specified class of educational institutions.


A proprietary educational institution refers to a private school maintained and administered by private individuals or groups that strictly adhere to the rules and regulations applicable to educational institutions based on the permit to operate duly issued by the DepEd, Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA). To simplify, the term proprietary means private.

1. Domestic Corporation – If the institution is considered a domestic corporation, the income must be subjected to a 10% preferential income tax rate. The same rate will apply to all domestic non-stock, non-profit (NSNP) educational institutions whose net income or assets benefit any specific person.

Pursuant to the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), however, the tax rate imposed was reduced to 1% from July 1, 2020 to June 30, 2023, after which the tax rate shall revert to 10%.

On the other hand, if the gross income from ‘unrelated trade, business or other activity’ of the institution exceeds 50% of the total gross income derived from all sources, the entire taxable income will be subjected to regular corporate income tax. A similar rule will apply to the income of non-stock non-profit (NSNP) educational institutions that is not used actually, directly, and exclusively for educational purposes.

2. Others – The rules on income tax for individuals shall apply to the income of an individual, trust, or estate that owns a proprietary educational institution as a sole proprietor. If the institution is classified as a resident foreign corporation, the income derived will be taxed under Section 28(A) of the Tax Code, as amended.


A government educational institution (GEI) refers to a public university or college that is fully owned and subsidized by the government. This may be created through a charter, or a law passed by the Congress of the Philippines.

The GEI is nonetheless exempt from income tax on the income received as such under Section 30(l) of the Tax Code. However, if the GEI's charter does not expressly provide that it is exempt from tax, the institution may only be exempt from income tax and be subjected to other applicable taxes.


All revenues and assets shall be exempt from taxes and duties if the NSNP educational institution will comply with two requisites: (1) the school is non-stock and non-profit; and (2) the income is actually, directly, and exclusively used for educational purposes.

To avail of the exemption, NSNP educational institutions shall file their application for tax exemption with the Office of the Assistant Commissioner for Legal Service by submitting the following documents pursuant to Revenue Memorandum Order No. 44-2016:

  1. Original application letter for issuance of tax exemption ruling;

  2. Certified true copy of a Certificate of Good Standing issued by the Securities and Exchange Commission;

  3. Original Certification under Oath of the Treasurer as to the amount of the income, compensation, salaries or any emoluments paid to its trustees, officers and other executive officers;

  4. Certified true copy of the Financial Statements for the last three years;

  5. Certified true copy of government recognition/permit/accreditation to operate as an educational institution issued by CHED, DepEd, or TESDA; and

  6. Original Certificate of utilization of annual revenues and assets by the Treasurer or his equivalent.

The one-time certificate of income tax exemption or exemption ruling from the BIR shall remain valid and effective, unless recalled for valid grounds. Failure to secure the certificate or revocation of such will make the income of the institution subject to applicable taxes under the Tax Code.


The Circular also clarified other applicable taxes on educational institutions such as deductions from gross income of donors, exemption from donor’s tax and withholding tax obligations. It also reiterated the relevant compliance requirements such as the registration, issuance of receipts and invoices, and filing of tax returns, among others.


One of the questions still hanging is the clarification on the term 'unrelated trade, business or other activity’. The Circular reiterated that 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 of its primary purpose or function.

However, such is still debatable and may create confusion and uncertainties. Hence, it would be best if the Bureau will further discuss this, especially the question on what constitutes “not substantially” related to the exercise or performance of its primary purpose.

Remember when our teachers would always tell us to ask when something is unclear? With the help of modern technology, let us seek information by asking the right questions. This way, we can help the Bureau determine what matters need to be further clarified. After all, it is our taxes that will be affected.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


As published in BusinessWorld, dated 28 June 2022