BIR Ruling No. 001-15

January 20, 2015 BIR RULING NO. 001-15 Revenue Memorandum Circular (RMC) No. 28-2010; Section 5.116 (A) (4) (b), Revenue Regulations No. 2-98; Republic Act No. 10026; BIR Ruling No. 179-12 Peablanca Water District Centro, Peablanca, Cagayan 3502 Attention: Mr. Calixto C. De Leon General Manager Gentlemen : This refers to your letter dated May 16, 2011, as indorsed by the OIC-Regional Director of Revenue Region No. 3, Tuguegarao City, on July 19, 2012, relative to your request from this Office for a ruling as to whether or not PEABLANCA WATER DISTRICT is exempt from Income and Franchise Taxes pursuant to Revenue Memorandum Circular (RMC) No. 28-2010 and Section 119 of the Tax Code of 1997, as amended, respectively, in relation to Republic Act (RA) No. 10026 , entitled "An Act Granting Income Tax Exemption to Local Water Districts by Amending Section 27 (C) of the National Internal Revenue Code (NIRC) of 1997, as amended, and Adding Section 289-A to the Code, for the Purpose." cTCaEA It is represented that PEABLANCA WATER DISTRICT with business address at Centro, Peablanca, Cagayan, was created and organized under Presidential Decree (PD) No. 198 , otherwise known as the "Provincial Water Utilities Act of 1973" through Resolution No. 26, Series of 1990 , by the Sangguniang Bayan of the Municipality of Peablanca, Province of Cagayan which was passed by the Sangguniang Bayan of the abovementioned Municipality on May 16, 1990; that it is duly registered with the Bureau of Internal Revenue (BIR) with Taxpayer's Identification No. (TIN) 005-641-545-000 and Certificate of Registration No. 4RC0000760603 dated September 22, 1999; and that it was issued a Certificate of Conformance No. 458 on August 22, 1990 by the Local Water Utilities Administration; In support of its request, PEABLANCA WATER DISTRICT submitted the following documents: 1) A certified true copy of its BIR Certificate of Registration; 2) A certified true copy of the Municipality's Sangguniang Bayan Resolution No. 75, Series of 1988; 3) A certified true copy of its Local Water Utilities Administration's (LWUA) Certificate of Conformance; and 4) Copies of its Annual Information Returns and Financial Statements for the years 2009-2012 as audited by COA. In reply, please be informed that Section 1 of RA No. 10026 , dated March 11, 2010, as circularized by Revenue Memorandum Circular (RMC) No. 28-2010 in pertinent part provides that: "SEC. 27. Rates of Income Tax on Domestic Corporations. xxx xxx xxx "(C) Government-Owned or Controlled Corporations, Agencies or Instrumentalities. The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Local Water District (LWD) and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity." TEDHaA xxx xxx xxx" On the other hand, Section 119 of the Tax Code of 1997, as amended, provides that: "SEC. 119. Tax on Franchises. Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises. . . and on gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: . . . ." A careful perusal of the afore-cited provisions of law disclosed that there are two types of taxes being imposed, to wit: FIRST, the regular corporate income tax of thirty percent (30%) as prescribed in Section 27 (A) of the Tax Code of 1997, as amended, and SECOND, the two percent (2%) franchise tax as prescribed in Section 119 of the same Code . As can be gleaned from the above, Local Water Districts, like the PEABLANCA WATER DISTRICT are exempt from the corporate income tax of thirty percent (30%). However, it is subject to the two percent (2%) franchise tax under Section 119 of the Tax Code of 1997 as there are no express provisions in RA No. 10026 and RMC No. 28-2010 exempting the local water districts from the said 2% franchise tax. It is fortified in Section 5.116 (A) (4) (b) of Revenue Regulations No. 2-98, as amended, which provides: "SEC. 5.116. Withholding of Percentage Tax . Bureaus, offices and instrumentalities of the Government, including government-owned or controlled corporations as well as their subsidiaries, provinces, cities and municipalities making any money payment to private individuals, corporations, partnerships and/or associations are required to deduct and withhold the percentage taxes due from the payees on account of such money payments. (A) Internal Revenue Taxes Required to be Withheld. Percentage taxes on gross money payments to the following shall be subjected to withholding at the rates herein prescribed. xxx xxx xxx (4) Franchises . xxx xxx xxx (b) On gross payments to franchises on gas and water utilities . Two percent (2%) xxx xxx xxx" The two percent (2%) franchise tax to be withheld on the part of Local Water Districts, like PEABLANCA WATER DISTRICT is a creditable percentage tax withheld which can be applied against their franchise tax pursuant to Section 4 of Revenue Regulations No. 4-2002. aTICAc SUCH BEING THE CASE, by the clear and unmistakable language of the provisions of RMC No. 28-2010 and RA No. 10026, this Office holds that PEABLANCA WATER DISTRICT is exempt from the corporate income tax of thirty percent (30%). It is to be emphasized, however, that it is subject to the two percent (2%) franchise tax as prescribed in Section 119 of the Tax Code of 1997, as amended. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue