BIR Ruling [DA-390-06]

June 23, 2006 BIR RULING [DA-390-06] RR No. 8-2005; DA-097-2006 Lazaro-Soriano Homeowners Association Lazaro-Soriano Subdivision, GSIS Village Project 8, Quezon City Attention: Mr. Dick Galan & Mr. Manny Ruiz Members Gentlemen : This refers to your letter dated May 3, 2006 requesting, in effect, on behalf of the members of the Lazaro-Soriano Homeowners Association (LSHA) for an exemption from the withholding of taxes in connection with the refund of the excess utility payments of LSHA from MERALCO. It is represented that LSHA is a non-stock, non-profit corporation duly accredited with the Confederation of Homeowners Association in Quezon City; that the primary purpose for which it is organized is to maintain the camaraderie among the homeowners and to collect dues for the maintenance of the security as well as the payment of the lightings along the streets of the subdivision; that the period covered by the MERALCO refund dates back from 1995 up to the year 2003; that since LSHA is a non-stock, non-profit organization created only for the above stated purpose, it has not been engaged in any profitable activities that would result in the imposition of income taxes, consequently, it has not claimed the above utility payments as deductions for income tax purposes; that LSHA is not subject to income tax, thus, it has not claimed the utility payments as deductions resulting in a benefit; and that it is your opinion that the refund to LSHA by MERALCO of the excess utility payments is exempt from the withholding tax imposed under Revenue Regulations No. 8-2005. In reply, please be informed that in BIR Ruling No. DA-097-2006 dated March 8, 2006, this Office ruled as follows: "Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments . . . . This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that "the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue, 47 BTA 590 ) (Emphasis supplied). When a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. vs. CIR , CTA Case No. 1407, December 29, 1966 ). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income . ( Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13 AFTR 930 ). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. . . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income ." (Emphasis supplied) Applying the foregoing in the instant case, and considering that LSHA is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under RR No. 8-2005. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service