The Seed Montessori School

January 31, 2007 BIR RULING [DA-052-07] R.R. 8-2005; DA-390-2006 The Seed Montessori School 4 Samonte St., Capitol District Quezon City Attention: Mr. Noel P. Morales Executive Director Gentlemen : This refers to your letter dated November 6, 2006 requesting for exemption from withholding taxes in connection with the refund of the excess utility payments of The Seed Montessori School (The Seed) from MERALCO. It is represented that The Seed Montessori School is a non-stock, non-profit corporation duly organized under the laws of the Philippines; that it is recognized by the Department of Education, Culture and Sports (DECS) with Permit No. P-0001, series of 1991; and that it is duly registered with the Securities and Exchange Commission under SEC Registration No. 161791 dated April 3, 1989. In reply, please be informed that in BIR Ruling DA-097-2006 dated March 8, 2006, this Office ruled as follows: "Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments. . . . This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that "the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue 47 (BTA 590) (Emphasis supplied) When a creditor cancel a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income. (Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income . (Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 CIR, 70 F 2d 95, 13 AFTR 930). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. . . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income." (emphasis supplied) (BIR Ruling No. DA-390-2006 dated June 23, 2006) Applying the foregoing in the instant case, and considering that The Seed is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under RR No. 8-2005. HTAEIS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service