BIR Ruling [DA-384-05]

September 7, 2005 BIR RULING [DA-384-05] P.D. 269; NIRC 119; RMC 72-03; BIR Ruling 069-98; DA 250-03 DA 021-04; R.A. 9337 House of Representatives Room 604, North Wing Building, Constitution Hills, Quezon City Attention: Hon. Ernesto C. Pablo Hon. Edgar L. Valdez Hon. Sunny R.A. Madamba Representatives (Association of Philippine Electric Cooperatives) Gentlemen : This refers to your letter dated May 18, 2005 requesting for a clarificatory ruling on the following issues: I. tax implications covering electric cooperatives registered with the National Electrification Administration (NEA) pursuant to Presidential Decree (P.D.) No. 269 but not registered with the Cooperative Development Authority (CDA.) pursuant to Republic Act (R.A.) No. 6938; II. whether Section A of Revenue Memorandum Circular (RMC) No. 72-2003 operates prospectively in accordance with Section 246 of the Tax Code of 1997 in relation to RMC No. 48-91; III. the meaning of the phrase " December 31 of the thirtieth full calendar year after the date of a cooperative's organization or conversion " stated in Section 39(a)(2) of P.D. 269. It is represented that the Association of Philippine Electric Cooperatives (APEC) is a national organization of rural electric cooperatives. The cooperatives were all created, established and registered with the NEA pursuant to the provisions of P.D. No. 269, as amended. 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 APEC opted not to register with CDA. I. On the issue of the tax implications covering electric cooperatives registered with the NEA pursuant to P.D. No. 269 but did not avail of option to register with the CDA pursuant to Republic Act (R.A.) No. 6938, please be informed that RMC No. 72-03 provides: "A. Electric Cooperatives (ECs) registered with the National Electrification Administration (NEA) are exempt from: 1. Franchise tax under Section 119 of the Tax Code of 1997 (BIR Ruling No. DA-250-03 dated July 31, 2003); 2. Value-Added tax (VAT), on sales relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity [Sec. 109(s) of the Tax Code of 1997]; 3. Income taxes for which they are directly liable [P.D. No. 269, Sec. 39(a)(1)]; 4. All National Government taxes and fees, including franchise, filing, recordation, license or permit fees or taxes. Provided, however, that the said exemption shall end on December 31 of the thirtieth full calendar year after the date of a cooperative's organization or conversion, or until it shall become completely free of indebtedness incurred by borrowing, whichever event first occurs. Provided further, that the period of exemption for a new cooperative formed by consolidation, as provided in Section 29 of P.D. No. 269, to begin from as of the date of the beginning of such period for the constituent consolidating cooperative which was most recently organized or converted under P.D. No. 269 [P.D. No. 269, Sec. 39(a)(2)]; and 5. Three Percent (3%) Percentage Tax under Sec. 116 of the Tax Code of 1997." However, all Electric Cooperatives registered with NEA shall be subject to: 1. 20% final income tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines; 2. 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system; 3. Capital Gains Tax on sales or exchanges of real property classified as capital assets or shares of stock, and income tax/withholding tax on sales or exchanges of realty classified as ordinary assets, provided, however, that the above transactions are not, in any way, related to the generation and distribution of electricity; HAISEa 4. Documentary Stamp Taxes on transactions not related to the generation and distribution of electricity; 5. VAT billed on purchases of goods and services not exempt; 6. All other taxes for which the Electric Cooperatives are not otherwise expressly exempted by any law. Moreover, Electric Cooperatives registered with NEA shall not be entitled to the other privileges granted to electric cooperatives registered with the Cooperative Development Authority (CDA) under RA No. 6938. Furthermore, all Electric Cooperatives are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding. With the effectivity of R.A. 9337 (which should have been July 1, 2005 but as of this writing, the Supreme Court has issued a Temporary Restraining Order on the implementation of R.A. 9337), electric cooperatives whether registered with the NEA or with the CDA shall be subject to VAT at 10%. " Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied : "(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%);or "(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%) ." (Section 106, National Internal Revenue Code of 1997 as amended by Republic Act 9337) II. On the issue of whether RMC No. 72-2003 operates prospectively in accordance with Section 246 of the Tax Code of 1997 in relation to RMC No. 48-91, a reply to this necessitates examining the secondary issues involved, viz : A. Application of Section 246 of the Tax Code of 1997 to RMC 72-2003 in relation to RMC 48-91; B. Application of RMC 48-91 to electric cooperatives registered with the NEA but not with the CDA; Section 246 of the Tax Code of 1997 provides: " Non-Retroactivity of Rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers . . . ." In the case of Commissioner of Internal Revenue vs. Court of Tax Appeals, et al ., G.R. No. 44007, March 20, 1991, the Supreme Court had occasion to pass upon the significance of the above provision of law which was then Section 338-A of the Tax Code of 1993: ". . . a ruling by a Commissioner cannot revoke a provision of the National Internal Revenue Code, a substantive law. . . . the provision above stated contemplates of a revocation, modification or reversal of any of the rules and regulations promulgated for the enforcement of the provisions of the tax code but not a revocation, modification or reversal of the tax code's provisions itself. (Emphasis supplied) The next question then for us to resolve is whether RMC 72-2003 is a revocation, modification or reversal of RMC 48-91. RMC 72-2003 discusses the tax implications of two types of electric cooperatives those registered with the NEA and those registered with the CDA. On the other hand, a close reading of RMC 48-91 shows that it is intended to implement the provisions of R.A. 6938, which refers to cooperatives registered with the CDA. It finds no application to electric cooperatives registered with the NEA but not registered with the CDA. This is apparent in the following: caAICE 1. The subject matter of RMC 48-91 is " Publishing the Provisions of Articles 61 and 62 of Republic Act No. 6938, otherwise known as the "Cooperative Code of the Philippines", Prescribing the extent of the tax exemption of Cooperatives and providing the guidelines for the availment thereof" ; 2. Section 1 of the same issuance quotes en toto Sections 61 and 62 of R.A. 6938 only; 3. The two definitions of cooperatives in Section 2 thereof were lifted from a primer on the Cooperative Code of the Philippines and Section 3 of R.A. 6938. Note that members of APEC opted not to register with the CDA, hence they are not covered by the definition. 4. Likewise, Revenue Regulations (RR) No. 20-2001 the subject matter of which is " Regulations Implementing Articles 61 and 62 of Republic Act No. 6938, Otherwise Known as the 'Cooperative Code of the Philippines', in Relation to R.A. Nos. 7716, 8241 and 8424, Thereby Amending Revenue Memorandum Circular No. 48-91 " (emphasis supplied) defines a cooperative as a cooperative duly registered with the CDA or whose registration has been confirmed by the latter. 5. Section 8.1(d) of RMC 48-91 states the requirement exclusive to cooperatives already existing before the creation of the Cooperative Development Authority (CDA) for the issuance of tax exemption certificate, viz : "Certificate of Confirmation of Registration from the CDA (in case of Cooperatives already existing and previously registered under P.D. 175, P.D. 775, and E.O. 898, before the creation of the CDA) . . . ." Note that the provision applies only to cooperatives registered under P.D. 175, P.D. 775, and E.O. 898 but no mention was made of cooperatives registered under P.D. 269. In fact, nowhere in RMC 48-91 was there any mention of electric cooperatives registered under P.D. 269. 6. The difference in treatment between electric cooperatives registered under P.D. 269 and those registered under R.A. 6938 is apparent in a number of legal issuances and judicial decisions. It is worthwhile to quote the relevant statement of then Secretary Guingona in DOJ Opinion No. 101 dated November 15, 1996, which was practically a reiteration of DOJ Opinion No. 41 dated April 23, 1996: "It is clear therefrom that electric cooperatives (of course, referring to existing electric cooperatives registered under P.D. NO. 269, as amended) which fail, or opt not, to register under R.A. No. 6938 are still covered by P.D. No. 269, and being so, are entitled to all the benefits and incentives granted under P.D. No. 269, as amended. "Among the benefits and incentives granted to electric cooperatives under P.D. No. 269, as amended, are those tax and duty exemption privileges mentioned in Section 39 thereof which, although withdrawn by P.D. No. 1955, were, as you state, later restored by the Fiscal Incentives Review Board (FIRB) under its Resolution No. 24-87 dated July 14, 1987 pursuant to Executive Order No. 93. "Accordingly, NEA-registered cooperatives which shall remain to be registered under P.D. No. 269, as amended, for their failure to register under R.A. No. 6938, shall continue to enjoy their tax and duty exemption privileges under Section 30 of P.D. No. 269, as amended, and as restored by FIRB Resolution No. 24-87. "It goes without saying that since such electric cooperatives are not registered cooperatives under R.A. No. 6938, "they shall not be entitled to the other benefits granted to CDA-registered electric cooperatives under R.A. NO. 6938." In Philippine Rural Electric Cooperatives Association, Inc., et al. vs. Secretary of Interior and Local Government and Secretary of Finance , (G.R. No. 143076, June 10, 2003), the Supreme Court, in discussing the constitutionality of certain provisions of the Local Government Code that grant tax exemption privileges to cooperatives registered under R.A. 6938 excluding those registered under P.D. 269, said: "We hold that there is reasonable classification . . . to justify the different tax treatment between electric cooperatives covered by P.D. No. 269, as amended, and electric cooperatives under R.A. No. 6938. ". . . substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and cooperatives under R.A. No. 6938. These distinctions are manifest in at least two material respects which go into the nature of cooperatives envisioned by R.A. No. 6938 and which characteristics are not present in the type of cooperative associations created under P.D. No. 269, as amended." IDETCA In view thereof, this Office rules that RMC 48-91 has no application to electric cooperatives registered with the NEA but opted not to register with the CDA. It follows therefore that since Section A of RMC 72-2003 deals with electric cooperatives registered with the NEA, a subject alien to RMC 48-91, the former RMC could not have revoked the latter; consequently, the provision of Section 246 of the Tax Code of 1997 has no relevance to RMC 72-03 insofar as tax implications of electric cooperatives registered with the NEA are concerned. That being resolved, the final question for us to settle is the effective date of the tax exemption privileges enumerated under Section A of RMC 72-03. The provision of Section A of RMC 72-03 merely made a restatement of the tax exemption privileges of electric cooperatives registered with the NEA as provided for by the respective laws cited therein. In Caltex Philippines, Inc. vs. Commissioner of Internal Revenue , C.T.A. Case No. 4711, July 5, 1994, the Court said: ". . . it has never been a rule that the issuance of an implementing regulation is an indispensable requirement before any law could take effect. On the contrary the effectivity of a law is governed by the date of effectivity provision which is an essential and standard part of a statute. It determines the time when the law shall take effect. (Martin, op cit., p. 27). On the other hand, the provision concerning the grant of authority to the concerned agency to issue rules and regulations is primarily designed to facilitate the smooth implementation of the law. It supplies the necessary details which may not be present in the law to carry out its objective or to clarify certain ambiguous provisions or provisions which are susceptible to different interpretation. It does not control the life of the statutes. Its non-issuance does not invalidate the existence of the law unless the provision of the law itself states in a clear manner that the concerned agency has to issue first an implementing regulation before it could take effect or as a prerequisite to its implementation." In view thereof, the effectivity of the tax exemptions enumerated under Section A of RMC 72-03 is consistent with the effectivity of the respective laws that granted the corresponding exemption unless otherwise stated therein, thus: The tax and duty exemption privileges of electric cooperatives registered under P.D. 269 promulgated in 1973, although withdrawn in 1984 by P.D. 1955 were later restored by the Fiscal Incentives Review Board (FIRB) under its Resolution No. 24-87 dated July 14, 1987 pursuant to Executive Order No. 93 (DOJ Opinion NO. 101, November 15, 1996). Unless otherwise stated therein, exemptions granted by the Tax Code of 1997 became effective on January 1, 1998 pursuant to Section 8 of Republic Act No. 8424 and Article 2 of the Civil Code of the Philippines, as amended. With the passage of R.A. 9337 amending certain provisions of the Tax Code, electric cooperatives are no longer exempt from VAT starting July 1, 2005. (As of this writing, however, the Supreme Court has issued a Temporary Restraining Order on the implementation of R.A. 9337.) III. On the issue of the meaning of the phrase "December 31 of the thirtieth full calendar year after the date of a cooperative's organization or conversion" stated in Section 39(a)(2) of P.D. 269, this has been explained in passing in BIR Ruling DA 021-04 dated January 15, 2004. The subject taxpayer in that case, Negros Occidental Electric Cooperative, Inc., was registered with the NEA on February 25, 1978 and the ruling categorically stated the date when the exemption granted by Section 39(a)(2) of P.D. 269 ends, to quote: "You are also exempt from all other national government taxes and fees, including franchise, filing, recordation, license or permit fees or taxes until December 31, 2008, which is the thirtieth full calendar year after the date of the cooperative's organization in 1978 . . ." (Emphasis supplied) This ruling is being issued on the basis of the foregoing fact 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 OIC-Commissioner of Internal Revenue