Imposition of Corporate Income Tax on Local Water Districts

May 27, 1998 BIR RULING NO. 074-98 27 (C)-000-00-074-98 Philippine Association of Water Districts, Inc. 2nd Floor, LWUA Bldg., Katipunan Road Balara, Quezon City Attention: Mr . Daniel P . Fandio , Jr . Chairman , Board of Governors Gentlemen : This refers to your letter dated December 5, 1997 requesting for a confirmatory ruling on matters relating to the Local Water Districts (LWDs) which are being subjected to corporate income tax pursuant to Section 24 of the Tax Code, as amended (now Section 27 of the Tax Code of 1997). Representations made and arguments posed are as follows, viz: 1) That these LWDs, which were organized as public utilities pursuant to the provisions of Presidential Decree No. 198, as amended by P.D. Nos. 768 and 1479, were granted with the exclusive franchise to provide safe and potable water within the designated franchised service area, an essential governmental function; 2) That by virtue of the Supreme Court Decision in the case of Davao City Water District, et al. vs. Civil Service Commission , LWDs were declared Government-Owned or Controlled Corporations (GOCCs), making them, seemingly, taxable pursuant to Section 24(c) of the Tax Code, as amended; 3) That LWDs derive their revenues from the sales and/or distribution of water at the rate periodically determined, regulated and approved by the LOCAL WATER UTILITIES ADMINISTRATION (LWUA), in accordance with the provisions of P.D. No. 198, as amended; 4) That notwithstanding Supreme Court's Decision, it cannot be denied that while LWDs continue to operate as public utilities, their organizational structure remain unaltered. As GOCCs, LWDs are now subject to the rules and regulations of the Civil Service Commission (CSC), Department of Budget and Management (DBM) and the Commission on Audit (COA); 5) That while their source of revenues remain the same, i.e., sale of water, there has been an upward trend in operating expenses, in terms of personnel salaries/wages and benefits as a consequence of the implementation of the Compensation Standardization Law and amendatory provisions of the GSIS Law; 6) That unlike other government agencies and GOCCs, and while LWDs are basically performing public utility function, i.e., provide water service which is essentially a government function, they are not beneficiaries of any government subsidies although they are entitled to an allocation in the General Appropriations Act (GAA) necessary to meet their financial requirements in the development of water supply systems, as provided for in Section 14 of P.D. No. 1479; prLL 7) That to finance such financial requirements in the development of water supply systems, LWDs use their own corporate funds or secure loans for their own account; 8) That, furthermore, whatever savings or income generated from LWDs' operations, the same are being allocated and used in the maintenance of the water system in order to minimize interruption of supply as well as the continuous development of both surface and ground water sources necessary to meet the ever increasing demand of the population in the franchised service area; and 9) That pursuant to then Section 28(b)(8)(B) [now Section 32(B)(8)(b) of the Tax Code of 1977] income from any public utility or from the exercise of any essential governmental function accruing to the government or to any political subdivisions thereof are EXCLUDED from gross income and therefore EXEMPT from tax. In reply, please be informed that pursuant to Section 27(C) of the Tax Code of 1997, it is stated that "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 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." The above-quoted provision specifically excepted only five (5) corporations, namely, GSIS, SSS, PHIC, PCSO, PAGCOR, from the payment of regular corporate income tax. All other government-owned or -controlled corporations, agencies or instrumentalities engaged in a similar business, industry or activity as that of an ordinary taxable corporation, which are not mentioned therefor are deemed taxable on their gross income. In relation to this, Section 7 of the Tax Reform Act of 1997 provides, among others, that charters of government-owned or -controlled corporations which are inconsistent with the said law are therefore repealed or amended accordingly. The pronouncements of the Supreme Court en banc in the case of Davao City Water Districts vs. Civil Service Commission, 201, SCRA 593, as to the personality of the LWDs as government-owned or-controlled corporations with original charter will not, in any manner make them fall within the provision of Section 32(B)(7)(b) of the same Code, as to include them within the meaning of the term government or its political subdivision performing an essential governmental function or as a public utility under said Section 32(B)(7)(b). In this context, we should limit the term "government" to the National Government consisting of the three (3) branches, namely, the Executive, the Legislative and the Judiciary, and "its political subdivisions" to the local government units (LGUs). To qualify LWDs as belonging to the National Government, it being a GOCC will defeat the provision of Section 27 which expressly taxes government-owned or -controlled corporations, agencies and instrumentalities of the government. It is worthwhile to mention that there is no tax by silence but, where the law levies tax, so also must the tax exemption be explicit in the law. The exemptions are not presumed ( Floro Cement vs . Gorospe, 200 SCRA 480 ). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. ( Commissioner of Internal Revenue vs . P . J . Kiener Company , Ltd ., 65 SCRA 143 ) Thus, while the Local Water Districts are government-owned or -controlled corporations incorporated as public utilities, but because they are not composite of the National Government itself or its political subdivision performing essential government function as contemplated by law, they are therefore subject to corporate income tax imposed under Section 27(A) of the Tax Code of 1997. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue