BIR Ruling [DA-188-03]

June 16, 2003 BIR RULING [DA-188-03] 27 (C); 064-98 Philippine National Railways Caloocan City Attention: Mr. Jose Ma. I. Sarasola II General Manager Gentlemen : This refers to your letter dated January 14, 2002 requesting exemption from revenue taxes, including creditable withholding tax, for the Philippine National Railways (PNR). It is represented that PNR is a government-owned and-controlled corporation created under Republic Act No. 4156 as amended by R.A. 6366 and Presidential Decree 741 to provide railway services within the integrated national transport system to serve as a social-economic tool while ensuring viability of operations for optimum service at minimum cost; that besides railway operations, PNR sources additional revenues from the lease of its real estate properties which is barely enough to meet its monthly payrolls and operating costs; that it is in this light that the PNR is requesting for tax exemption since under Section 12 of its Charter, the PNR was granted tax exemption privilege and over the years it has been operating at a loss due to high fuel, salaries and maintenance costs; that PNR's Profit and Loss Statement for the years 1999 and 2000 reflects Net Loss of P669.7M and P667.26M respectively; that in your follow-up letter to Hon. Antonio M. Bernardo, Undersecretary, Department of Finance, dated January 18, 2002, you stated therein that the PNR has an existing lease contract with Tutuban Properties, Inc. (TPI) for the use of an 8.5-hectare PNR property located in Tutuban; that in consideration of this use, TPI is paying PNR about P68 million per annum, payable in quarterly installments which are due on the 10th day of the month after the quarter; that for the payment corresponding to the last quarter of CY 2001 which was paid last January 10, 2002, TPI, as withholding agent, deducted more than P3 million which, according to TPI, represents the tax on the rental payments paid to PNR for the year 2001; that this completely disturbed your cash flow programming as this was the first time that this was done; that you exerted all efforts by requesting TPI not to withhold, but to no avail; and that TPI assured you that once you get the exemption, they will return to you what they deducted as soon as possible. In reply, please be informed that Section 12 of the PNR Charter (Republic Act No. 4156 as amended by R.A. 6366), provides, viz. : "Section 12. Exemption from taxes, duties and port charges or dues, customs bonds and port charges . The Corporation is hereby exempt from payment of all taxes of every name and nature- municipal, city, provincial or national upon its capital stock franchise, right of way, earnings, and all other property owned or operated by it and all import duties on all railway materials, rolling stock, spare parts, supplies and equipment imported in the Philippines for and/or by the said Corporation, and its exemption shall extend to wharfage dues, storage charges, arrastre and shipside charges, and special duties on such importations, and other port charges upon the carrying vessels whose entire cargo consists of materials for the construction of its projects and rehabilitation of its lines, facilities and to such proportion of the prescribed port charges on other vessel as to the tonnage of materials for such constructions or equipment may bear to the tonnage of the entire cargo of the vessel; and such exemption shall further extend to the filing of general importer's and general documentary bonds and warehouse bonds for the operation of its warehouses whether general bonded warehouses or general order store." However, Executive Order No. 93 dated December 17, 1986, effectively withdrew all tax and duty incentives granted to government and private entities. ( BIR Ruling No. 064-098 dated May 21, 1998 ) In addition, Section 27(C) of the Tax Code of 1997 provides that the provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay the tax at the rate of 32% upon their taxable income. Therefore, PNR can no longer invoke its exemption from taxes, duties and port charges or dues, customs bonds and port charges provided for under Section 12 of its Charter. The income of PNR, the same not being one of the exempt government corporations, is subject to tax. Such being the case, PNR is subject to the creditable withholding tax on its rental income from TPI. DAaHET Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group