SGV & CO

February 15, 2007 BIR RULING [DA-097-07] DA 516-06 SGV & CO 6760 Ayala Avenue Makati City Attention: W. U. Villanueva Principal Gentlemen : This refers to your letter dated December 29, 2006 stating that your client, Ateneo de Manila University (Quezon City), Inc. [Ateneo], is a non-stock, non-profit educational institution duly registered and existing under Philippine laws; that it was created primarily to establish and conduct a university, open and maintain the necessary schools, colleges and institutes, and offer therein elementary, secondary, collegiate and postgraduate courses of study as well as technical, vocational and special courses, as the Board of Directors may determine, the primary intention being to afford a Catholic education to the youth of the land and develop and mold such youth, physically, intellectually and spiritually according to Catholic standards; that Ateneo is a non-stock corporation without any shares or corporate stock and it exists and functions solely and exclusively for the physical, moral and intellectual upliftment of the youth of the land; that it is a non-profit corporation, and accordingly, no dividend or profit whatsoever shall at any time be declared or paid to any person; and that all fees, charges, donations, inheritances, devises and legacies collected or received by it shall be spent solely and exclusively in such activities and for such purposes as will enable the corporation to carry out its objectives; that on the other hand, the Manila Electric Company (MERALCO) is a domestic utility corporation duly organized and existing under Philippine laws to engage in the production of light, heat and power; that on December 23, 1993, MERALCO filed an application for a rate increase with then Energy Regulatory Board (ERB); that the ERB granted a provisional increase of P0.184 per kWh subject to the condition that, in the event that it finds, after hearing and evaluation, that MERALCO is entitled to a lesser rate increase, all excess amounts collected shall be refunded to its customers or credited in their favor for future consumption; that on February 16, 1998, the ERB rendered its decision granting MERALCO an increase in rate by P0.017 per kWh only and hence, ordered MERALCO to refund or credit to its customers the amount of P0.167 per kWh beginning February 1994; that MERALCO appealed the decision to the Court of Appeals, which reversed the ERB's decision; that on appeal, the Supreme Court reversed the Court of Appeal's decision and upheld the previous ERB decision; that upon denial of MERALCO's motion for consideration, the Supreme Court's decision became final and executory on May 5, 2003; that pursuant thereto, the MERALCO has given refunds to residential users described as Phase I to III customers; that as approved by the Energy Regulatory Commission (ERC), MERALCO started giving refunds to Phase IV commercial and industrial customers, which include the Ateneo; that relative to the Supreme Court decision mandating the MERALCO refunds, the BIR issued Revenue Regulations No. 8-2005 requiring MERALCO to withhold a tax of 25% on gross refunds to "Customers with Active Contracts" and 30%, on refunds to "Customers with Terminated Contracts"; that Revenue Memorandum Order No. 22-05 provides that those customers claiming exemption from withholding tax under Revenue Regulations No. 8-2005 shall obtain and submit to MERALCO a certified true copy of the Certificate of Exemption or BIR ruling duly issued by the BIR for the purpose; and that since Ateneo is a non-stock, non-profit educational institution exempt from income tax it is likewise exempt from withholding tax, hence this request. Based on the foregoing representations, you now request confirmation of your opinion that the refund to be given by MERALCO to Ateneo for excess utility payments is exempt from withholding tax. In reply thereto, please be informed that this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA097-2006 dated March 8, 2006 , that "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 cancels 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) Later, in BIR Ruling No. DA516-2006 dated August 25, 2006 , this Office in reiterating the above-cited ruling, likewise ruled that "Applying the foregoing in the instant case, and considering that BITCAI 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 Revenue Regulations No. 8-2005. . . ." ECTHIA At this juncture, observation has to be made of the fact that since Ateneo is exempt from income tax, it did not benefit from the utilities expense which it incurred. The receipt of the refund from MERALCO will not give rise to a taxable transaction, as Ateneo did not receive anything of exchangeable value from it. SUCH BEING THE CASE, this Office hereby confirms your opinion that the refund which Ateneo will receive from MERALCO is not a taxable event and therefore NOT subject, to income tax, and consequently, to withholding tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service