SP asks GMA to intercede in COWD-BIR tax row
Mike Banos
July 05, 2008
"As an initial move, I will make a formal report to the council in session this Monday and will sponsor five resolutions," said Kag. Ramon Tabor, chair of the city council committee on rules who chaired the meeting with Kag. Ian Mark Nacaya, chair of the committee on public utilities held Thursday, July 3, 2008 at the SP session hall.
Foremost among these will be an appeal seeking President Arroyo´s intercession in the tax row between the two government entities which the SP will course through the Office of the Presidential Assistant for Northern Mindanao Pacifico "Jojo" Pupos.
The other resolutions will call on the BIR through Commissioner Lilian B. Hefti to withdraw its warrants of distraint and levy on the COWD, and garnishment on its banks accounts; the Department of Justice through Sec. Raul Gonzales to fast track on COWD´s pending case for arbitration; for Senators Aquilino Pimentel, Jr. and Jose Miguel Zubiri, and Rep. Rolando Uy (1st District, Cagayan de Oro) and Rep. Rufus Rodriguez (2nd District, Cagayan de Oro) to make representations for the conflict´s early resolution.
During Thursday´s meeting, the members of the city´s legislature unanimously passed resolutions seeking the soonest resolution of the impasse over the COWD´s alleged tax delinquencies with the BIR during a joint meeting of the committees on rules and public utilities. Although Tabor admitted these resolutions were "good as done" he described a resolution passed during a regular session as "mas bug-at."
"This is a matter of public interest which affects everyone in the city," Tabor said. "I suggest the Office of the Government Corporate Counsel (OGCC, which is acting as COWD´s legal counsel in the matter) to also seek legal remedies to resolve this."
"Unless a speedy resolution of this deadlock is attained, our basic service of water to our constituents will be greatly affected," Nacaya said.
Asked what sort of assistance the COWD needed from the council, Bienvenido Batar, Jr., assistant general manager said "We are requesting the honorable city council to endorse our petition for the soonest resolution of our pending case for arbitration with the Department of Justice on the Cagayan de Oro Water District´s exemption from the payment of income taxes," said "We would also like to request your assistance to request the BIR to immediately lift the warrant of distraint and levy on COWD´s properties and garnishment on our bank accounts," he added.
According to Batar, the OGCC counsels appealed to the BIR three times after June 26 to lift the levy and garnishment to no avail. However, before they left for Manila Thursday, the OGCC counsels told him the Supreme Court had previously decided that a government entity cannot impose a warrant of distraint and/or levy on another government entity, especially public utilities. Neither can it garnish the funds of other government entities, especially when these involve funds which are used by public utilities for a public purpose.
The council invited COWD and BIR officials to the joint committee meeting for the purpose of exploring possible solutions to the tax impasse. However, Revenue District Officer Ester Palala sent a letter of regret saying they could not attend since July is their performance evaluation month.
Kag. Abaday said he cannot understand why BIR insisted on pursuing the tax case against the COWD despite the latter´s repeated assurances it would do so once the courts decided on the matter.
"COWD is not, has not been remiss in any of its obligations," Abaday said. "We find it puzzling why the BIR has to resort to such measures which put our water supply in jeopardy when it has granted concessions even to multi-national corporations in the past for similar alleged delinquencies. I believe there is a need for the city government to intervene for the resolution of this matter."
Present during the joint committee meeting were administration councilors Emmanuel Abejuela, Alden Bacal, Adrian Barba, Alexander Dacer, Simeon Licayan and opposition councilmen Rogelio Abaday, Teodulfo Lao and Zaldy Ocon.
Background of the conflict:
The COWD is a government-owned and controlled corporation, duly organized and existing under and by virtue of Presidential Decree No. 198, as amended by PD Nos. 768 and 1479, otherwise known as the "Provincial Water Utilities Act of 1973" and is engaged in providing and supplying potable and safe drinking water to consumers within its area of jurisdiction. It operates independent of government subsidy with no budget allocation from the Department of Budget and Management (DBM) and utilizes its internal financial resources to fund its operations and expansion projects.
The conflict over the COWD´s alleged tax liabilities with the BIR flared anew when the water district was served a Warrant of Distraint and/or Levy on some of its properties while its bank accounts in four banks were garnished last Thursday, June 26, 2008 for its failure to its alleged P23-million tax liabilities for the year 2004.
Batar said some P20-25 million of the COWD´s operating funds is affected by the garnishment, and they have been constrained to use their daily cash collections to finance their daily operations without the security of the banking system. The warrant of distraint and/or levy covers the COWD administration building, all its pumping stations and the booster stations in Macasandig and Balulang.
Prior to this, BIR also served the COWD with a Final Notice Before Seizure for properties previously levied for its alleged outstanding tax liabilities for the period 1997-2003.
Last April 2, 2007, BIR RR16 issued a Warrant of Distraint and/or Levy with the City Register of Deeds on the real properties of the Cagayan de Oro City Water District including its administration building and compound along Corrales Avenue and its engineering annex in Macasandig. On the same date, BIR issued a notice of garnishment to all banks where the COWD had deposits, advising them not to allow anyone to touch the funds until COWD had settled its taxes due to the national government in the amount of P341-million.
The controversy arose after the BIR issued in 2005 an Assessment Notice by the BIR Assessment Division demanding payment of deficiency income, value added and franchise taxes for the taxable years 1997-2003, amounting to P340,948,913.57 inclusive of 50% surcharge and 20% interest.
COWD appealed to BIR Regional Director Mustapha Gandarosa but was denied. COWD next filed a Motion for Reconsideration with the Commission on Internal Revenue maintaining that COWD, being a public utility/entity is exempt from all taxes under Section 36 of Presidential Decree 198, as amended, and remained exempt from taxes under Section 32 (B) (7) (B) of the Comprehensive Tax Reform Package of 1997.
Upon the advice of the Office of the Government Corporate Counsel (OGCC), acting as counsel for COWD, the water district filed a Petition for Arbitration with the Secretary of the Department of Justice. It was advised to defer from availing of the BIR abatement offer pending resolution of the DOJ on the disputed case.
However, Gandarosa insists the DOJ has no jurisdiction to rule in the case at bar since they are both co-equal executive agencies. "The DOJ is the wrong venue for the COWD´s appeal," Gandarosa said. "The water district´s appeal should have instead been filed with the Court of Tax Appeals (CTA) where it should have filed a surety bond and continue operating unhampered by distraint or garnishment."
But Batar believes the DOJ is the right venue for its appeal. "The DOJ has ruled water districts are tax exempt under section 32 of the NIRC which states that income derived by government from operating a public utility is considered exempt from taxation," Batar said.
The OGCC cited the cases of MWSS and the National Power Corporation which both continue to enjoy tax exemptions under this NIRC provision. However, the DOJ has subsequently ruled that water districts as GOCCs are only exempt from income and value added taxes but not franchise tax.
In a statement, the COWD cited a previous case involving the petition filed by the Camarines Norte Water District wherein the Department of Justice ruled that water districts are exempt from payment of Income and Value-added tax. The BIR Commissioner subsequently filed a Motion for Reconsideration but was denied. The BIR Commissioner appealed its case to the Court of Appeals where it remains pending.
"We believe that we are in a similar situation with the Camarines Norte Water District (CNWD) and thus, whatever the decision of the Court of Appeals regarding their case will similarly affects us," Batar said. "However, we will abide by the decision of the courts and will settle whatever obligations may be decided we owe to the BIR."
Taking its cue from the CNWD case, Batar said the COWD started paying in April 2007 its franchise taxes for 2006 and 2007 in the amount of P42.75-million and P5.6-million to date for 2008 as a "show of good faith" that it intends to settle all its tax obligations once the courts decide on it.
"Although the law allows public utilities to pass on the franchise tax to its consumers, such rate increase necessitated a public hearing," Batar said. "COWD did not and will not pass this on to our consumers, neither do we have plans for such."
Branch 38 of the Regional Trial Court of Misamis Oriental issued a Writ of Preliminary Injunction last March 17, 2008 with reference to Civil Case No. 2008-007 and the pending case for arbitration COWD filed with the Department of Justice.
But BIR officials insist the writ only covers its initial assessment for 1997-2003 and excludes the present levy and garnishment which cover the tax year 2004.
The BIR claims that until a final decision by the Supreme Court on the matter is rendered, all water districts countrywide are subject to payments of income and franchise taxes per decision of the Court of Tax Appeals (CTA) on Case No. 7403 promulgated by the 2ndDivision of the CTA October 9, 2007.
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