BIR Ruling [DA-207-04]

April 12, 2004 BIR RULING [DA-207-04] Section 27 (C); DA-215-2001 Barangay Council of Poblacion Pateros Pateros, Metro Manila Attention: Mr. Eddie R. Reyes Punong Barangay Gentlemen : This refers to your letter dated April 22, 2003 which was indorsed to this Office by way of 1st Indorsement, by the Chief, Legal Division, Revenue Region No. 8 requesting for an opinion on the tax consequence of the Ordinance passed by the Barangay Council; It is represented that the Sangguniang Bayan, during its 4th Regular Session held on February 11, 2003, unanimously passed in review the Barangay Poblacion Ordinance No. 10; that it was an ordinance converting the left side of B. Morcilla St. from corner P. Tangco St. and B. Morcilla toward corner A. Mabini St. and B. Morcilla and left side of G. Flores St. from gate of Pateros Catholic School up to C. Almeda corner G. Flores to pay parking zone; and that you are soliciting the opinion of this Office regarding its tax consequence. In reply, please be informed that pursuant to Section 32(B)(7)(b) of the Tax Code of 1997 which provides that "SEC. 32. Gross Income . "(A) . . . "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: "xxx xxx xxx "(7) Miscellaneous Items. "(a) . . . "(b) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential government function accruing to the Government of the Philippines or totally political subdivision thereof." Income derived by the Government or its political subdivision from any public utility or from the exercise of any government function is excluded from their, gross income. The general rule enunciated in Section 27(C) of the Tax Code of 1997, subjecting all corporations, agencies, or instrumentalities owned or controlled by the Government, with the exception of certain entities, to corporate income tax is subject to the above exception. Further, a crucial qualification of this provision, is that, government entities, to be taxable, must be engaged in similar business, industry, or activity as performed by other ordinary taxable corporations. Conversely, when the government or its political subdivision engages in governmental function or activities imbued with public interest and generally is not acting in a proprietary manner, any consequential income derived therefrom is excluded from its gross income. Government function is defined as functions of a Municipality or City which are essential to its existence in the sense of serving the public and which has for its objective the promotion of the public health, safety, morals, general welfare, security, prosperity and contentment of the inhabitant or in the performance of a duty imposed by sovereign power. Thus, governmental functions are limited to legal duties imposed by the state upon its creatures which it may not omit with impunity, but must perform at its peril. Whereas government proprietary functions are private in nature and are not necessary to its existence and which inures to the advantage of its inhabitants. aHESCT Under Section 17(4) in relation to Section 17(2)(vii), (ix) and (x) both of Republic Act No. 7160, otherwise known as the "Local Government Code of 1991", a City is mandated to provide the following basic services and facilities, among others, Sports Facilities and Equipment, Public Market, Public Slaughter House; and Waterworks System. However, since the passage of an ordinance by your barangay converting apportion of certain streets into a pay parking zone is for profitable activities, any income derived from such activities which are aimed in raising revenues is not covered by the exemption contemplated under the aforementioned Section 32(B)(7)(b) of the Tax Code of 1997 and therefore subject to income tax as provided for under Section 27(C) of the same Code. For your guidance. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group