Income Taxation of Proprietary Educational Institutions

For tax income tax purposes, educational institutions are classified as follows:

 Proprietary educational institution;

 Non-stock, non-profit educational institution; or,
 Government educational institution.

In this Article, let us uncover how a proprietary educational institution is being subjected to income
tax.

Definition

Under the Tax Code, 'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an 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 regulations.

Income tax rates

As a rule, it is subject to a special income tax rate of ten percent (10%) on their taxable
income except on certain passive income. Notably, this is much lower than the regular corporate
income tax rate of 30% of taxable net income. However, they must dedicate their operations to
providing educational services because if they does not, then, they will cease to enjoy the benefit
of 10%. If the gross income from unrelated trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived from all sources, they shall be taxed at 30% on the entire
taxable income. '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.

Allowable deductions

It is allowed to claim from its gross income, allowable deductions in like manner as an ordinary
taxpayer engaged in trade or business. In addition to the expenses allowable as deductions, it may
at its option elect either:

(a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities, or

(b) to deduct allowance for depreciation thereof.

In other words, capital outlays which would have been normally considered as an asset subject to
depreciation maybe claimed by proprietary educational institutions as an outright deduction from
its gross income.

Passive income

Finally, passive income of proprietary educational institutions is taxed in the same manner as
ordinary corporations. Examples of passive income are interest income from Philippine bank
deposits and royalties