BIR Ruling No. 014-09

July 24, 2009 BIR RULING NO. 014-09 32 (B) (7) (b) National Dairy Authority NDA Building, BAI Compound Visayas Avenue, 1100 Diliman Quezon City Attention: Mr. Naomi K. Torreta OIC, Administrator Gentlemen : This refers to your letter dated September 11, 2008 requesting exemption from the payment of corporate income tax for the P50 Million subsidy and for all the government subsidy releases to the National Dairy Authority (NDA) pursuant to Section 32 (B) (7) (b) of the Tax Code of 1997. It is represented that the National Dairy Authority, an attached corporation of the Department of Agriculture (DA) and created pursuant to Republic Act No. 7884, otherwise known as the National Dairy Development Act of 1995, is the central policy determining and directing body mandated to ensure the accelerated development of the Philippine dairy industry; that although the NDA is a government corporation, regulation is not within its power, hence, NDA is unable to derive income out of regulatory fees; that the main source of NDA funds come from subsidies from the National Government which finance NDA Personnel Services (PS) component; that to cover the NDA operating expenses, trust funds are sourced from its mother agency, the DA, as well as from other government agencies where NDA has established linkages; that meager amount of income from very short term investments of funds which are to be utilized in much later periods are likewise resorted to; that unfortunately, said funds are not enough to cover the maintenance and operating expenses of the NDA, hence, the NDA usually incurs deficit or losses before the government subsidies, as reflected in the NDA's yearly financial statements; that NDA's partner in the industry, the Dairy Confederation of the Philippines (DairyCon), was able to lobby for additional subsidy amounting to P50 Million primarily for the procurement of dairy animals for the industry herd build-up program; that these animals are to be distributed in various dairy project areas to various dairy farmers/cooperatives all over the country; that these animals shall be taken up as Breeding Animals account which is an asset account in the NDA books; that on the other hand, the additional amount of P50 Million, which is an insertion to NDA's government subsidy will be taken up in the NDA books of accounts as INCOME as prescribed by the government accounting rules and regulations; that being a corporation, said income will be treated as taxable income; and that NDA will not, in the real sense, realize income for such transaction since it will just facilitate the procurement of the animals in behalf of the dairy cooperatives, hence, this request for exemption. In reply, please be informed that Section 27 (C) of the Tax Code of 1997, as amended by Republic Act No. 9337, effective November 1, 2005, provides: DcAaSI "(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),and the Philippine Charity Sweepstakes Office (PCSO),shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporation or associations engaged in a similar business, industry, or activity." The repealing clause under Section 7 (B) of R.A. No. 8424, in part, further provides: "(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of government-owned or -controlled corporations, decrees, orders or regulations or parts thereof, that are inconsistent with this Act are hereby repealed or an ended accordingly." Based on the foregoing, the NDA is not one of those exempt from the corporate income tax under Section 27 of the Tax Code of 1997. However, income has been defined as an amount of money (may also be in kind) coming to a person or corporation within a specified time whether as payment for service, interest or profit from investment. Sec. 31 in relation to Sec. 32 of the 1997 Tax code defines taxable income, but subsidy is not included therein. By the term itself, subsidy is not an income neither does it fall within the definition of income; it is a grant or gift of money from a government to a private company, organization, or charity to help it to function. ITcCSA The mere classification of the subsidy under the account title income in the financial statement/books of accounts of a government corporation does not make it a taxable income. Moreover, the International Accounting Standards (IAS) No. 20 or the Philippine Accounting Standards (PAS) 20 defined Government grants/subsidies/subventions or premiums as assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity. Also, it is inappropriate to recognize government grants in the income statement since they are not earned but represent an incentive provided by government without related costs. (par 14 (b),IAS 20, Vol. 5, Philippine Accounting Standards) In view thereof, it is our opinion, as we hereby hold, that the P50M subsidy and all the government subsidy releases to the NDA are not earnings of the NDA. Very clearly, such subsidies are not corporate income of the NDA or income derived from its operations as the same are specifically earmarked by law for the exclusive use and purposes of the NDA. Hence, the same are deemed outside the purview of gross income and therefore, exempt from income tax and consequently from the withholding tax prescribed in Chapter IV, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. SICDAa 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 as null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue