Summit One Condominium Corporation

August 8, 2008 BIR RULING [DA-(C-033) 125-08] DA516-06 Summit One Condominium Corporation Upper Basement Summit One Tower 530 Shaw Boulevard Mandaluyong City Attention: Engr. Lamberto S. Manalo Building Manager Gentlemen : This refers to your letter dated October 16, 2007, which was referred to this Office by Revenue Region No. 7, Quezon City, by way of its 1st Indorsement dated April 17, 2008, requesting for confirmation of your opinion that the refund to be given by MERALCO to Summit One Condominium Corporation for excess utility payments is exempt from withholding tax. It is represented that the Summit One Condominium Corporation is a non-stock, non-profit corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 09883 dated July 29, 1998; that it is primarily organized to own and hold title to the common and limited common areas in the condominium project known and identified as Summit One Tower, which has been constituted pursuant to the provisions of Republic Act No. 4726, otherwise known as the Condominium Act of 1992; that relative to the Supreme Court decision mandating the MERALCO refunds, the BIR issued Revenue Regulations No. 8-2005 requiring MERALCO to withhold a tax of 25% on gross refunds to "Customers with Active Contracts" and 30%, on refunds to "Customers with Terminated Contracts"; that Revenue Memorandum Order No. 22-05 provides that those customers claiming exemption from withholding tax under Revenue Regulations No. 8-2005 shall obtain and submit to MERALCO a certified true copy of the Certificate of Exemption or BIR ruling duly issued by the BIR for the purpose; and that since Summit One Condominium Corporation is a non-stock, non-profit educational institution exempt from income tax it is likewise exempt from withholding tax, hence this request. CDHSac In reply thereto, please be informed that this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA097-2006 dated March 8, 2006, that "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) Later, in BIR Ruling No. DA516-2006 dated August 25, 2006, this Office in reiterating the above-cited ruling, likewise ruled that "Applying the foregoing in the instant case, and considering that BITCAI 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 Revenue RegulationsNo.8-2005. . . ." At this juncture, observation has to be made of the fact that since Summit One Condominium Corporation is exempt from income tax, it did not benefit from the utilities expense which it incurred. The receipt of the refund from MERALCO will not give rise to a taxable transaction, as Summit One Condominium Corporation did not receive anything of exchangeable value from it. THIAaD SUCH BEING THE CASE, this Office hereby confirms your opinion that the refund which Summit One Condominium Corporation will receive from MERALCO is not a taxable event and therefore NOT subject, to income tax, and consequently, 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 null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service