National Housing Authority, Exempt from Payment of Fees and Charges and from Creditable Withholding Tax

May 25, 1998 BIR RULING NO. 071-98 Sec. 19 & 20, R.A. 7279 32 (B) (7) (b)-000-00-071-98 National Housing Authority Quezon Memorial Elliptical Road Diliman, Quezon City Attention: Mr . Mariano M . Pineda General Manager Gentlemen : This refers to your letter dated January 8, 1998, seeking confirmation of the following: a) that the sale by the National Housing Authority (NHA) of industrial/commercial lots in the reclaimed area which forms an integral part of the Smokey Mountain Socialized Housing Project is exempt from income tax and the creditable withholding tax, and value-added tax; and b) that the tax exemption of NHA under R.A. No. 7279 on the sale of lots to the socialized housing project is not repealed by R.A. No. 8424. prcd It is represented that the National Housing Authority, in partnership with a private contractor, has embarked on a massive project which started in 1992, to convert the notorious Smokey Mountain dumpsite into a modern urban community, with the squatter families dwelling on the site as the main beneficiary of the project; that in the process, the 22-hectare, 20 storey-high dumpsite will be forever removed; that with impetus coming from no less than then President Corazon C. Aquino and the current administration of President Fidel V. Ramos, a general plan to develop the Smokey Mountain dumpsite was initiated; that on January 17, 1992, President Ramos issued Memorandum Order No. 415 "Directing the National Housing Authority to Implement the Smokey Mountain Development Plan and Undertake the Reclamation of the Area Across R-10 and Creating an Executive Committee to Oversee Its Implementation";that said Memorandum No. 415 was amended by Memorandum Order No. 38-A dated September 14, 1992, naming the additional members of the Executive Committee to oversee the implementation of the Plan, thus, NCR-CORD as chair agency, the NHA, the City of Manila, the Department of Public Works and Highways (DPWH),the Public Estates Authority (PEA),the Philippine Ports Authority, the Department of Environment and Natural Resources (DENR),the Development Bank of the Philippines (DBP),the National Economic and Development Authority (NEDA),the Metropolitan Manila Authority (MMA),the Presidential Commission for the Urban Poor (PCUP),and the Chairman of Presidential Task Force on Solid Waste Management, as members; that the said project was officially referred to as the Smokey Mountain Development and Reclamation Project (SMDRP);that under the said Memorandum Order, the National Housing Authority was directed to implement the project "through a private sector joint venture scheme at the least cost to the Government";that pursuant thereto, the NHA entered into a joint venture agreement with a private developer, R-10 Builders, Inc.,to convert Smokey Mountain into a modern urban community; that due to limited sources of government funds and/or absence of budget for this purpose, the private developer is called upon to "fully finance all aspects of development of Smokey Mountain and reclamation of no more than 40 hectares of the Manila Bay area across Radial Road 10, which is in front of the Smokey Mountain; that in return, the private developer is to be reimbursed out of the sales of lots in the adjacent reclaimed area, the development of which is likewise being undertaken by the said developer; that the Board of Directors of the NHA, in their Resolution No. 3757 dated September 5, 1997, named, made, constituted and appointed as Attorney-in-Fact for the NHA the Philippine National Bank (PNB) as Trustee of the Smokey Mountain Development and Reclamation Project Asset Pool, to cede, transfer and convey the Smokey Mountain properties covered by Transfer Certificate of Title Nos. 233401, 233402, 233403, 233404, 233405, 233406, 233407, 233408, 233409, 233410, 233411, 233412, 233413, 233414, 233415, 233416, 233417, 233418, 233419, 233420, 233421, 233422, 233423, 233424, 233425, 233426, 233427, 233428, 233429, 233430, 233431, 233432, 233433, 233434, 233435, 233436, 233437, 233438, 233439, 233440, 233441, 233442, 233443, 233444, 233445, 233446, 233447, 233448, 233449, 233450, 233451, 233452, 233453, 233454, 233455, 233456, 233457, 233458, 233459, 233460, 233461, 233462, 233463, 233464, 233465, 233466, 233467, 233468, 233469, 233470, 233471, 233472, 233473, 233474, 233475, 233476, 233477, 233478, 233479, 233480, 233481, 233482, 233483, 233484, 233485, 233486, 233487, 233488, 233489, 233490, 233491, 233492, 233493, 233494, 233495, 233496, 233497, 233498, 233499, 233500, 233501, 233502, 233503, 233504, 233505, 233506, 233507, 233508, 233509, 233510, 233511, 233512, 233513, 233514, 233515, 233516, 233517, 233518, 233519, 233520, 233521, 233522, 233523, 233524, 233525, 233526, 233527, 233528, 233529, 233530, 233531, 233532, 233533, 233534, 233535, 233536, 233537, 233538, 233539, 233540, 233541, 233542, 233543, 233544, 233545, 233546, 233547, 233548, 233549, 233550, 233551, 233552, 233553, 233554, 233555, 233556, 233557, 233558, 233559, 233560, 233561, 233562, 233563, 233564, 233565, 233566, 233567, 233568, 233569, 233570, 233571, 233572, 233573, 233574, 233575, 233576, 233577, 233578, 233579, 233580, 233581, 233582, 233583, 233584, 233585, 233586, 233587, 233588, 233589, 233590, 233591, 233592, 233593, 233594, 233595, 233596, 233597, 233598, 233599, 233600, 233601, 233602, 233603, 233604, 233605, 233606, 233607, 233608, 233609, 233610, 233611, 233612, 233613, 233614, 233615, 233616, 233617, 233618, 233619, 233620, 233621, 233622, 233623, 233624, 233625, 233626, 233627, 233628, 233629, 233630, 233631, 233632, 233633, 233634, 233635, 233636, 233637, 233638, 233639, 233640, 233641, 233642, 233643, 233644, 233645, 233646, 233647, 233648, 233649, 233650, 233651, 233652, 233653, 233654, 233655, subject however, to the condition that the authority granted to PNB shall be contingent upon the approval of all sale transaction by the Governing Board of the Smokey Mountain Asset Pool composed of one representative from PNB, NHA, HIGC and R-11; that the project (SMDRP) is a tailored land development and reclamation project composed of two major components, as follows: LLphil "1. Smokey Mountain Development . This involves the building of 34 permanent housing structure for 3,500 homeless families. Prior to its completion, the private developer shall construct temporary housing structures complete with basic amenities, to house the squatter residents in the area. Also part of this component is the clearing of the Smokey Mountain stockpile of garbage materials, as well as the land development of the cleared Smokey Mountain dumpsite into a mixed-use development of residential, industrial, commercial and institutional uses. Included here is the allocation of five (5) hectares of land to put up a major incinerator plant. "2. Reclamation . The reclamation of a portion of the Manila Bay area directly fronting the Smokey Mountain dumpsite is the major enabling component of the Project. The reclaimed land shall serve as the source of funds for the construction of permanent housing units and the payment for the services of the project contractor/developer. It is the sales proceeds of the reclaimed land which makes possible the implementation of the project. To ensure that such sales proceeds would only be used in connection with the project, an Asset Pool Formation Trust Agreement was entered into by and between the Philippine National Bank, National Housing Authority, Home Insurance Guarantee Corporation and R-11 Builders, Inc.,with PNB acting as the Trustee of the Fund. The trusteeship covers, among others, the receipt and custody of the proceeds from sale, administration of the trust fund, and releasing of funds as approved by its Governing Board." that these matters are now being brought to this Office attention in the light of the effectivity of R.A. No. 8424, otherwise known as the "Tax Reform Act of 1997" wherein Section 27(C) of Sec. 3 thereof provides that all government agencies and instrumentalities and government-owned or controlled -corporations, except GSIS, SSS, PAGCOR, PCSO and PHIC, shall be subject to the payment of income tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry or activity; that it is your contention that although the NHA is not mentioned as one of the exempt entities, it is nevertheless exempt from internal revenue taxes pursuant to R.A. No. 7279, otherwise known as the "Urban Development and Housing Act"; that the provision of R.A. 8424 does not repeal the tax exemption of NHA with respect to the socialized housing program under R.A. No. 7279, the former being a general law, while the latter a special and specific statute; and that it is therefore your concern that pending clarification from this Office and in the light of the implementation of R.A. No. 8424, your sales of the aforementioned reclaimed lots in the Smokey Mountain Development and Reclamation Project (SMDRP), in particular, and your sales of other lots connected to your socialized housing projects, in general, may be interpreted to be subject to taxes for which you have been enjoying exemptions. In reply, please be informed of the following: In Republic Act No. 7279, otherwise known as the "Urban Development and Housing Act", which was enacted on March 24, 1992, the State declares as its policy to undertake, in cooperation with the private sector, a comprehensive and continuing urban development and housing program. To be able to accomplish the aforementioned policy, the National Housing Authority (NHA) has been granted such incentives which are specifically provided for in Section 19, Article V thereof, portion of which reads as follows: "Sec. 19. Incentives for the National Housing Authority . The National Housing Authority, being the primary government agency in charge of providing housing for the underprivileged and homeless, shall be exempted from the payment of all fees and charges of any kind, whether local or national such as income and realty taxes. All documents or contracts executed by and in favor of the National Housing Authority shall also be exempt from the payment of documentary stamp tax and registration fees, including fees required for the issuance of transfer certificates of title".(Emphasis supplied) In contrast, however, Section 27(C) of the Tax Code of 1997 provides "SEC. 27. ... "(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 Insurance Service System (GSIS),the Social Security System (SSS),the Philippine 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." The Repealing Clauses of R.A. No. 8424, on the other hand, provides that "SEC. 7. Repealing Clauses . (A) ... "(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 amended accordingly." To hold however, that the above referred provisions of the Tax Code, as amended by R.A. 8424, repealed the tax exemptions granted to NHA and to its project contractors under R.A. No. 7279, would have a serious adverse impact on the ability of the NHA to accomplish the State objectives as set forth in the latter Act. In the construction or interpretation of a legislative measure, the primary rule is to search for and determine the intent and spirit of the law. Legislative intent is the controlling factor. It is a salutary principle in statutory construction that there exists a valid presumption that undesirable consequences were never intended by legislative measure, and that a construction of which the statute is fairly susceptible is favored, which will avoid all objectionable, mischievous, indefensible wrongful, evil and injurious consequences. (People v. Purisima, 86 SCRA 543) Accordingly, R.A. 8424 did not repeal and has no effect on the provisions of R.A. 7279. At best, it repealed only the inconsistent provisions of the law or charter creating the National Housing Authority insofar as they relate to the grant of tax exemptions. Further, a crucial qualification of Section 27(C) of the Tax Code of 1997 is that government entities, to be taxable, must be engaged in similar business, industry or activity as performed by other ordinary taxable corporations. It is recognized that NHA is the primary government agency in charge of providing housing for the underprivileged and homeless citizens. Pursuant to P.D. No. 757, the main purposes and objectives for which the NHA was created are: a) To provide and maintain adequate housing for the greater possible number of people; b) To undertake housing, development, resettlement or other activities as would enhance the provision of housing to every Filipino; c) To harness and promote private participation in housing ventures in terms of capital expenditures, land expertise, financing and other facilities. These objectives are not business related per se as to subject the NHA to the coverage of applicable taxes under the aforesaid provision of law. Rather, these purposes are so imbued with governmental concerns, in recognition perhaps of the fact that mass housing, socialized housing and such other programs for the underprivileged sectors of the society are not so much of a money-making activity that private business would rather not venture in these areas. It is, therefore, left to the government to make mass housing development an interest of national priority. Ordinarily, the sale of lots by government-owned or -controlled corporations, agencies or instrumentalities for commercial/industrial purposes is subject to all applicable taxes since the same is readily ascertainable as purely business endeavor. However, a distinction is apparent in the instant case. Firstly, NHA is selling the reclaimed lots of the Smokey Mountain Development and Reclamation Project for commercial/industrial purposes, is not motivated by profits, the same being resorted to in order to finance the development cost of the project itself. Secondly, the proceeds thereof do not inure to the NHA but to the Asset Pool under a trusteeship arrangement, there to be disposed of in a manner not under the sole control of the NHA. Finally, the arrangement is an inseparable and integral part of the Smokey Mountain development, without which the very project would not have materialized at all. In relation to this, Section 4 of Memorandum Order No. 415 by President Corazon C. Aquino dated January 17, 1992 provides as follows: "Section 4. The land area covered by the Smokey Mountain dumpsite is hereby conveyed to the National Housing Authority as well as the area to be reclaimed across R-10." In view of this, a Memorandum of Agreement was executed by and among the NHA, PNB, R-II Builders, Inc. and Home Insurance Guaranty Corporation wherein they entered into a joint venture to develop a mixed-use industrial , commercial , residential estate and which titles to the subject lands remain under the name of the NHA .Given these scenarios, this Office holds the view that the NHA shall still be benefited by existing tax exemptions on the sales of these particular lots of the Smokey Mountain Development and Reclamation Project. This Office is well aware of the development efforts being undertaken in the Smokey Mountain dumpsite, the same being a flagship socio-economic project of the government which, every now and then, gain some prominence in the news. On this score, it may well be said that the primary purpose of taxation is to raise and provide sufficient funds to support the government, its projects and activities, and secondarily, to carry out or encourage adherence to certain government policies and objectives, be they social, political and/or economic. Thus, the tax which would otherwise be imposed on this activity of the NHA would be the very same revenue which will be needed to carry it out, hence underscoring the wisdom of exempting the same in the first place. The general rule enunciated in Section 27(C) of the Tax Code of 1997, subjecting all corporations, government agencies, or instrumentalities and government-owned or -controlled by the Government, with the exception of certain entities, to corporate income tax if engaged in similar business, industry or activity as ordinary taxable corporation, is subject to further exception as provided for under Section 32(B)(7)(b) thereof. Pursuant thereto, income derived by the Government or its political subdivision from any public utility or from the exercise of any governmental function is excluded from their gross income. For the purpose of defining what constitutes the term government, Section 2 of the Introductory Provisions of Administrative Code of 1987 (E.O. No. 292),provides as follows: "(1) Government of the Republic of the Philippines refers to 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." Thus, following the above definitions, the term Government (of the Republic of the Philippines) technically refers to the single body through which the functions of the government are exercised, and which for its parts or subdivisions are composed of various government agencies and various political subdivisions. Based on the foregoing, the National Housing Authority is a government entity which undertakes various projects for mass housing and socialized housing, and in the process of performing an essential governmental function, is entitled to certain tax exemption. Accordingly, pursuant to Section 19 of R.A. No. 7279, the National Housing Authority is exempt from payment of all fees and charges of any kind, whether local or national, such as income and real taxes, value-added taxes as well as documentary stamp tax and registration fees, including fees required for the issuance of transfer certificate of titles. Consequently, NHA is likewise exempt from the creditable withholding tax. Meanwhile, this Office is of the opinion as it hereby holds that, in general, the provisions of existing special or general laws granting tax exemptions to government entities have been effectively revoked, modified or deleted by R.A. No. 8424, and your opinion as to the tax exempt status of the NHA is, with respect to the said Smokey Mountain project and other socialized housing projects, confirmed based solely on the facts as represented and on the grounds enunciated above. LLcd 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.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue