‘Tax clarity’ seen a tool for smoother collection

TO ensure that private schools and hospitals “would not suffer from tax uncertainty,” the chairman of the House Committee on Ways and Means urged the Bureau of Internal Revenue (BIR) to clarify the definition of “unrelated activities” under its revenue regulations.

House Ways and Means Chairman Joey Sarte Salceda said in a statement that his office issued over the weekend that clarifying what unrelated trade, business or other activity would help ensure that schools and hospitals toe the line.

“Tax clarity is the clear next step after that law,” Salceda said.

He further said he will work with the BIR and the private schools on the matter.

“I particularly want to know what business activities of these schools was counted as unrelated in the past; and I want to know what the gray areas are so that we can figure them out with the tax authorities,” Salceda said.

The lawmaker added the country has “to take these steps so that we can prevent conflict and litigation.”

“The faster and smoother tax collection is, with little dispute between taxpayers and tax authorities, the better for economic recovery,” Salceda added.

Malacañang signed the law that reinforces the 10-percent preferential income tax rate to proprietary private educational institutions, including for-profit schools—overturning an earlier BIR order that raises private schools’ corporate income tax rate to 25 percent.

President Rodrigo Duterte signed Republic Act 11635, also known as “An Act Amending Section (B) of the National Internal Revenue Code of 1997, As Amended and For Other Purposes,” clarifying a contested portion on revenue regulation under the Corporate Recovery and Tax Incentives for Enterprises (Create) Act.

Under the Create Act (RA 11534), “proprietary educational institutions and hospitals which are nonprofit” must pay 10 percent of their taxable income, which has been brought down to 1 percent until June 2023.

But under Revenue Regulation 3-2022, issued by the tax bureau, consistent with the tax code’s provisions, the regular corporate income tax rate of 25 percent “shall be imposed on the entire taxable income of the institutions…if their gross income from unrelated trade, business or other activity…exceeds 50 percent of the total gross income they derived from all sources.”

“I think it’s better if we prevent confusion by clarifying what that means and providing examples of those activities. For example, is selling a PE (Physical Education) shirt for related PE-classes unrelated business activities? What about varsity merchandise? What about revenues from sponsorships for their school teams? I think we have to be clearer so they know what to avoid,” he said.

“Citing specific cases that the BIR would consider unrelated is a good way to prevent litigation and tax uncertainty. It would also prevent arbitrary actions on the part of BIR agents,” Salceda explained. “Generally, the clearer the test for ‘unrelated activities’ the better.”

According to the lawmaker, he will work with the bureau again to make sure that the definition “is consistent with prudent tax policy as well as the experience of private schools and hospitals.”

Salceda is the principal author of RA 11635, which clarified the tax regime for proprietary schools and hospitals. Private schools touted the measure as a way to provide relief to these educational institutions and help keep tuition fees lower.

“We should consider an omnibus compendium of what constitutes related and unrelated business activities for hospitals and schools. That would make the work of tax practitioners, tax assessors, and other parties involved in the tax collection process easier,” Salceda said. “Tax conflict always arises out of tax uncertainty. The result is always bad for everyone concerned. The people don’t get taxes on time. The parties pay for litigation costs. And tax still has to be paid anyway.”