BIR Ruling [DA-439-04]

August 12, 2004 BIR RULING [DA-439-04] Ma. Merceditas N. Gutierrez Secretary of Justice Department of Justice 2nd Fl., Padre Faura, Ermita Manila Dear. Hon. Gutierrez : Greetings! It has come to the attention of this Office that several, if not almost all, of the water districts (WD) created pursuant to Presidential Decree No. 198 (PD 198), as amended by Republic Act No. 7109 (RA 7109) had been flooding queries not only in this Office but also in other government departments and agencies including your Office on the removal of its tax exemption privileges. As a factual backdrop of the matter, PD 198, as amended by RA 7109, exempted WD from the following taxes: (1) income taxes, except taxes on interest income from deposits and on investments that have no direct relation with water service operations; (2) franchise taxes; (3) duties and taxes on imported machinery, equipment and materials required for its operations: Provided, That such machinery, equipment and materials are not domestically manufactured at comparable and competitive prices and quality. (Section 1, RA 7109); and (4) All lands, buildings, and other real property, including equipment attached thereto, that are used for water supply generation and distribution shall be exempted from real property taxes: Provided, That the land or building is not used for office or any other commercial purposes. (Section 2, RA 7109) However, such tax exemption privileges were limited for a period of five years under Section 3 of RA 7109, 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 percent (25%) a year during the period of exemption." (Emphasis supplied.) Hence, beginning August 14, 1996, all WD became liable to income and franchise taxes, as well as duties and taxes on imported machinery, equipment and materials required for its operations and real property taxes. It is the hope of this Office that this clarificatory letter will put the present issue to rest. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group