BIR Ruling [DA-215-01]

October 22, 2001 BIR RULING [DA-215-01] MEMORANDUM TO: THE REVENUE DISTRICT OFFICER Bureau of Internal Revenue Revenue District Office No. 114 Mati, Davao, Oriental This refers to the indorsement dated August 16, 2000 made by Regional Director Lirio, A. Cabsaba requesting for resolution in respect to the taxability or exemption of local government units' (LGUs) economic activities such as the operation of Menzi Tourism Complex by the Provincial Government of Mati, Davao Oriental, in relation to Republic Act (R.A.) No. 8424, otherwise known as the "Tax Reform Act of 1997" specifically Section 27(c) of the Tax Code. Based on the letter indorsement of the Province of Davao Oriental through its Provincial Legal Officer, Atty. Russia S. Mangampo, the Province of Davao Oriental poses the issue on the imposition of tax on LGU's economic activities, particularly, the operation of Menzi Tourism Complex of the province, which in your opinion, is subject to tax citing as basis Section 27(C) of R.A. No. 8424. A perusal of said indorsement disclosed that Menzi Tourism Complex was established and organized pursuant to the mandate of Section 17(3)(xii), Chapter 2, Title I, Book I of Republic Act No. 7160, otherwise known as "The Local Government Code of 1991", for the purpose of providing quality accommodation services, which is a dearth in the locality, to foreign and local tourists and/or transients visitors to the Province of Davao Oriental, and likewise, includes accommodation on function halls, training center for conferences and meeting, and spaces for other gatherings; that no part of its income derived from rentals, fees charges inure to the benefit of any individual nor is there a shareholder thereof but rather, entered into the accounts of the General Fund of the Provincial Government; and that such income is expended solely for administration cost and operational expenses incurred by the Provincial Government in operating such complex. In reply please be informed that pursuant to Section 32(B)(7)(b) of the 1997 Tax Code 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 to any 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 proprietary manner, any consequential income derived therefrom is excluded from its gross income. Government functions 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 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 operation by MENZI TOURISM COMPLEX 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 and therefore subject to the corporate income tax as provided for under Section 27(C) of the 1997 Tax Code. For your guidance. (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group