BIR Ruling [DA-322-03]

September 29, 2003 BIR RULING [DA-322-03] P.D. 269; 119; # 069-98 Philippine Rural Electric Cooperatives Association, Inc. 4th Floor Casman Building 1198 Quezon Avenue, Quezon City Attention: Attys. Manuel P. Sear and Zenon S. Suarez Legal Consultants Gentlemen : This refers to your letter dated August 15, 2002, a supplement to your letter January 20, 2001 requesting for confirmation of your opinion that electric cooperatives registered with the National Electrification Administration ("NEA") are exempt from franchise tax. It is represented that the Philippine Rural Electric Cooperatives Association, Inc. ("PHILRECA") is a national organization of rural electric cooperatives. The cooperatives were all created, established and registered with the NEA pursuant to the provisions of Presidential Decree (PD) No. 269, as amended. Said members were provisionally registered with the Cooperative Development Authority ("CDA") from March 10, 1993 to May 4, 1997. However, in DOJ Opinion No. 41, dated April 23, 1996, the Department of Justice ruled that registration with the CDA is optional. Thus, the members of PHILRECA opted not to register with CDA. In reply, please be informed that electric cooperatives are exempt from the franchise tax imposed under Section 119 of the National Internal Revenue Code of 1997 pursuant to the ruling of this Office in BIR Ruling No. 069-98 dated May 21, 1998, viz. : " In reply, please be informed that the 2% tax imposed under Section 117 of the Tax Code, as amended (now Section 119 of the Tax Code of 1997), is due and payable by electric utilities who are holders of legislative franchises. As an electric cooperative you are not subject to the said 2 % franchise tax by reason of the fact that you are not a legislative franchisee but is created by virtue of R.A. No. 6938, otherwise known as the Cooperative Code of the Philippines. Moreover, pursuant to Section 103(s) also of the Tax Code (now Section 109(s) of the Tax Code of 1997), sales by electric cooperatives duly registered with the CDA or the National Electrification Administration (NEA) , relative to the generation and distribution of electricity, as well as their importation of machineries and equipment, including spare parts, which shall be used directly in the generation and distribution of electricity shall be exempt from VAT." It is clear from the foregoing ruling that the electric utilities, not being a cooperative, subject to franchise tax under Section 119 of the NIRC of 1997 are those which are grantees of a legislative franchise. It does not apply to electric cooperatives. In fact, under Section 2(d) of Revenue Regulations No. 4-88, "Withholding of Taxes on Money Payments by Government Offices, Agencies and Instrumentalities." Dated January 21, 1988, a government money payments to electric cooperatives are not subject to the 2% franchise tax, to wit: "SEC. 2. Internal Revenue Taxes Required to be Withheld . Percentage taxes on gross money payments to the following are subject to withholding: xxx xxx xxx (d) Franchise grantees on their gross receipts from the business covered by the law granting the franchise, at the following rates: DCSTAH 1. On electric utilities, city gas and water supplies . . . Two (2%) percent, except electric and local waterworks cooperatives pursuant to Memorandum Order No. 65, dated January 21, 1987 of the President." The fact that the members of the Philippine Rural Electric Cooperatives Association, Inc. are not registered with the Cooperative Development Authority does not remove them from the coverage of said exemption from franchise tax. In DOJ Opinion No. 41, dated April 23, 1996, the Department of Justice opined that electric cooperatives registered with the National Electric Administration have the same status as those, registered with the Cooperative Development Authority, to wit: "Based on these premises, it is believed that registration with the CDA under Republic Act (RA) No. 6938 is optional insofar as ECs are concerned. Hence, some ECs may opt not to register with the CDA, or if they do choose to register with the CDA, may fail to qualify registration under RA No. 6938. In either case, the ECs shall not lose their status as registered ECs under PD No. 269, as amended, and shall continue to be governed by said PD No. 269. However, they shall not be entitled to the other privileges granted to CDA registered electric cooperatives under RA No. 6938." In fine, since members of the Philippine Rural Electric Cooperatives Association, Inc. are not holders of legislative franchise, they are not subject to the franchise tax imposed under Section 119 of the Tax Code of 1997. Accordingly, your opinion that electric cooperatives registered with NEA are exempt from the 2% franchise tax imposed under the aforementioned Section 119 of the Tax Code of 1997, is hereby confirmed. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group