BIR Ruling No. 455-2017

REPUBIC OFTHF PHHPPINFS

BUREAU OF INTERNAL REVENUE DEPARIMENT OF FINANCE

Quezon City

Section NIRC of 1997 119 Of PD 198 "RR 16-05 Person to Contact: Chief. Law Division Tel Nos. 926-55-36 / 927-09-63 +20 9-25-2017

Metro Manila. Philippines 11th Avenue corner 39th Street Bonifacio Global City 1634 V&A LAW Ccnter VILLARAZA & ANGANGCO

Attention: Sylvette Y. Tankiang

Joseph James K. Joaquino. Jr. Kristin Charisse C. Siao Juanito L. Sanosa, Jr.

Gentlemen:

client, Metro Agoo Waterworks, Inc. ("MAWI", for brevity), for confirmation of your opinion that MA WI is not subject to two percent (2%) franchise tax on its gross receipts from water business but is subject to the 12% value-added tax (VAT). This refers to your letter dated January 8, 2016, requesting on behalf of your

La Union ("Franchise"^, for brevity); and that the Franchise authorizes MA WI: domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that MAWI is a hoider of a provincial franchise to Tubao and other Waterless Municipalities in the Second District of the Province of La Union granted under Ordinance No. 031-2012 issued by the provincial government of Construct. Install, Operate and Maintain a Water Supply and Sewerage System in Agoo. It is represented that MA WI, with Tax Identification No. is a

conduits, reservoirs or dams, machineries and other waterworks on land develop. expand, modernize. administer, operate and maintain water- related and sewage-related assets including but not limited to water mains, tunnels, aqueducts, purification piants, pumping stations, pipes. owned or acquired or obtained by the grantee (MA WI) for said purposes: (a) To invest, acquire. own, lease. hold, sell. transfer. construct.

and to charge and collect a schedule for the use of said water. which schedulc of prices and rates shall at all times be subject to regulation by public or private concerns within the limits of the province of La Union. {b} To supply. sell, furnish such water to any person, corporation. or

:

Metro Agoo Waterworks. Inc. Pagc 2 ot'4

agency concerned thereon: the NWRB (National Water Resources Board), or any other government

supply services within the province of La Union and to charge and collect a schedule of prices and conventional rates for the availment of C To construct, develop. operate, maintain and provide bulk water

such services:

La Union, and to charge and collect a scheduic of fces which shall at all scwers as may be necessary for the proper sanitation of the province of times be subject to regulation by the government entity in charge of this activity: To construct. maintain and operate such systeins of sanitary

dams, subject to the approval of the Department of Health and/or any and use, and prevent waste of water; and e} other government agency concerned thereon. and to regulate the control To purify the sources of water supply. the reservoirs and the

and springs as may be needed in its operation within the province of Ia Union;" (f To construct, develop. maintain and operate such artesian welis

hut to the I2% VAT. on whether the gross receipts of MA WI is not subject to the 2% franchise tax imposed by Section 119 of the National Internal Revenue Code of 1997 ("NIRC"). as amended. On the basis of the foregoing representations, you now request for legal opinion

2(14) and 4.108-3(h) of Revenue Regulations (RR) No. 16-05, as amended, to wit: on the gross receipts dcrived from the sale or exchange of services, including thc use or lease of properties. The 12% VA'T on sale of services applies to services of franchisc grantees not covered by Section 119 of the NIRC, in accordance with Sections 4.108- In reply. p!ease be informed that Section 108 of the NIRC imposcs 12% VAT

of Services". The term "sale or exchange of services" Philippines for others for a fee. means the performance of all kind of services in the "SECTION 4. 108-2. Meaning of "Sale or Exchange remuneraiouo

performed or rendered by the following: consideration. whether in kind or in cash, including those

XXX XXX XXXX

telegraph. radio and/or television broudcasting and all other franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual gross receipts "1+) .franchise grantees of electric utilities, telephone and

(P10.000.000.00). and franchise gramtees of gas and wuter of the preceding vear do not exceed Ten Million Pesos utilities:

Metro Agoo Waterworks. Inc. Page 3 ot 4 #455-017 9-25-2017

on Selected Services. SE('TI0N 4.108-3. Definitions and Specific Rules

XXX XXX XXXX

"amended. However, franchise grantees of rudio andior .franchise tax. pursuant to Sec. 20 of RA No. 7716. as preceding year do not exceed Ten Million Pesos the Tax Code, subject to the optional registration provisions under Sec. 9.236-I(c) hereof. and telegraph. radio and/or television hroadcusting. toll road operations und ull other franchise gruntees. except gas television hroadcasting whose annual gross receipts of the three percent (3%) franchise tax imposed under Sec. 119 of and water utilities. shall be subject to VAl in lieu of (P10.000.000.00) shall not be subject to VA7, hut to the h Services of franchise grantees of telephone

utilities shall be suhject to two percent (2%) franchise tax on their gross receipts derived from the business covered by the Likewise, franchise grantees of gas and_water

Code. taw granting the franchise pursuant to Sec. II9 of the Tax

their franchises may have been granted shall be subject to the 10% V4T imposed under Sec. 108 .of the Tax Code. xxx those covered by Sec. I! 9 of the Tax Code, regardless of how Gross receipis._.of all other franchisees..other.than..

covered by the law granting the franchise. The said provision states: subject to franchise tax under Section l19 of the NIRC is the governmental authority 2% franchise tax. gross receipts of a water utility must have been derived from business which granted its franchise. Section l19 of the NIRC requires that to be subject to the The determining factor of whether or not a water utility such as MAwl is

provision of general or special law to the contrury receipts of the preceding year do not exceed Ten million tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: companies referred to in this Section shull have an option to notwithstanding. there shall he levied. assessed and collected in respect to all franchises on radio and'or television hroadcasting companies whose annuul gross pesos (P10.000,000). subject to Section 236 of this Code, a tax of three percent (3%) and on gas and water utilities. a Provided, however. That rudio and television broudcasting he registered as a value-added taxpuyer and pu the tax due SECTION U9 Tax on Franchises. wAy}

Page 4 of 4 Metro Agoo Waterworks. inc t455-2017 9-25-.017

exercised, said option shall he irrevocable. thereon: Provided. further. That once the option is

business covered by a "law"" granting the franchise. A law is national in character while Clearly, the above provision refers to franchise tax imposed on the water utility

an ordinance is a municipal regulation, which is local in character, A national law is a

of local governments. such as provinces, can pass.! In this case. MAWI's franchise law that only Congress can pass while an ordinance is one that only legislative bodies was not granted by a law but by a provincial ordinance.

LwDs are considered Congressiona! franchisees. having been created pursuant to provisions of PD 198 and not under the jurisdiction of any political subdivision. Section 6 of Presidential Decree (PD) 198. the source of authorization and power to form and maintain a local water district. Once formed, an LwD is subject to the It is also noted that MAWI was not organized as a local water district ("LWD").

is not a LWD. It is a Local Water Utility ("L WU"), which is defined as "[a]ny district. L.WU can be owned by a private corporation. As can be gieaned from the records, MAWI is a private corporation duly registered with the Securities and Exchange MA wI's franchise has been granted through a mere ordinance. transferred its water supply facilities to the LWD. It is important to note that MA WI city. municipality, province. investor-owned public utility or cooperative corporation which owns or operates a water system serving an urban center in the Philippines."3 A Regulations (SEC) with SEC Registration No. An LWD is a water utility which is owned by the local government who It is likewise shown that

imposed under Section 119 of the NIRC, but it is subject to the 12% VAT under Section 108 of the same Code. In view of the foregoing. we hold that MAWI is not subject to the franchise tax

Howevcr. if upon investigation, it will be disclosed that the facts are different. then this ruling shall be considered null and void. This ruling is being issued on the basis of the foregoing facts as represented.

Very truly yours. 1araMe

Commissioner of Internal Revenue CAESAR R. DULAY

K - 0 09 315

Santiago v. COMELEC, G.R. No. 12732S, 19 March 1997. P.D. 198, Sec. 3 (h) P.D. 198, Sec. 6.