No Withholding Taxes on Income Payments Made to LGUs

In the recently decided Court of Tax Appeals (CTA) case of Conal Holdings Corporation vs. Commissioner of Internal Revenue (CTA Case No. 9099, 17 July 2017), Conal Holdings Corporation (Conal) filed a Petition for Review praying for the cancellation and withdrawal of the Bureau of Internal Revenue’s (BIR) deficiency assessment in the aggregate amount of Php291,875,839.72, which arose from Conal’s alleged failure to withhold taxes on the purchase of two (2) diesel power plants and machineries from the City Government of Iligan. 
The BIR based its assessment on Section 57 of the National Internal Revenue Code which requires the withholding of tax on items of income payable to any person within the Philippines. On the other hand, Conal alleged that the transaction is exempt from the withholding of tax under BIR Revenue Regulations No. 2-98.
The CTA ruled in favor of Conal stating that Section 2.57.5(A) of BIR Revenue Regulations No. 2-98 expressly states that the withholding of creditable withholding tax shall not apply to income payments made to the National Government and its instrumentalities. Conal was erroneously assessed for deficiency in tax payments in connection with the income payments made to the City Government of Iligan.