BIR Ruling

July 6, 1970 Mayor Joaquin F. Enriquez Jr. City Mayor Zamboanga S i r : This refers to your letter dated March 2, 1970 to the Regional Director, Revenue Region No. 20, Zamboanga City, protesting the assessment issued by our Regional Office against the Zamboanga City Waterworks System, in the amounts of P34,889.10 and P90.00, as percentage tax and fixed tax respectively, for the period from May 16, 1965 to June 30, 1969 including penalties. The protest is based on the grounds alleged in the 5th indorsement of City Fiscal Pascual E. Atilano of Zamboanga City dated February 4, 1970. It is alleged that the City of Zamboanga in operating the Zamboanga City Waterworks System is not liable to the aforesaid taxes on the ground that the operation thereof is in compliance with its governmental function of supplying water to the inhabitants of the city and to prevent fire. In support thereof, it is argued that (1) since a municipal corporation is an agency of the state performing governmental functions, it would be paradoxical to require such municipal corporation to pay taxes in the performance of its governmental functions; (2) that the city derives income from the operation of the waterworks system, should not be taken as a basis to determine the character of the system, but the primary purpose of the operation of the said system must be the sole criteria; and (3) that to hold the city liable to the payment of the percentage tax would, in effect, be taxing the government. In reply, please be informed that we find neither legal nor factual basis in the contention that the City of Zamboanga in operating the Zamboanga City Waterworks System and in supplying water to its inhabitants is performing a governmental function. The fact that the City of Zamboanga in operating the Zamboanga City Waterworks System derives income by selling water to its inhabitants is a clear indication that it is performing a private proprietary function, and therefore, it is subject to the percentage tax imposed by Section 191 of the Tax code, as any private corporation engaged in the same business of selling water it appearing that the System is being operated without the benefit of a franchise. In this connection, please be further informed that the Secretary of Justice, in his opinion dated February 16, 1951 (Opinion No. 65, series of 1951) ruled that a municipal corporation is subject to internal revenue taxes, other than the income tax, in the operation of its public utilities, such as electric light, telephone, and water, under the Certificates of Public Convenience issued by the Public Convenience issued by the Public Service Commission, taking into consideration Section 1 of Republic Act No. 104, which provides that "All corporations, agencies, instrumentalities owned or controlled by the Government shall pay such duties, taxes, fees and other charges upon their transaction, business, industry, sale or income as are imposed by law upon individuals, associations, or corporations engaged in any taxable business, industry, or activity, . . ." In holding, the Secretary of Justice said, "This Office has held that Republic Act No. 104 was intended by Congress to apply to corporations or agencies owned or controlled by the Government engaged in business or industry for profit in competition with private enterprises . . ." There are many other authorities which support our stand in this case. Thus "it has been generally held that in the operation of a public utility a municipal corporation acts in a proprietary rather than a governmental capacity (37 Am. Jr. 729) and no distinction is to be drawn between the business of selling light, water, or gas when indulged in by a municipality and when engaged in by a private corporation both being conducted for profit (City of Chicago v. Ames, 361 111.529). When a municipality is engaged in operating a municipal plant, 'it acts in a business capacity and stands upon the same footing as a private individual or business corporations similarly situated' (Traveler's Insurance Co. v. Madeworth, 142 N.E. 90) add 'becomes subject to the same burdens, responsibilities, and liabilities as a private corporation acting in the same capacity.' (State v. Helmos, 47 Pac. (2d); City of Lakeland v. Ames, 106 Fla. 873). That chartered cities and municipalities in the Philippines are not exempt from all internal revenue taxes when operating in its proprietary capacity is apparent from the fact that they are expressly and distinctly exempted by the Internal Revenue Code from the income tax. (Exemption from income tax excludes exemption from the other internal revenue taxes." (See Gen. Cir. No. V-116, BIR, dated May 12, 1951). In view of the foregoing, it is requested that the City of Zamboanga pay the amounts of P34,889.10 and P90.00 as percentage tax and penalties and fixed tax, respectively, for the period from May 16, 1965 to June 30, 1969, within ten (10) days from receipt hereof; otherwise, the Collection of the deficiency fixed and percentage taxes including penalties will be enforced by means of the summary remedies provided by law. cdt MISAEL P. VERA Commissioner of Internal Revenue