BIR Ruling [DA-357-04]

June 25, 2004 BIR RULING [DA-357-04] Mr. Ranulfo "Noli" C. Feliciano President, Philippine Association of Water Districts, Inc. 2/F LWUA Bldg., Katipunan Road, Balara, Quezon City S i r : This refers to your letter addressed to Ms. Imelda D. Cebuano, Revenue District Officer, Revenue District Office No. 88, Candahug, Palo, Leyte, which was referred to this Office, requesting that the BIR should temporarily defer or hold in abeyance the imposition/collection of taxes from Leyte Metropolitan Water District (LMWD), until such time that your case which is now before the Court of Appeals shall have been resolved, due to the following grounds: 1. The grant of tax exemption to water districts is expressly and unequivocally clear under Section 45 of P.D. No. 198; 2. The view that the water districts tax exemption has been modified, amended, repealed, withdrawn or removed by subsequent laws is untenable or does not hold water, because said tax exemption is covered by the non-impairment clause of the Constitution. 3. Imposing/collecting taxes from the water districts is indeed a passed-on cost/financial burden to the water district consumers and the public through the resulting increase of water rates because in truth, the water districts are self-supporting, etc. receiving no tax money revenues from the government; and, 4. The case you filed in your capacity as General Manager of the LMWD, Tacloban City, Petitioner vs. Hon. Cornelio C. Gison, Undersecretary, Department of Finance, Roxas Blvd. cor. Vito Cruz St., Manila, Respondent, CA-G.R. No. 72412 is pending resolution in the Court of Appeals and therefore, subjudice. In reply, please be informed that Section 45 of P.D. No. 198 authorizing the formation of Local Water Districts provides, viz : "Sec. 45. Exemption from Taxes. A district shall (1) be exempt from paying taxes, and (2) shall be exempt from the payment of (a) all National Government, local government and municipal taxes and fees, including any franchise, filing, recordation, license or permit fees or taxes and fees, charges or costs involved in any court of administrative proceeding in which it may be a party and (b) all duties or imposts on imported machinery, equipment and materials required for its operations." However, the aforesaid P.D. No. 198 has been amended by Section 1 of R.A. No. 7109, which took effect upon its approval on August 14, 1991. On the other hand, the tax exemption privilege granted to local water districts was 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 (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. R.A. No. 7109 which amended the tax exemption privileges granted to Local Water Districts under P.D. No. 198 is not a violation of the non-impairment of contract clause of the Constitution. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service ( Act No. 1305, Civil Code of the Philippines, Vol. IV ). When the Local Water Districts were granted an exemption from the payment of taxes under then P.D. No. 198, no contractual relationship was created between the local water districts and the government. The exemption then granted to Local Water Districts is only a privilege which the Congress of the Philippines can withdraw anytime especially when it determines that the Local Water Districts are already financially and economically viable. SAHITC While the BIR commiserates with your concern that the imposition of an income tax and franchise tax as well as duties and taxes on imported machinery, equipment and materials required for your operations effective August 13, 1996 or five (5) years from the effectivity of R.A. No 7109 will result in the increase of water rate or additional financial burden to local water district consumers, nevertheless, the BIR cannot do anything except to implement the law otherwise, it will be remiss in its duties and obligations as the revenue collecting agency of the government. The term "subjudice" means that the case is before a judge or court or a case is under judicial consideration which is not yet decided. The case you filed which is now pending before the Court of Appeals entitled Engr. Ranulfo C. Feliciano in his capacity as General Manager of the Leyte Metropolitan Water District, Tacloban City, Petitioner vs. Hon. Cornelio C. Gison, Undersecretary, Department of Finance, Roxas Blvd. cor. Vito Cruz St., Manila, Respondent, C.A.-GR No. 72412 involved the importation of a motor vehicle by the Local Water District which is being subjected to customs duties by the Bureau of Customs. While the petitioner will be citing P.D. No. 198 to support its case and the Department of Finance, R.A. No. 7109, nevertheless the concern of the BIR is the payment of income tax and franchise tax by Local Water District pursuant to R.A. No. 7109 which is different from the case pending with the Court of Appeals. Accordingly, the Court of Appeals case is not subjudice insofar as the imposition and collection of tax by the BIR on Local Water District is concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group