Whether EO 93 Withdrew Tax and Duty Exemption and Incentives of Government Agencies

November 5, 2002 BIR RULING NO. 038-02 E.O. 46 P.D. 564, as amended E.O. 93; Secs. 27 (C) & 109 (q), NIRC 136-95 Duty Free Philippines FiestaMall, EHA Building Ninoy Aquino Avenue, Paraaque City Attention: Mr. Michael Christian U. Kho General Manager Gentlemen : This refers to your dated April 10, 2001 that was indorsed to this Office by the Secretary of Tourism on April 17, 2001 and follow-up letters dated June 26, 2001 and December 6, 2001 requesting reconsideration of BIR Ruling No. 136-95 dated September 6, 1995, which held that Executive Order (EO) 93 withdrew all tax and duties exemption and incentives of all government agencies, including the Duty Free Philippines (DFP). BACKGROUND OF THE CASE The facts as represented by herein taxpayer are as follows: DFP was established as a tax and duty free merchandising system by virtue of a special legislative act, i.e. , EO 46, series of 1986, granting the Department of Tourism, through the Philippine Tourism Authority (PTA), authority to operate a tax and duty free merchandising system in order "to augment the service facilities for tourists and to generate foreign exchange and revenue for the government." 1 Under the system, "the PTA shall have the exclusive authority to operate stores and shops that would sell among others, tax and duty free merchandise, goods and articles in international airports and seaports throughout the country in accordance with rules and regulation issued by the Ministry of Tourism". 2 The functions of PTA are governmental in character. 3 It enjoys exemption from the payment of all taxes pursuant to PD 564, as amended, otherwise known as its Revised Charter. DFP is a division of PTA primarily established to operate duty and tax free stores. By operation of law, income derived from DFP's operations is remitted to the Department of Tourism (DOT) and therefore, to the Government of the Philippines, as evidenced by the submitted certification of such remittances to the DOT. 4 POSITION OF DUTY FREE PHILIPPINES It is DFP's contention that EO 93 neither revoked nor withdrew the tax incentives of DFP for the following reasons, to wit: "1. The primary purpose of EO 93 in withdrawing tax exemptions of private parties and the government is to improve the fiscal monitoring aspects of government operations. It was intended to apply to entities enjoying tax exemptions incidental to their operations and not to DFP, whose tax and duty free status is inherent in its operations. "2. The authority granted to the Department of Tourism to operate a tax and duty free merchandising system partakes the nature of a grant of a franchise to operate and can be revoked only by another special law specifically withdrawing or revoking the franchise. "3. EO 93 could not effect the withdrawal of the exemptions because this would effectively result in the cancellation of the franchise granted to the Department of Tourism to operate a tax and duty free merchandising system. "4. Moreover, it is noted that EO 46 was issued on September 4, 1986, while EO 93 was issued on December 17, 1986. It is unlikely that barely two months after the issuance of the authority to operate in September of the same year, government would immediately cancel the same authority two months from its issuance." LEGAL BASES INVOKED BY DFP 1. Section 9 of PD 189 which expressly provides that the functions of PTA are governmental in character. 2. Pursuant to PD 564, as amended, otherwise known as its Revised Charter; PTA enjoys exemption from the payment of all taxes. 3. Pursuant to Section 3 of the said EO 46, "all the net profits from the merchandising operations conducted pursuant hereto shall accrue to the Ministry of Tourism which shall allocate the same in accordance with existing policies and regulations." Likewise, DFP posed the following considerations to support the reconsideration of the aforementioned BIR Ruling No. 136-95, to wit: 1. Opinion No. 110, Series of 2001 issued by the Office of the Government Corporate Counsel (OGCC) of the Department of Justice (DOJ) confirming that DFP is exempt from the payment of taxes and duties in order that it can fulfill its mandate under EO 46, to wit: "The use of the phrase "all kinds" of taxes demonstrates the intention of the decree to give PTA all the tax exemptions it may enjoy in line with its integrated activities and services related to tourism development. This tax exemption privilege gained more consistency with the grant to said entity through EO No. 46, the authority to establish and operate a duty and tax free merchandising system in the country, for the generation of foreign exchange and revenue for the government. . . . The nature of the business tourist duty free stores or enterprises requires therefore its exemption from taxes to enable said shops to be much more competitive by reducing its cost of operations. . . . Said tax exemption has the objective of generating foreign exchange and revenue for the government thru the Department of Tourism which in turn shall allocate the same in accordance with existing policies and regulations." 2. As the only tax and duty free merchandising system owned and operated by the government, Duty Free Philippines has to contend with its competitors in the duty free retailing industry, (duty free shops owned and operated by the private sector) who enjoy tax and duty free privileges. "The economic crisis brought about by the peso devaluation has effectively reduced DFP's capability to generate foreign exchange and revenue for the government resulting in a reduction of the remittances of DFP to the Department of Tourism for tourism development and promotions. "Recognizing the role of tourism in the socio-economic development of the country and its significant role in nation building, the present administration, through the Department of Tourism has directed the concentration of government efforts towards the development of the tourism industry." 3. The OGCC Opinion No. 110, S. 2001 on DFP's query as to VAT exempt status, states that "The nature of the business tourist duty free stores or enterprises requires therefore its exemption from taxes to enable said shops to be much more competitive by reducing its cost of operations the business tourist duty free stores or enterprises requires therefore its exemption from taxes to enable said shops to be much more competitive by reducing its cost of operations. If PTA were to pay VAT which is an indirect tax, on its tax free merchandising related operations, the amount will practically be shifted or passed on the buyer, transferee or lessee of the goods, properties or services, thereby rendering the merchandising as not tax free after all. This exemption from VAT and other duties and taxes becomes imperative and inherent, therefore, in the authority or its franchise to operate a duty and tax free merchandising system, not to mention that the exemption privilege itself has been so specifically stipulated under PTA's charter. ..." 4. As opined by DOJ in its Opinion No. 110, S. 2001, EO 93 did not revoke or withdraw the tax incentives enjoyed by DFP, thus "While EO No. 93, is a later law having been passed three months after the issuance of EO 46, the former order is a general law as it refers to "all tax and duty incentives" granted to "government and private entities" which cannot be considered to have repealed the specified grant of franchise under EO 46 and exemption under the Charter of PTA. Repeal by implication is not favored unless it is manifest that legislature so intended. ( De Jesus vs. People ,120 SCRA 760; Philippine American Management Co. Inc. vs. Phil. American Management Employees Assn. ,49 SCRA 194).A construction which in effect will repeal a statute altogether should, if possible, be rejected. For this reason, in case of doubt as to whether a later statute has impliedly repealed a prior law on the same subject, the doubt should be resolved against implied repeal. ( Bacobo vs. Estanislao ,72 SCRA 520) "Moreover, since the exemptions redound to the benefit of the government, strict interpretations against exemption should not be implied. "The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non-tax liability of such agencies." ( Maceda vs. Macaraig, Jr. ,197 SCRA 773) 5. The exemption from all kinds of taxes as expressly stated in Section 11-A(b) of the PTA Charter is in line with the integrated activities and services related to tourism development. BIR REPLY In reply, please be advised as follows: 1. Income Tax Section 1 of E.O. 46, series of 1986, provides, viz : "SEC. 1. The Ministry of Tourism, through the Philippine Tourism Authority (PTA),is hereby authorized to established a duty and tax free merchandising system in the Philippines to augment the services facilities for tourists and to generate foreign exchange and revenue for the government. Under this system, the Philippine Tourism Authority shall have the exclusive authority to operate stores and shops that would sell, among others, tax and duty free merchandise, goods and articles, in international airports and seaports throughout the country in accordance with the rules and regulations issued by the Ministry of Tourism. In the event that the operation of the stores is to be contracted to private parties, the award thereof shall be done through the usual public bidding." (Emphasis supplied.) In relation thereto, Section 3 of the same E.O. 46 provides that "all net profits from the merchandising operation conducted pursuant hereto shall accrue to the Ministry of Tourism which shall allocate the same in accordance with existing policies and regulations." On the other hand, E.O. 93 dated March 10, 1987 was issued, withdrawing all tax and duty incentives granted to government and public entities. Although E.O. 93 enumerated certain exemptions not considered withdrawn or revoked by it, PTA was not included in that enumeration. Subsequently, on April 22, 1987, the Fiscal Incentives Review Board (FIRB), issued FIRB Resolution No. 10-87, that restored the tax and duty exemptions granted under E.O. 46 effective March 10, 1987, subject to the following conditions: 1. The restoration shall be limited only to taxes and duties arising out of merchandise imported/purchased by the DFP and subsequently sold by it through authorized tax-and duty free shops; 2. Operations of tax and duty free shops shall be restricted only to the two international airports situated in Manila and Cebu; 3. Sales by tax-and-duty-free shops to incoming passengers shall be restricted in accordance with the rules, regulations and procedures promulgated by the Bureau of Customs; and 4. Sales by tax-and duty-free shops to diplomatic personnel and those with authorized special privileges shall be made only through their respective embassies, offices, agencies, institutions, associations or organizations. Thereafter, on January 1, 1998, Republic Act (R.A.) No. 8424, otherwise known as the Tax Reform Act of 1997, and which amended the Tax Code of 1977, took effect. Section 27 (C) of the Tax Code of 1997 limits the exemptions to government-owned or controlled corporation, agencies, or instrumentalities owned or controlled by the Government, to wit: "(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 Philippine Charity Sweepstakes Office (PCSO),and the Philippine Amusement and Gaming Corporation (PAGCOR) ,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. (emphasis supplied)" BIR Ruling No. 136-95, a reconsideration of which is being sought, ruled that PTA, being a government instrumentality, is now subject to income tax as provided for in the foregoing provisions of the law. It is noted that E.O. 93 dated December 17, 1986 withdrew all tax and duty incentives granted to government and private entities except those specifically excluded from the coverage thereof. Said ruling further concludes that such withdrawal of tax and duty incentives shall effectively subject the affected private entities and government agencies to income tax imposed under then Section 24(c) of the Tax Code, as amended (now Section 27 (C) of the 1997 Tax Code). This Office confirms that DFP, as the tax and duty free merchandising division of the PTA to further the tourism development of the Government, is now deemed subject to income tax. PTA, to which DFP is attached, is a government instrumentality, which is one of the entities referred to in Section 27 (C) of the Tax Code of 1997. The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is broader and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of 1987 defines as the "corporate governmental entity through which the functions of government are exercised throughout the Philippines, including, save as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or barangay subdivisions or other forms of local government. 5 An "instrumentality" refers to "any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned and controlled corporations. 6 PTA has a charter, i.e. P.D. 189 as amended by P.D. 564. Moreover, there is no provision in its charter which expressly states that PTA is exempt from payment of all kinds of taxes. The tax exemption provided under Section 11 thereof refers to the instruments of indebtedness which the PTA is authorized to issue and any income accruing from such instruments. The exception provided under Section 32(B)(7)(b) of the Tax Code of 1997 where income derived from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof, shall be excluded from gross income subject to income tax, is not applicable to DFP. If Section 32(B)(7)(b) intended to extend the exception to the agencies and instrumentalities of the National Government, then it should have restated the wording of the law to include the same. And yet, the legislature used the phrase "Government of the Philippines" in Section 32(B)(7)(b) while Section 27(C) expressly mentioned "instrumentalities." Nothing can actually prevent Congress from decreeing that even instrumentalities or agencies of the Government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. 7 2 Value-added tax (VAT) The withdrawal of the exemption privileges granted to government agencies and instrumentalities such as PTA/DFP under Section 27(C) covers only income tax. With respect to the imposition of VAT on DFP's importation of goods and its local purchases of goods, the nature of business of duty free shops require its exemption from taxes to enable said shops to be much more competitive by reducing its cost of operation. If PTA and Consequently, DFP were to pay VAT, which is an indirect tax, it will be passed on to its tax-free merchandise, rendering the same not tax free at all. Thus, its purchases of goods are exempt from VAT (VAT Ruling Nos. 297-89, 144-90) under Section 109(q) of the Tax Code of 1997, to wit "Section 109. Exempt Transactions. "xxx xxx xxx "(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590. "xxx xxx xxx On the other hand, considering that the incentives restored by FIRB Resolution No. 10-87 are limited only to taxes and duties arising out of merchandise imported/purchased by the DFP and subsequently sold by it through authorized tax-and duty free shops, the sale of services to DFP is subject to VAT pursuant to Section 108 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. Sec. 1, E.O. 46. 2. Supra . 3. Sec. 9, P.D. 189. 4. Sec. 3, E.O. 46. 5. Section 2 (1), Introductory Provisions, Administrative Code of 1987. 6. Section 2 (10), Introductory Provisions, Administrative Code of 1987. 7. Mactan Cebu International Airport Authority vs. Hon. Ferdinand J. Marcos, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City, et al.,Davide, Jr. J.,GR No. 120082, September 11, 1996).