BIR Ruling No. 414-15

December 14, 2015 BIR RULING NO. 414-15 Sections 30 (J), 106, 108, 116, 109 (1) (V), NIRC National Irrigation Administration EDSA, Diliman, Quezon City Attention: Mr. Claro V. Maranan Administrator Gentlemen : This refers to your letter dated February 24, 2014 requesting for clarification oil whether the share of irrigators' associations (IA) on the irrigation service fees (ISF) paid by individual farmers to the NATIONAL IRRIGATION ADMINISTRATION (NIA) under the Irrigation Management Transfer (IMT) Program is exempted from taxes or not, if the IA qualifies as a tax exempt association. The Irrigation Management Transfer Program seeks at transferring from the NIA, the management, operation and maintenance of the National Irrigation Systems (NIS) to IAs, wholly or partially, depending on the size of the NIS and the capacity of the IA. Pursuant to the program, the NIA and the IAs enter into IMT Contracts wherein IAs receive canal maintenance fees and a part of the ISF Collection from the NIA as compensation for the operations and maintenance activities required of the IAs under their respective Contracts. In reply, we regret to inform you that the receipt by IAs of "compensation" under the IMT Contracts, whether it be the canal maintenance fee or its share in the part of the ISF collections, removes the exemption of the IAs previously confirmed as an exempt non-stock and non-profit organization under Section 30 (J) of the National Internal Revenue Code of 1997, as amended (Tax Code). Section 30 (J) of the Tax Code provides: "Sec. 30. Exemptions from Tax on Corporations. The following organization shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses." CAIHTE Thus, if an IA receives income from IMT Contracts that are in the form of shares or remuneration for the maintenance of canals, then the IA is no longer exempt under Section 30 (J). Likewise, the IAs' gross receipts from operations are subject to the 12% VAT imposed under Sections 106 and 108 of the Tax Code of 1997, as amended, or 3% percentage tax imposed under Section 116 in relation to Section 109 (1) (V) of the same Code if the gross sales or receipts from such sale of goods and services do not exceed One Million Nine Hundred Nineteen Thousand and Five Hundred Pesos (P1,919,500.00) which tax payment may legitimately be passed on to buyers of such goods and services. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue