(Exempting Local Water Districts from Income Tax)
Constitutional Provisions Paragraph (1), Section 28, Article VI of the 1987 Constitution provides that: “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.”
While on July 27, 2009, our tax lawyer expert Senate President Juan Ponce Enrile, in opening the Third Regular Session of Congress said: “I urge my colleagues in this Senate and the leaders of the country to reassess our fiscal policies and economic objectives, and devise more creative ways and means to stimulate and hasten the momentum of business and industry in the country, instead of simply looking at taxing the people more. Otherwise, the result might be worse than just economic stagnation.
Guided by the constitutional precepts as well as the wise advise of the Senate President, your Committee on Ways and Means technically and ably back-up by the Senate Tax Study and Research Office (STSRO) has the honor to report back to this august body, Senate Bill 3392 under Committee Report No. 551, entitled: AN ACT GRANTING INCOME TAX EXEMPTION TO LOCAL WATER DISTRICTS, AMENDING FOR THE PURPOSE SECTION 27(C) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED.
The Committee bill which is a product of a public hearing on April 21, 2009 and a public consultation on May 29 2009 at Cebu City is in substitution of the following measures: House Bill No. 5210, introduced by Representative Antonino-Custodio, Angara, et. al, entitled: AN ACT AMENDING SECTIONS 27, 30, 34, 108 AND 109 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED; Senate Bill No. 3152, introduced by this representation, entitled: AN ACT EXEMPTING LOCAL WATER DISTRICTS FROM INCOME TAX AMENDING FOR THE PURPOSE SECTION 27(C) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED; and Senate Joint Resolution No. 24, introduced by Senator Escudero, entitled: A JOINT RESOLUTION INCLUDING LOCAL WATER DISTRICTS WITHIN THE APPLICATION, COVERAGE AND SCOPE OF SECTION 32(b)(7)(b) OF REPUBLIC ACT NO. 8424 BEING THE LEGISLATIVE INTENT MEANT AND APPROVED BY CONGRESS IN PASSING THE SAID LAW.
Problems in Water Resources
Based on a study entitled Philippine Water Supply Sector Roadmap 2008-2010 (Secretariat’s Report), our country is endowed with abundant water resources but it is currently confronted with difficulties in meeting its water needs, expansion of capacity and connecting poor households to the water supply system. The study concluded that the magnitude of the problem is nothing short of alarming in the context of sustainable and equitable access to water supply. There is an overlapping challenge to meet present needs while ensuring long-term availability of safe water factoring annual increase in demand. Rapid population growth, economic development, urbanization, and industrialization have taken their toll on the country’s water services and resource base.
The government is saddled with fiscal constraints affecting level of public capital expenditures in the water supply sector. This is exacerbated by problems of cost recovery in existing public water utilities, tariff regulation and over taxation to the local water districts.
The Provisions of the 1997 Tax Code
Thus, after public hearing and consultations and careful study on the 478 operational local water districts in the country, serving 2.6 million households or about 15 million, SNo. 3392 proposes to include local water districts (LWDs) in the short list of government agencies exempt from payment of the corporate income tax as imposed under Section 27(C) of the Tax Reform Act of 1997.
Said section of the Tax Code provides for the exemption from income tax of government-owned or -controlled corporations (GOCCs), agencies or instrumentalities such as the GSIS, the SSS, Philhealth, and the PCSO.
The 1997 Tax Reform Act, provided relief to GOCCs, agencies or instrumentalities of the government but not to the local water districts.
BIR’s Interpretations of the Tax Code
Interpreting Section 27(C) of the Tax Code, The Bureau of Internal Revenue (BIR) issued several Revenue Memorandum Circulars which required local water districts to pay corporate income tax and franchise taxes due between 1996 and 2002.
On the other hand, interpreting the same provision of the law, the BIR granted income tax exemption to the Metropolitan Waterworks and Sewerage System (MWSS) as well as the National Power Corporation (NaPoCor) on the basis of these entities being public utilities.
Worthy to note, Mr. President, the Department of Justice in its Decision dated March 29, 2006 in the case of Camarines Norte Water District vs. BIR Case No. OSJ-2005-03 ruled that local water districts are exempt from payment of income tax under Sec. 32(B)(7)(b), of the Tax Code, since they are no different from Napocor or MWSS. The decision was contested by the BIR before the Court of Tax Appeals.
Thus, Mr. President, SNo. 3392 seeks to remedy this inequity which has continued to hamper the growth of local water districts, undermining their momentum for long-term viability as local water districts perform their mandate to adequately provide the citizenry with the most fundamental of all human needs — potable water.
Cart Wheeling Policies on LWDs
Records would show that between 1973 up to the present, local water districts were subject to changing income tax regimes.
PD No. 198, otherwise known as the Provincial Water Utilities Act of 1973, considered the charter of the local water districts provides in Section 48 thereof, the exemption of local water districts from national and local taxes, as well as duties on importation and all fees and charges.
Under PD 198, local water districts were considered quasi-public corporations.
However, in 1986 under E.O. No. 93, the Executive Order withdrew the tax and duty privileges of local water districts.
On August 14, 1991, during the 8th Congress, RA No. 7109, entitled “AN ACT GRANTING TAX EXEMPTION PRIVILEGES TO LOCAL WATER DISTRICTS” was enacted into law.
Under RA 7109, all water districts created pursuant to PD No. 198 were exempt from the payment of: (1) income taxes; (2) franchise taxes; (3) duties and taxes on imported machinery, equipment and materials required for its operations; and, (4) real property taxes.
It must be pointed out that said tax exemption was enjoyed only by the local water districts for a period of five (5) years or until 1996.
Also under RA 7109, all unpaid taxes and duties or any portion thereof due from a local water district for the period starting October 15, 1984 until the effectivity of the law were condoned.
In 1992, the Supreme Court in GR 962637-38 ruled that local water districts are government-owned and –controlled corporations subject to COA, CSC and DBM rules and regulations.
Mr. President as mentioned earlier, the passage of the 1997 Tax Code provided relief from the income tax to GOCCs, agencies or instrumentalities but not to local water districts.
Basis for the Tax Exemption of the Local Water Districts
Thus, after careful study and considering all factors, your Committee on Ways and Means, recommends to include the local water districts in the ambit of tax-exempt government entities under Section 27(C) based on the following reasons:
LWDs are definitely government-owned and –controlled corporations.
LWDs are definitely public utilities.
The 1997 Tax Code expressly exempts from gross income that is derived by the government or its political subdivision in its exercise of any essential governmental function; and,
Income derived by LWDs as public utilities accrue to the Government of the Philippines or to any of its political subdivision.
Mr. President, to put safeguard on tax savings of the local water districts, Section 2 of Senate Bill 3392 provides that: “The amount that would have been paid as income tax and saved by the local water district by virtue of its exemption to the income taxes shall be used by the local water district concerned for capital equipment expenditure in order to expand water services coverage and improve water quality in order to provide safe and clean water in the provinces, cities, and municipalities. Provided, That the water district shall adopt internal control reforms that would bring about their economic and financial viability. Provided further, That the water district shall not increase by more than twenty percent (20%) a year its appropriation for personal services, as well as for travel, transportation or representation expenses and purchase of motor vehicle.”
The tax savings will be used for capital development expenditure in order to address access to potable water of our people.
As of 2000, water supply coverage in eleven (11) administrative regions was below 50% of the population (see Table 1) of the fifteen (15) administrative regions, only five (5) namely: Metro Manila, Northern Mindanao, Cordillera Administrative Region, Southern Tagalog, and, Eastern Visayas had more than 50% water supply coverage.
Table 1. Waterless Regions (NSO 2000)
Region Name Total Population Pop. Covered Coverage Rank “Waterless”CAR Cordillera Administrative Region 1,365,412 834,686 61.13% 2 I Ilocos 4,200,478 1,080,846 25.73% 14 YesII Cagayan Valley 2,813,159 526,741 18.72% 15 YesIII Central Luzon 8,030,945 3,485,699 43.40% 10 YesIV Southern Tagalog 11,793,655 6,146,765 52.12% 4 V Bicol 4,686,669 1,964,915 41.93% 11 YesVI Western Visayas 6,211,038 1,735,210 27.94% 13 YesVII Central Visayas 5,706,953 2,640,134 46.26% 7 YesVIII Eastern Visayas 3,610,355 1,845,463 51.12% 5 IX Western Mindanao 3,091,208 1,356,320 43.88% 8 YesX Northern Mindanao 2,747,585 1,608,419 58.54% 3 XI Southern Mindanao 5,189,335 2,261,291 43.58% 9 YesXII Central Mindanao 2,598,210 867,302 33.38% 12 YesCARAGA CARAGA 2,095,367 1,036,929 49.49% 6 YesARMM Autonomous Region of Muslim Mindanao 2,412,159 436,480 18.09% 16 YesNCR National Capital Region 9,932,560 7,456,038 75.07% TOTAL 76,485,088 35,283,239 46.13%
The Need To Provide Access To Water
Mr. President, an independent estimate made by Moore (2006, in PWSR 2006) cites 80% coverage with 67% having piped connection. Currently, the proportion of the Philippine population with formal access to safe drinking water is around 79% distributed as follows: 44% with individual house connections, 10% with shared connections through communal faucets and 25% relying on shared point sources without distribution (WB 2005). The extent of access through informal sources is not clearly known. What is known is that households without formal access cope with the gap by self-provision (e.g., private wells) or by accessing services of informal provides such as small-scale independent providers (SSIPs), entrepreneurs with water tankers or neighborhood water vendors. Piped water supply (Level III) is provided by 5741 water districts, 9 private operators, 1,000 LGU-run utilities or through CBOs and an undetermined number of SSIPs in middle and upper class subdivisions. Shared water supply consists of two levels. Point sources (Level 1) are provided by 3,100 Barangay Water and Sanitation Associations (BWSAs) and about 200 water cooperatives while communal faucet systems (Level II) are provided by around 500 Rural Water and Sanitation Associations (RWSAs).
The Water Roadmap
Mr. President, the passage of SNo. 3392 is in line with the Philippine Water Supply Sector Roadmap (Roadmap). With our concerted action on this bill, this will be Congress’ contribution to the Roadmap.
The Roadmap sets the direction to help the country meet the sector’s challenges and intended objectives by 2010 in line with the targets defined by the 2004-2010 Medium Term Philippine Development Plan (MTPDP) and 2015 Millenium Development Goals. In the longer term, the Roadmap also aims to ensure adequate long-term availability and accessibility of potable water and sustainable management of water.
Goal number seven of the UN Millenium Development Goals clearly articulates the need to integrate principles of sustainable development into country programs and policies, reverse loss of environmental resources, reduce by half the proportion of people without sustainable access to safe water and sanitation, and to provide significant improvement in the lives of at least 100,000,000 slum dwellers by year 2020.
Thus, the passage of the bill under consideration is a small step towards achieving this goal.
The Foregone Revenue
Mr. President, the foregone revenue from the Government is estimated between 650 million to 700 million pesos. However, as provided in the bill, the annual revenue losses can be recouped from the expansion and capital development expenditures of the local water districts. In the long run, this strategy of your Committee seeks to respond to the reality that water scarcity and misuse pose threats to sustainable development and environment.
Basic Principles In Water
In closing, allow me to spread in the Senate records, the ten basic principles that respond to the reality that water is scarce:
Water is human right and the government has an obligation to respect, protect and fulfill the enjoyment of the right to water.
Water is a finite and vulnerable resource, essential to sustain life development and the environment. It should be managed for the common good.
Access to water should be equitable and sensitive to gender and the disadvantaged.
The governance of water resources should be transparent and socially accountable and its management should be decentralized at the lowest possible level.
Water supply services should be financially sustainable and socially acceptable.
Water supply services should be demand responsive. This includes appropriateness and viability of technology and management.
Water supply projects should have capacity development components at all levels inclusive of knowledge management that promotes a learning environment for all stakeholders.
Water supply provision should be a priority component in poverty reduction programs. This means giving priority to public allocation for water supply services.
Sanitation is directly linked to water supply.
The development of water supply sector should contribute to the promotion of gender equality.
Mr. President, in view of the foregoing, I urge this Senate of the people to support the immediate passage of Senate Bill No. 3392, granting income tax exemption to local water districts nationwide, which would benefit millions of our people through better access to potable water.