BIR Ruling [DA-496-03]

December 10, 2003 BIR RULING [DA-496-03] Mr . Danilo A . Lihaylihay 25 Kaunlaran Street, Batasan Hills Quezon City S i r : This refers to Confidential Information No. 66-2002 dated July 1, 2002 wherein you denounced MAYNILAD (formerly MWSS) for alleged tax fraud/evasion committed during the taxable years 1998, 1999, 2000, 2001 and 2002. You alleged that " the exemption from income tax being granted to MWSS under Section 18 of RA 6234 (its charter while still a government-owned corporation) has been repealed or amended by RA 8424 (Tax Reform Act of 1997) effective January 1, 1998 . Hence, MWSS is now subject to 35% corporate income tax pursuant to Section 27(C) of the Tax Code of 1997 . But, what is worst, inspite of full knowledge by the officers of MWSS of the law (RA 8424) and the fact that the MWSS has already long been privatized during the ERAP Administration, they still insisted and has anomalously availed of the exemption from income taxation as they were able to secure a clarificatory ruling for tax exemption from the Deputy Commissioner, BIR Legal Inspection Group, Atty . Edmundo P . Guevarra dated May 16, 2001 . . . .". You further stated that " BIR Ruling No. 088-2001 which was illegally issued by Deputy Commissioner, BIR, Edmundo P . Guevarra on May 16, 2001 is very contrary to an earlier BIR Ruling No . 037-99 dated March 29, 1999 legally issued by then BIR Commissioner Rualo to MWSS imposing a 10% VAT on the gross receipts/sales from operations or concession agreement of MWSS privatization thereby completely departing from the tax exemption privileges which the MWSS enjoyed under its charter, RA No. 6234 , which imposition of 10% VAT is mandated under Section 108(A) of the Tax Reform Act of 1997 ." In reply, please be informed that your allegation has no factual or legal basis whatsoever. BIR Ruling No. DA-088-2001 was based on BIR Ruling No. 018-2000 issued by former Commissioner Rualo exempting the National Power Corporation (NPC) from income tax. The reason for the exemption is explained in the ruling as follows: "The exemption from income tax of the NPC under Section 13 of its Charter, i . e ., RA 6395, as amended, has been further amended by RA 8424, effective January 1, 1998. Hence, in general, the NPC is now subject to corporate income tax under Section 27 of the National Internal Revenue Code of 1997. However, Section 32(B)(7)(b) of the National Internal Revenue Code, as amended by RA 8424, further provides that 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 government function accruing to the Government of the Philippines or to any political subdivision thereof. HCaEAT "xxx xxx xxx. The NPC is a wholly owned and controlled government corporation. As such, it is 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 Code ( supra ), the income of the NPC from its operations as a public utility shall be exempt from corporate income tax." Like NPC, MAYNILAD is also a public utility and therefore, its income from operations as a public utility shall be exempt from income tax. Upon the other hand, the alleged conflicting and contrary ruling which you cited, i . e ., BIR Ruling No. 037-99 dated March 29, 1999, which was also issued by former Commissioner Rualo, is on the imposition of 10% value-added tax on the gross receipts derived by MAYNILAD from " connection fees ." There is, therefore, no perceptible conflict between BIR Ruling No. DA-088-2001 and BIR Ruling No. 037-99. Under Section 4 of the 1997 Tax Code, the power to interpret the provisions of the Tax Code and other tax laws shall be within the exclusive and original jurisdiction of the Commissioner of Internal Revenue. The interpretation by the CIR has administrative finality unless revoked or altered by the Secretary of Finance. Thus, absent any allusion of patent illegality in BIR Ruling No. DA-88-2001, the same must be given due weight and credence. It may be stated herein that under Section 7 of the 1997 Tax Code, the Commissioner may delegate the power vested in him " to any or such subordinate officials with the rank equivalent to a division chief or higher . ". . .." The power to issue rulings with established precedents, like BIR Ruling No. DA-088-2001, can be legally delegated to the Deputy Commissioner, the same not being one of those enumerated therein as non-delegable. Finally, Section 2 of Finance Regulation No. 1 provides that the information shall be in the form of a sworn statement and shall state DEFINITELY THE FACTS OR ACTS CONSTITUTING THE FRAUD UPON OR VIOLATION of the internal revenue laws. It cannot be said that MAYNILAD violated the 1997 Tax Code or any tax laws for that matter because its non-payment of income taxes during the years in question was based on a ruling validly issued by the Deputy Commissioner under Section 7, in relation to Section 6 of the Tax Code of 1997. Moreover, even if BIR Ruling No. DA-088-2001 is revoked, such revocation cannot be given retroactive application as it will be prejudicial to MAYNILAD. Accordingly, this Office cannot issue any Letter of Authority (LA) to investigate, inspect and verify the books and other records of MAYNILAD for income tax purposes covering the taxable years 1998-2002, notwithstanding your Confidential Information No. 66-2002. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group