BIR Ruling No. 239-12

April 10, 2012 BIR RULING NO. 239-12 Sections 30 and 105 of the Tax Code of 1997, as amended; BIR Ruling No. 310-2011; BIR Ruling No. 083-2011; BIR Ruling No. 160-2011 Department of Social Welfare and Development IBP Road, Batasan Pambansa Complex, Constitution Hills, Quezon City 1128 Attention: Ma. Chona O. David-Casis Assistant Secretary Gentlemen : This refers to your letter dated July 15, 2011 requesting the clarification on the following matters relative to the Contract entered into by the Department of Social Welfare and Development ("DSWD") and the Social Weather Stations, Inc. ("SWS") on November 17, 2010 wherein SWS shall monitor the implementation of the DSWD's "Pantawid Pamilyang Pilipino Program" by conducting "Spot Checks" for which services the DSWD would pay SWS: 1) Are the DSWD's payments to SWS under the Contract subject to income tax? 2) Are the DSWD's payments to SWS under the Contract subject to withholding tax? ATICcS 3) Are there any other taxes that apply to DSWD's payments to SWS under the Contract? Relative thereto, SWS claims that it is exempt from income tax and that payments to it are thus not subject to withholding income tax. As authority, SWS cites BIR Ruling No. S-30-108-2000 dated December 29, 2000. However, the Commission on Audit ("COA"), in its letter dated May 11, 2011, believes that payments to SWS under the Contract for consultancy services are subject to withholding tax since the SWS stands to gain pecuniary profit from the contracted project. In reply thereto, please be informed that the last paragraph of Section 30 of the Tax Code, clearly subjects to tax the income of whatever kind and character derived by any organization otherwise exempt under the same section, from any of its properties, real or personal, from any of its activities conducted for profit regardless of the disposition made of such income. Specifically, the Tax Code provides as follows: DTEHIA "SEC. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxx xxx xxx Notwithstanding, the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any properties, real or personal, or from any of the activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code ." (Underscoring supplied) The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 of the Tax Code, particularly, does not leave any room for interpretation; the income from any of the organization's activities conducted for profit is subject to tax under the Tax Code, regardless of the disposition made of such income. Paragraph (e) of Section 26 [now par. (E) of Section 30] of the Tax Code should be read together with the last paragraph of the same Section since statutes must be construed as a whole. In fact, a cardinal rule of statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated part or a particular provision alone. 1 Accordingly, the last paragraph of Section 30 (then Section 26) of the Tax Code, as well as the whole section should be understood and interpreted in connection and jointly with all the other provisions of the same law, and in the light of the preceding and subsequent provisions, giving a meaning to each word or expression in said Section 30. 2 ( BIR Ruling No. 160-2011 dated May 19, 2011 ) aCcHEI Hence, SWS shall only be exempted from income tax on the income earned from its operation as a non-stock and non-profit organization pursuant to the purposes for which it was incorporated as indicated in its Articles of Incorporation. BIR Ruling No. S-30-108-2000 dated December 29, 2000 is explicit that SWS "is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation". Expressio unius est exclusion alterius , the mention of one thing implies the exclusion of another thing not mentioned. If a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect. 3 Aside from being held liable for income tax and withholding tax, SWS is liable for the payment of 12% Value-Added Tax (VAT) pursuant to Section 108 of the said Code, as amended by Republic Act No. 9337. Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit organization, irrespective of the disposition of its net income. Accordingly, any person engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, shall also be liable to VAT. It is a well-settled principle in statutory construction that exemption from tax is strictly construed against the taxpayer and liberally in favor of the taxing authority. A taxpayer who claims an exemption must be able to justify by the clearest grant of organic or statute law its exemption from the payment of tax. An exemption from the common burden cannot be permitted to exist upon vague implication. (BIR Ruling No. 083-2011 dated March 15, 2011) aTEScI It must be stressed that along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of statute. 4 Tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. In case of doubt, non-exemption must be favored. Taxes being the lifeblood of the government that should be collected without unnecessary hindrance, every precaution must be taken not to unduly suppress it. 5 BIR Ruling No. 310-2011 dated August 22, 2011) In view of the foregoing premises, this Office rules that the DSWD's payments to SWS under the Contract dated November 17, 2010 are subject to income tax and consequently, to withholding tax. Likewise, for engaging in the sale of services in the course of a business pursuit, SWS shall also be liable to VAT. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Aboitiz Shipping Corporation, et al. vs. City of Cebu, et al., 13 SCRA 449. 2. Chartered Bank vs. Imperial, 48 Phil. 931. 3. Tolentino vs. Paqueo, 523 SCRA 377. 4. Jaka Investment Corporation vs. Commissioner of Internal Revenue, G.R. No. 147629 citing Compagnie Financiere Sucres Et Denrees v. Commissioner of Internal Revenue, G.R. No. 133834, August 28, 2006, 499 SCRA 664, 667-668. 5. Republic vs. Caguioa, G.R. No. 168584, October 15, 2007.