Bureau of Local Government Finance Opinion

July 30, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully referred to the Honorable Commissioner, Bureau of Internal Revenue, BIR National Office Bldg., BIR Road, Diliman, Quezon City, Philippines, the attached 1st Indorsement dated July 13, 2010 of Mr. RICARDO T. CAWED, ICO-Regional Director for Local Government Finance, Department of Finance, Cordillera Administrative Region, Baguio City, relative to the letter dated June 23, 2010 of Mr. CAWED A. GAMONNAC, Provincial Treasurer, Province of Mountain Province, requesting the favor of clarification on the matter concerning the taxability of the proprietary activities of local government units (LGUs). In a letter dated June 3, 2010 of Mr. P. GEORGE CABURAO, OIC-Revenue District Officer, Revenue District Office No. 10, Office of the Revenue District Officer, BIR, Bontoc, Mountain Province, reiterated the stand of that Office that government activities such as lease of buildings are proprietary in nature and therefore subject to income and business taxes, pursuant to Section 105 of R.A. No. 8424, on income derived from profitable activities aimed to raise revenues. On the other hand, the Provincial Treasurer of Mountain Province is of the contrary view. As stated in the letter dated June 23, 2010, it was submitted that rentals derived from the lease of its buildings constructed from secured loan is not taxable by the BIR. SEIaHT In view of the foregoing and inasmuch as the imposition of corporate income tax and VAT fall under the jurisdiction of that Bureau, the matter is being referred thereto for the favor of appropriate action. Action taken on the matter may be coursed directly to Mr. CAWED A. GAMONNAC, copy furnished this Bureau and the BLGF-CAR, Baguio City. (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director ATTACHMENT 1st Indorsement July 13, 2010 Respectfully forwarded to Hon. Ma. Presentacion R. Montesa, Executive Director, Bureau of Local Government Finance, Manila, the herein letter of Mr. Cawed A. Gamonnac, Provincial Treasurer of Mountain Province dated June 23, 2010, regarding the attached letter of the OIC-Revenue District Officer of the Bureau of Internal Revenue, same province, requiring the Provincial Government to pay VAT and income tax on rentals and collections derived from government buildings owned by the province. It is informed that the Provincial Government of Mountain Province was able to construct several buildings from secured loans and the buildings were leased to private individuals and other government agencies with corresponding rentals. As provided in the Loan Contract, rentals derived thereat shall form part of the payment of the quarterly amortization of the loan for a duration of 7-10 years. It is the contention of the LGU that the rentals collected are used for recovering costs and maintenance of government facilities. The OIC Revenue District Officer cited Section 105 of Republic Act 8424, also known as Tax Reform Act of 1997, as basis to collect income tax and VAT from the Provincial Government of which the full text of the said provision was stated in his letter which is hereto attached. Our bureau has been advocating to the LGUs to exercise their proprietary powers to generate more funds to lessen their dependency from Internal Revenue Allotment (IRA). With the foregoing scenario, this complicates the operation of economic enterprises at the local level. SCaDAE In this connection, this office humbly requests the Central Office to clarify the matter with top officials of the Bureau of Internal Revenue as well as the Department of Finance considering the massive effect to the LGUs if this will not be settled judiciously. We hope that this matter be given utmost attention. (SGD.) RICARDO T. CAWED, CPA ICO, Regional Director