Imposition of Income Tax and VAT by the BIR to Local Economic Enterprises

April 20, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Jeffrey A. Torres Hotel Manager Dapitan Resort Hotel Sunset Boulevard, Dawo, Dapitan City SUBJECT : Imposition of Income Tax and VAT by the BIR to Local Economic Enterprises Dear Mr. Torres : This refers to your letter dated 16 March 2017, addressed to the Secretary of Finance, which was forwarded to this Bureau for appropriate action, regarding your request for opinion on the imposition of income tax and value added tax (VAT) by the Bureau of Internal Revenue (BIR) to local economic enterprises of local government units (LGUs). aDSIHc Representations are made that the Dapitan Resort Hotel (Hotel for brevity) is a local economic enterprise of the City Government of Dapitan. That upon your appointment as Tax Manager of the Hotel, you found out that the hotel has been paying its income tax and VAT with the BIR. Likewise, you asserted that as a local economic enterprise, it shall no longer be required to pay the income tax and VAT to the BIR, and that all revenues collected by the hotel shall accrue exclusively to the local government of Dapitan, in conformity with Sections 129 1 and 130 (d) 2 of Republic Act No. 7160, otherwise known as the Local Government Code (LGC) of 1991. On the other hand, the BIR contends that the Hotel, even though an economic enterprise of the LGU, is subject to tax because the hotel is operating as a business. To shed light to the issue at hand, a discussion of the corporate powers of a local government is necessary. Section 15 3 of the LGC expounds on the powers of a municipality, which are two-fold in character: first ,as public, governmental or political on the one hand; and, second ,as corporate, private, or proprietary on the other. Governmental powers are those exercised by the corporation in administering the powers of the state and promoting the public welfare and they include the legislative, judicial public, and political aspects. Municipal powers, on the other hand, are exercised for the special benefit and advantage of the community and include those which are ministerial, private and corporate. 4 Notably, local government units, as part of their powers to create their sources of revenues, may venture in the operations of local economic enterprises. As provided in Section 18 of the LGC, LGUs are authorized to generate their own sources of revenues and the allocation of the same shall accrue exclusively to them. ATICcS Meanwhile, premised on the basic principles of taxation and as a matter of public policy, properties of the State and of its municipal subdivisions devoted to government uses and purposes are generally deemed to be exempt from taxation, although no express provision in the law is made therefore. 5 However, the conflicting arguments on the taxability of an economic enterprise shall be resolved by considering the purpose and intent for establishing the said enterprise. Whereas, purely governmental function are exempt from taxes, the acts of an LGU in its corporate capacity and for the purpose of economic gain and profit may be subject to tax and treated just like any other private or government corporation. Based on the National Internal Revenue Code (NIRC), particularly the provisions on exemptions from tax on corporations, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code . 6 Even a non-stock, non-profit organization or government entity is liable to pay VAT on the sales of goods and services . 7 As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT . 8 In order to establish as to whether the Dapitan Hotel Resort is exempt from taxes imposed by the BIR, it must prove that the objective of its economic endeavour is purely governmental. It must present through evidentiary documents, the purpose of its creation, the manner of its operation, intended recipients of its services or customers and the disposition of its revenues. 9 Hence, should the Hotel be able to satisfy all these requisites, this Bureau expresses its Opinion that the Hotel shall be exempted from taxes imposed by the BIR. This Opinion is issued based on the information provided. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void. We hope we have provided clarity on the matter. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. Section 129 .Power to Create Sources of Revenue. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. 2. Section 130 .Fundamental Principles. The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, 3. Section 15 . Political and Corporate Nature of Local Government Units. Every local government unit created or recognized under this Code is a body politic and corporate endowed with powers to be exercised by it in conformity with law. As such, it shall exercise powers as a political subdivision of the national government and as a corporate entity representing the inhabitants of its territory. 4. Torio vs. Fontanilla ,85 SCRA 99 (1978). 5. 51 Am. Jur. 503. 6. Section 30, National Internal Revenue Code of 1997. 7. Commissioner of Internal Revenue vs. Court of Appeals ,G.R. No. 125355, March 30, 2000. 8. Ibid. 9. Based on the Decision of BIR dated 04 March 2010, re: Denial of Protest of the Audit Result/Assessment Notice of Ormoc City.