BIR Ruling [DA-310-04]

June 8, 2004 BIR RULING [DA-310-04] Diaz Murillo Dalupan (L.C. Diaz & CO.) 5th Floor, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village Makati City Attention: Atty. Millard M. Manseguiao Director, Tax & Corporate Services Gentlemen : This refers to your letter dated April 22, 2004 requesting for a ruling that the sale of potable water by the local water districts operating outside Metro Manila is exempt from the corporate income tax and franchise tax notwithstanding the provisions in Revenue Memorandum Circular (RMC) No. 63-2003, as amplified in the Philippine Daily Inquirer dated April 20, 2004, that local water districts are now subject to the aforesaid taxes, since the tax exemption enjoyed under Republic Act (RA) No. 7109 has already been lifted in 2001. HSDaTC It appears that Section 3 of RA No. 7109 provides that "Section 3. Period and Conditions of Exemptions . The tax exemption privileges provided in Sections 1 and 2 to all water districts shall be enjoyed only for a period of five (5) years from the effectivity of the said Act: . . .." In BIR Ruling No. 074-98 dated May 27, 1998, this Office ruled that "xxx xxx xxx "Thus, while the Local Water Districts are government-owned and controlled corporations incorporated as public utilities, but because they are not composite of the National Government itself or its political subdivision performing essential government function as contemplated by law, they are therefore subject to corporate income tax imposed under Section 27(A) of the Tax Code of 1997." Thus, in RMC No. 63-2003, local water districts are now subject to: (1) Income taxes; and (2) Franchise taxes in addition to the following taxes, to wit: (a) Excise taxes; (b) Value-added tax (VAT) on sale of goods and services; (c) Other percentage taxes under Title V of the Tax Code; (d) Capital gains tax; (e) Income tax on income not arising from the water district's productive activity such as interest, royalties, prizes, winnings and dividends; (f) Final tax of 20% on interest income from Philippine currency bank deposit, yield or any other monetary benefits from deposit substitutes and from trust funds and similar arrangement; and (g) Documentary stamp tax on documents, instruments and papers. However, it is your contention that Section 32(B)(7)(b) of the Tax Code of 1997 which provides that 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 shall be excluded from gross income. Be that as it may, it cannot be denied that the use of the conjunction "or" after the word public utility should mean that both income of the government-owned and controlled corporation functioning as public utilities, like water districts, and that of the government or its political subdivisions in the exercise of essential government functions should likewise be covered. Accordingly, water districts are public utilities as contemplated in the aforesaid section and income derived by the local water districts in the sale of potable water should be excluded from gross income. Hence, the ruling in BIR Ruling No. 074-98 dated May 27, 1998, should be qualified to the extent that local water districts are subject to income tax on their income derived for services rendered, i.e. , installation and repair, inter alia , other than the supply of potable water. ETHaDC In reply thereto, please be informed that after a careful review of the afore-cited cases and the laws applicable thereto, this Office regrets to inform you that your request for exemption from the payment of the corporate income and franchise taxes cannot be granted for lack of legal basis. This is so because of the clear provisions of Section 3 of R. A. No. 7109 that the tax exemption privileges provided for in Sections 1 and 2 to all water districts concerned shall be enjoyed only for a period of five (5) years from the effectivity of the aforesaid Act, i.e. , August 14, 1991. SUCH BEING THE CASE, the sale of potable water by the local water districts operating outside Metro Manila is nevertheless subject to the corporate income tax and franchise tax, in addition to the taxes mentioned in RMC No. 63-2002. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group