BIR Ruling [DA-380-06]

June 20, 2006 BIR RULING [DA-380-06] Section 32 (B) (7) (b); BIR Ruling No. 18-2000 & DA-494-2003 Philippine Coconut Authority Elliptical Road Diliman, Quezon City Attention: Mr. Jesus Emmanuel M. Paras Administrator Gentlemen : This refers to your letter dated August 5, 2005 requesting, in effect, for a ruling exempting Philippine Coconut Authority (PCA) from the payment of income tax for the following reasons: "1. As provided by Presidential Decree No. 232, dated June 30, 1973 (Annex A), the PCA was created to implement and attain the declared national policy of promoting the rapid integrated development and growth of the coconut and other palm oil industry in all its aspects. With this mandate is the power to receive and administer funds provided by law, and to draw existing appropriations as may be necessary, to support its programs. 2. The PCA derives its funds from the following: 1.1 PCA Fees as provided per PD 1854 1.2 Regulatory Fees such as: a. Moisture Meter Fees b. Registration Fees c. Laboratory Analysis Fees d. Certificate, Licenses & Processing Fees e. Inspection Fees f. Application Fees, and g. Land Conversion Fees 1.3 Miscellaneous revenues such as: a. Sale of copra, coco by-products, coco seedlings, seednuts, and intercrops b. Rent income PCA Fee is being collected pursuant to Presidential Decree No. 1854 dated December 21, 1982 (Annex B), Section 2 of P.D. No. 1854 provides that the receipts and proceeds of all collections shall be utilized exclusively for the operations of the PCA and shall be released automatically by the National Treasury upon approval by the PCA Governing Board of its budgetary requirements, as an exception to PD 1234 and the budgetary process provided in PD 1177, as amended. ASHaDT Collection of registration fees and other regulatory fees is in accordance with Presidential Decree 1234 dated November 18, 1977 (Annex C), collections are remitted to the Bureau of Treasury (BTr) and treated as Special Account in the General Fund. The total amount accruing to the Special Account is automatically appropriated for the operations of the PCA as provided by PD 1234. Application fees are collected under RA 8048 (Annex D) which provisions allow PCA to allocate the funds for replanting programs and for overhead expenses of the project. 3. Collection of fees for regulatory and operating purposes have been provided by several Presidential Decrees and Republic Acts. It is unfortunate to note however, that for the past years, total collections or income fall short of the required amount for PCA's operations, to wit: 2000 2001 2002 2003 2004 Total Income 152,820.03 206,060.62 193,347.28 214,931.95 216,252.42 ======== ======== ======== ======== ======== Total Expenses: Salaries 302,484.55 313,657.41 319,445.64 291,495.50 130,886.94 Operating Exp. 100,196.85 87,956.23 103,165.02 131,404.87 130,886.94 402,681.40 401,613.63 422,610.66 422,900.36 412,212.66 ========= ========= ======== ======== ======== Net Income (loss before (249,861.37) (195,553.02) (229,263.38) (207,968.41) (195,960.24) subsidy) ========== ========= ========= ========= ========= Various reasons contribute to the low income generated by PCA including the very minimal amount of P.06 assessed and collected for every one kilogram of copra or husked nuts or their equivalent in other coconut products delivered to and/or purchased by copra exporters, oil millers, desiccators and other end-users of coconut products. Thus, the PCA still depends on the National Government to supplement its income in order to fund its operations and carry out its mandated functions. To impose taxes on its collections, therefore, is somehow inconsistent with the provisions of the above-mentioned laws and would be an additional burden that would hinder the implementation and attainment of its mandated function, that is, to promote the rapid integrated development and growth of the coconut and other palm oil industry." In reply, please be informed that Section 27 (C) of the Tax Code of 1997, as amended by Republic Act (RA) No. 8424, effective January 1, 1998, provides: "(C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities . The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity." The repealing clause under Section 7 (B) of R.A. No. 8424, in part, further provides: "(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of government-owned or -controlled corporations, decrees, orders or regulations or parts thereof, that are inconsistent with this Act are hereby repealed or amended accordingly." Based on the foregoing, it may seem that the PCA is subject to corporate income tax under Section 27 of the Tax Code of 1997. HTSaEC However, Section 32 (B) (7) (b) of the National Internal Revenue Code, as amended by R.A. No. 8424, further provides that the following shall be excluded in computing for the taxable income for income tax purposes: "(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 (b) Income derived by the Government or its Political Subdivisions . Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. xxx xxx xxx" Since PCA is a government-owned and -controlled corporation. It is, therefore, embraced by the word "government" under Section 32 (B) (7) (b) of the said Code: ". . . the term 'National Government' refers only to the Central Government consisting of the legislative, executive and judicial departments of the government, as distinguished from local governments and other governmental entities and is not synonymous, therefore, with the terms 'the Government of the Republic of the Philippines' or 'Philippine Government' which are the expressions broad enough to include not only the central government but also the provincial and municipal governments, chartered cities and other government-controlled corporations or agencies , like the Central Bank." ( Central Bank of the Philippines vs. Court of Appeals and Ablaza Construction & Finance Corporation , G.R. No. L-33022, April 22, 1975) In view thereof, pursuant to Section 32 (B) (7) (b) of the Tax Code of 1997, the income of PCA from the exercise of its governmental functions shall be exempt from corporate income tax. On the other hand, the tax exemption privilege of government agencies, if any, is limited only to taxes for which they are directly liable and does not embrace indirect taxes, e.g. value-added tax (VAT). Accordingly, PCA is subject to VAT. CTcSAE 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service