To tax or not to tax government entities? While this is a common question in every Public-Private Partnership (PPP) project, this is often addressed by adopting a conservative approach. Perhaps, because of the urgency of PPP projects, the easy solution to this conundrum is to just pay whatever taxes are identified. One should realize though that this approach definitely affects the stakeholders. The taxes added to the cost of the project would make the public assets more expensive, which will eventually be paid for by the public. Hence, ways to minimize, if not eliminate, any taxes should be seriously taken into consideration.
Government entities are exempted from taxation so long as they perform governmental functions. But what happens when the government partners with a private entity to undertake a PPP project for public use or service?
A PPP is a contractual agreement targeted towards financing, designing, implementing and operating infrastructure facilities and services that were traditionally provided by the public sector. Recently, all the rules and regulations were codified into one law — Republic Act (RA) No. 11966, otherwise known as the Public-Private Partnership Code of the Philippines.
The question now stands: is the government still exercising government functions when it enters a PPP agreement with a private partner, and hence, exempted from taxation? There is probably no issue if the government partner is a government-owned and -controlled corporation or GOCC, which is usually established as a corporation to primarily conduct business. These GOCCs are generally taxable unless specifically exempted. Thus, what is more interesting to look into is a situation where the implementing agency is a government instrumentality, such as departments of Transportation (DoTr), Public Works and Highways (DPWH), Health (DoH), and so on.
From the perspective of the government, the possible taxable events that could arise in a PPP arrangement are: (1) when the government agency receives money from the private partner, (2) the government provides a subsidy to the private partner, or (3) the taxability of the public asset built via PPP.
To illustrate the first scenario, the government usually receives a bid premium after a successful bidding. Now, should we treat this bid premium as income subject to taxation? I believe the answer should be negative. By entering into a PPP contract, the government partner is not reduced to an ordinary corporation. Technically, it is only undertaking another way of procuring public assets which is still part of its mandate and powers, and thus, essentially government functions.
PPP contracts normally contain a provision declaring that the government is waiving its immunity from suit as it is entering into a corporate deal. While this declaration is provided for the contractual and legal viability of the PPP project, I believe this should be viewed differently for taxation purposes. When the State is shedding its immunity from suit, it does not necessarily make itself taxable. Bear in mind that taxes are inherently not imposed when it comes to government entities exercising governmental functions for the benefit of the public. PPPs are usually utilized in big public infrastructure projects. Ultimately, these projects are for public use, which is synonymous with public interest, public benefit, public welfare, and public convenience. From any angle, it is undeniable that these infrastructure projects, sometimes undertaken through PPP, are for the betterment of the lives of Filipino citizens. I strongly believe that the participation of the government in PPPs remains a government function.
The second scenario is when the government provides monetary contributions to the PPP project. Under Section 4(v) of the PPP Code IRR, government undertakings refer to any form of contribution and/or support, which the government may extend to a Private Partner for the implementation of PPP Projects. The contribution or support is given to make the PPP project financially viable for the private partner.
On the monetary contributions under Section 138(a) of the PPP Code, the question now is whether or not this undertaking is taxable.
Looking closely at the nature of this monetary contribution from the government, one may note that the government subsidy should not be taxable in the hands of the private partner, much like the entity it came from. This government undertaking may be considered as part of the government’s public service since ultimately the subsidy will be used for the PPP project.
Assuming that the undertaking is not considered public service, the question remains — is a government undertaking in the form of a subsidy really income? The quick answer is no. Income is the return in money from one’s business, labor, or capital invested; gains profits, or private revenue. Evidently, the government undertaking is not a return in money; rather, this subsidy will be circulated in the project like capital. In Fisher v. Trinidad, the Supreme Court held that the State cannot tax as income any property which by nature is really capital. In the same case, even certain types of dividends were treated as capital and not “income” and therefore not subject to the “income tax” law. Having settled that government subsidies in PPP projects should be treated as capital, then, it should not be taxed as income.
And now, on to the taxability of the public assets itself, particularly the imposition of real property taxes thereon. I believe that there should also be no taxation involved but not for the reasons above. In PPP projects, these real properties are usually part of the public domain. Hence, ownership and even the beneficial use cannot be transferred as such is outside the commerce of man. It would then be more feasible to tax the contract itself as the subject of taxation is in fact, the rights over the property. This is, however, a topic for another discussion.
Finally, to further drive this point, it would really make sense if public infrastructure projects not be taxed at all. Interestingly, in public infrastructure projects funded by the Japan International Cooperation Agency (JICA), JICA usually requires that all the funding should go to the project. There is simply no space for taxes. That is why there is the tax assumption scheme imposed by JICA (i.e., any taxes to Japanese contractors engaged in the project should be assumed by the implementing government agency). This seems sensible — still, the better route is for the government to not tax itself; otherwise, there will be double exaction. Meaning, the taxes will be collected from the public anyway either through user fees or other sources. Taxing itself would make the public asset more expensive and will ultimately be paid for by the public.
Overall, the exemption being enjoyed by some government entities is rooted in jurisprudence. In Maceda v. Macaraig, one of the reasons is to reduce the amount of money that has to be handled by the government in the course of its official operations. Further, to make sure that the functions of the government are not impeded by taxing matters. So perhaps, all of these are warranted so long as these PPP projects serve their true purpose — quality infrastructure and service for every Filipino.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Cabrera & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Joelle Mae Garcia is a senior legal advisor at Cabrera & Co., a Philippine member firm of the PwC network.
+63 (2) 8845-2728