BIR Ruling No. 296-11

August 12, 2011 BIR RULING NO. 296-11 Sections 27 (D) (5), 57, 106, 188, l96 of the Tax Code of 1997, as amended; RR 6-2001; BIR Ruling No. 158-94; BIR Ruling No. DA-365-04 Isabela State University Echague, Isabela Attention: Romeo R. Quilang, Ph.D. University President Gentlemen : This refers to your letter dated October 12, 2010, received via Indorsement from Revenue Region No. 3-Tuguegarao City, requesting tax exemption from Gross Receipts Tax on the proposed contract of loan pursuant to Republic Act No. 8292. Documents submitted show that the Isabela State University is a government educational institution created pursuant to Presidential Decree (P.D.) No. 1434, a decree MERGING THE ISABELA STATE COLLEGE OF AGRICULTURE AND CAGAYAN VALLEY INSTITUTE OF TECHNOLOGY INTO A STATE UNIVERSITY TO BE KNOWN AS THE ISABELA STATE UNIVERSITY, TRANSFERRING THE COLLEGE LEVEL COURSES OF ISABELA SCHOOL OF ARTS AND TRADES, JONES RURAL SCHOOL, ROXAS MEMORIAL AGRICULTURAL AND INDUSTRIAL SCHOOL, AND SAN MATEO VOCATIONAL AND INDUSTRIAL SCHOOL INTO SAID UNIVERSITY, PROVIDING A CHARTER FOR THIS PURPOSE, AND APPROPRIATE FUNDS THEREFOR, expanding its jurisdictions and curricular programs. Section 1 of P.D. No. 1434, provides viz. : Section 1. The present Isabela College of Agriculture located in Echague, Isabela and the Cagayan Valley Institute of Technology located in Cabagan, Isabela are hereby merged into a state university which shall be known as the Isabela State University, hereinafter referred to as the University with the main campus and administrative site at Echague, Isabela. The college level courses of the Isabela School of Arts and Trades at Ilagan, Isabela, Jones Rural School at Jones, Isabela, Roxas Memorial Agricultural and Industrial School at Roxas, Isabela and San Mateo Vocational and Industrial School at San Mateo, Isabela are hereby transferred to the University. It is further represented that, Isabela State University has applied for loan with Land Bank of the Philippines to finance the construction of school building. The standard provision of the proposed contract of loan requires the borrower to pay gross receipt tax. ACcTDS In view of the foregoing, you are now requesting for a tax exemption in favor of Isabela State University pursuant to Section 4 (f) of Republic Act No. 8292 known as Higher Education Modernization Act of 1997. In reply, please be informed that Section 121 of the NIRC of 1997, as amended by R.A. No. 9238 (An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-Added Tax and Re-Imposing the Gross Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1, 2004), provides as follows: "SEC. 121. Tax on Banks and Non-bank Financial Intermediaries. "There shall be collected a tax on gross receipts derived from sources within the Philippines ...in accordance with the following schedule: (a) On interest, commissions, and discounts from lending activities as well as income from financial leasing, on the basis of the remaining maturities of instruments from which such receipts are derived: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% (b) ... (c) ... (d) ... Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for the purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. xxx xxx xxx" The above provision is the basis for the GRT on banks. Notably, the amendment under R.A. No. 9238 mainly involved the revision of the various classifications of the maturity period (that is, short, medium or long-term) to either 5 years and below or more than 5 years. Under said provision, in case the maturity period of the instrument from which interest is derived is shortened through pretermination, the maturity shall be reckoned to end as of the date of the pretermination for purposes of classifying the transaction as short, medium or long term, and applying the correct GRT rate. (BIR Ruling No. 024-96 dated February 22, 1996) The significance of the date of pretermination is to adjust the maturity period for purposes of applying the correct GRT rate, as if the revised maturity period were the original maturity period. (BIR Ruling No. DA-297-08 May 16, 2008) Moreover, although the banks and non-bank financial intermediaries are directly liable for the gross receipts tax, by agreement, however, the burden of shouldering the GRT may be shifted by the bank to its borrower, as in the present case when Isabela State University agreed to shoulder the GRT with respect to the Agreement. While the term "gross receipts" for purposes of the gross receipts tax on banks should be interpreted and applied in its plain and ordinary meaning, the interest income (of banks) is taxable for gross receipts tax purposes only upon actual receipt, and the same shall form part of their "tax base upon which the gross receipts tax is based." ( China Banking Corporation vs. Court of Appeals , G.R. No. 146749, June 10, 2003, RR No. 12-80). The concept of GRT is based on the definition of "gross receipts", that is, based on "actual or constructive receipt" of income. Accordingly, the GRT due should also be computed, or recomputed in case of pretermination, based on the rates prescribed at the time of income payment. IcESDA Furthermore, Republic Act No. 8292, entitled "AN ACT PROVIDING FOR THE UNIFORM COMPOSITION AND POWERS OF THE GOVERNING BOARDS, THE MANNER OF APPOINTMENT AND TERM OF OFFICE OF THE PRESIDENT OF CHARTERED STATE UNIVERSITIES AND COLLEGES, AND FOR OTHER PURPOSES" Section 4 (f) of R.A. 8292 provides: Section 4. Powers and duties of Governing Boards. The governing board shall have the following specific powers and duties in addition to its general powers of administration and the exercise of all the powers granted to the board of directors of a corporation under Section 36 of Batas Pambansa Blg. 68 otherwise known as the Corporation Code of the Philippines; xxx xxx xxx (f) to authorize the construction or repair of its buildings, machineries, equipment and other facilities and the purchase and acquisition of real and personal properties including necessary supplies, materials and equipment. Purchases and other transactions entered into by the university or college through the Board of Regents/Trustees shall be exempt from all taxes and duties; (emphasis supplied) The above cited provision exempts from taxes purchases on the construction and repair of its buildings, machineries, equipment and other facilities. The said tax exemption does not include gross receipt tax imposed on the contract of loan as the exemption granted under Section 4 (f) of R.A. 8292 is specific only to the purchases entered into by the university or college through the Board of Regent/Trustees. Accordingly, Section 4 (f) of R.A. 8292 cannot be used as basis for Isabela State University claim of exemption from Gross Receipt Tax on the contract of Loan. The law is really clear and there is no need for interpretation but mere application. Further, where a provision of law expressly limits its application to certain transactions, it cannot be extended to other transactions by interpretation. Conversely, courts may not enlarge nor restrict statutes if the provision contains no limitations in its operation or scope. 1 Statutes that are clear, plain and specific should be applied without further construction and interpretation. Thus, "where a provision of law expressly limits its application to certain transactions, it cannot be extended to other transactions by interpretation." 2 Tax exemption cannot be created by implication because exemptions from taxation are highly disfavored in law and one who claims exemption from tax must be able to justify his claim by clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist on vague implication. 3 To be exempted from payment of taxes, it is the taxpayer's duty to justify the exemption "by words too plain to be mistaken and too categorical to be misinterpreted. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. 4 From the foregoing, the proposed contract of loan by Isabela State University to Land Bank of the Philippines is subject to Gross Receipts Tax. 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 null and void. HTASIa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Lapid v. CA ,G.R. No. 142261, June 29, 2000, 334 SCRA 738, 753; quoting Morales v. Subido ,G.R. No. 29658, November 29, 1968, 26 SCRA 150. 2. Canet v. Decena ,G.R. No. 155344, January 20, 2004, 420 SCRA 388. 3. Collector vs. Manila Jockey Club, Inc., L-875, March 23, 1956; Petroleum Co. vs. Llanes ,49 Phil. 466. 4. Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation ,G.R. 80041, Jan. 22, 1990.