Ms. Magdalena A. Barrientos

July 23, 2007 BIR RULING [DA-405-07] BIR Ruling No. DA-322-04 & DA-390-06 Ms. Magdalena A. Barrientos Pila Elementary School Pila, Laguna M a d a m : This refers to your letter dated August 3, 2006 indorsed to this Office by OIC-Regional Director Araceli L. Francisco requesting on behalf of Pila Elementary School ("PES") for a ruling that the Manila Electric Company (MERALCO) refund to the corporation is not subject to creditable withholding tax. As represented, PES, is a government educational institution under the Department of Education, Region IV Calabarzon. In reply, please be informed that the same issue has been passed upon in BIR Ruling No. DA-390-2006 dated June 23, 2006. Therein, it was ruled that where a non-stock, non-profit corporation, exempt from income tax under Section 30 of the National Internal Revenue Code of 1997, as amended, is not engaged in any profitable activity that would result in taxable income, the utility payments made by that entity to MERALCO were not claimed as deductions for income tax purposes. Conversely, a refund from MERALCO of excess utility payments neither gives rise to any taxable income nor any tax benefit. Hence the refund is not subject to the withholding tax under the purview of Revenue Regulations (RR) No. 8-2005, to wit: "SEC. 2. Income Payments Subject to Creditable Withholding Tax . Sec. 2.57.2. of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: AEIHCS 'Sec. 2.57.2. Income payments subject to creditable tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (U) MERALCO Refund arising from Supreme Court Case G.R. No. 14814 of April 9, 2003 to customers under Phase IV as approved by ERC On gross amount of refund given by MERALCO to Customers with active contracts as classified by MERALCO Twenty Five Percent (25%); To Customers with terminated contracts Thirty Two Percent (32%); xxx xxx xxx" Since PES is a government educational institution exempt from income tax under Section 30 (I) of the Tax Code of 1997, the refund of the excess utility payments in its favor will not give rise to or create a taxable income. Consequently, said refund is not subject to withholding tax. 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. TAaEIc Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner