BIR Ruling [DA-683-06]

November 30, 2006 BIR RULING [DA-683-06] RR 8-2005 St. Luke's Medical Center, Inc . 279 E. Rodriguez Sr. Blvd. Quezon City Attention: Mr. Romeo B. Mary Accounting Manager Gentlemen : This refers to your letter dated August 8, 2006 requesting for a ruling that the Manila Electric Company (MERALCO) refund to the corporation is not subject to the twenty-five percent (25%) creditable withholding tax. Documents show that St. Luke's Medical Center, Inc. (SLMCI) is a non-stock, non-profit charitable and social welfare corporation duly registered with the Securities and Exchange Commission. On June 6, 1990, the BIR issued a ruling exempting it from income tax under Section 26(e) and (g) [now Section 30(E) and (G)] of the Tax Code. In reply, please be informed that Section 2.57.2 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 3-2004 and 8-2005, implementing Section 57(B) of the Code provides, to wit: "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" Moreover, in a Memorandum (Memo-033-2003) dated September 19, 2003, this Office clarified that SLMCI, as a non-profit hospital, is now subject to the 10% tax on its taxable income pursuant to Section 27(B) of the Tax Code of 1997 which, in effect, amended the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1977 Tax Code, as amended, viz: "SEC. 27. Rates of Income Tax on Domestic Corporations . (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. ..." (Emphasis ours.) Thus, SLMCI can no longer claim exemption from income tax, and consequently, from the withholding, tax under Section 30 (then Section 26) of the Tax Code. HSaIET In view of the foregoing, this Office regrets to deny your request for exemption from withholding tax on MERALCO refund since the said refund of the excess utility payments in your favor will give rise to or create a taxable income. Accordingly, the refund of the excess utility payments with MERALCO is subject to the withholding tax. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner