BIR Ruling [DA-312-04]

June 8, 2004 BIR RULING [DA-312-04] Visayas Association of Water Districts c/o Bacolod City Water District Bacolod City Gentlemen : This refers to your letter dated April 1, 2004 requesting for a reconsideration of Revenue Memorandum Circular 63-2003 which informs all internal revenue Officers and others concerned that local water districts are now subject to income and franchise taxes. Representations made and arguments posed are as follows, to wit: 1. That the income of local water districts derived from its operation of an essential governmental function, as a public water utility, should be excluded from gross income, in effect such income necessarily accruing, to the government of the Philippines pursuant to Section 32(B)(7)(b) of the Tax Code of 1997; 2. That water districts are not covered by Section 119 of the National Internal Revenue Code, on the ground that they are not holders of a legislative franchise; and 3. That Section 45 of Presidential Decree (PD) No. 198, as amended by Section 20 of PD No. 768, explicitly provides that water districts are to be exempted from payment of all national and local taxes. In reply, please be informed as follows: 1. Section 32(B)(7)(b) of the Tax Code of 1997 refers only to income derived by or accruing to the government or to any political subdivision thereof. In BIR Ruling No. 74-98 dated May 27, 1998, this Office has already ruled that the term "government" shall be limited to the National Government which refers only to the central government, consisting of the legislative, executive and judicial departments of the government. ( Central Bank v. Court of Appeals ,63 SCRA 431) While the term "political subdivision" refers to the local government units established by or in accordance with the Constitution. ( Sec. 2(3), Administrative Code of 1987 ) Accordingly, this Office is of the opinion as it hereby holds that since local water districts are not composite of the National Government itself nor its political subdivision performing essential government function, they are therefore subject to corporate income tax imposed under Section 27(A) of the Tax Code of 1997. 2. BIR Ruling No. 69-98 dated May 21, 1998 whereby this Office ruled that electric cooperatives are exempt from the. payment of franchise tax applies only to cooperatives created under the Cooperative Code of the Philippines, not being a legislative franchisee. IDAaCc Clearly, local water districts are not cooperatives. They are created under P.D. No. 198, as last amended by R.A. 7109 dated August 14, 1991 which is obviously a legislative enactment. Furthermore, Section 119 of the Tax Code of 1997 provides that any provision of general or special law to the contrary notwithstanding, there shall be collected a 2% franchise tax on the gross receipts derived from the business covered by the law granting the franchise. Therefore, the franchise tax imposed under Section 119 of the Tax Code of 1997 shall be made applicable to local water districts created as water utilities. 3. The exemption from payment of all national and local taxes under Section 45 of P.D. No. 198, as amended, has been limited to a period of five (5) years from the effectivity of R.A. No. 7109 as provided in Section 3, to wit: "Sec. 3. Period and Conditions of Exemptions . The tax exemption privileges provided for in Sections 1 and 2 to all water districts shall be enjoyed only for a period of five (5) years from the effectivity of this Act: Provided, That the water districts shall adopt internal control reforms that would bring about their economic and financial viability: Provided, further, That, for a water district to be entitled to the tax exemption, its appropriation for personal services, as well as for travel, transportation or representation expenses and purchase of motor vehicles shall not be increased by more than twenty-five percent (25%) a year during the period of exemption". Accordingly, Local Water Districts which were created under P.D. No. 198 became liable to income and franchise taxes, as well as duties and taxes on imported machinery, equipment and materials required for its operation and real property taxes effective August 13, 1996 or five years from the effectivity of R.A. No. 7109. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group