BIR Ruling [DA-054-98]

February 12, 1998 BIR RULING [DA-054-98] SyCip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated October 21, 1997 requesting a ruling confirming your opinion that your client, Puregold Duty Free, Inc . (PDFI) , is exempt from the 5% creditable withholding tax on its rental income from lease of property inside the Clark Special Economic Zone (CSEZ) and the 1% creditable withholding tax on income payments received from credit card companies pursuant to Section 4 (b) 2 of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, in relation to Section 5 of Executive Order No. 80 and Section 12 (c) of Republic Act No. 7227, otherwise known as "Bases Conversion and Development Act of 1992". prcd It is represented that PDFI is a domestic corporation duly registered and existing under the laws of the Philippines; that it is a CSEZ Enterprise duly registered with the Clark Development Corporation (CDC) to engage in duty-free and commercial shopping operation, trading and retail operation and other related activities such as food outlet, theater and amusement arcade within the CSEZ; that it owns and operates the Puregold Duty Free Plaza (Plaza) located inside the CSEZ; that it leases the stalls inside the Plaza for a certain period of time for which it will be paid monthly rentals; that the Plaza also entered into a Merchant Agreement with Citibank, N.A., to enable holders of VISA and MASTERCARD credit cards to purchase merchandise and/or services on credit from PDFI; and that Citibank, N.A. will credit the checking account of PDFI or issue a check to PDFI for the amount of merchandise or service purchased by the cardholders less the agreed discount rate. In reply, please be informed that Section 4 (b) 2 of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, provides that: "SEC. 4. Exemption from Withholding . The withholding of tax prescribed in these regulations shall not apply to income payments in the following cases: xxx xxx xxx (b) Income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx xxx xxx 2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of the Omnibus Investment Code of 1987, as amended. xxx xxx xxx Furthermore, Sec. 5 of Executive Order No. 80 authorizing the establishment of the CDC as the implementing arm of the Bases Conversion and Development Authority (BCDA) for CSEZ provides, that the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under R . A . No . 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments law which may hereafter be enacted. On the other hand, Section 12 (c) of R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992 provides, viz: "The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government unit affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter." Such being the case, as a registered business enterprises conducting business within the CSEZ, PDFI is exempt from the payment of 5% creditable withholding tax on its rental income from the lease of its property inside the Plaza as well as the 1% creditable withholding tax on income payment it receives from credit card companies, but PDFI shall be liable to the above-stated preferential tax rate based on its gross income earned, in lieu of local and national internal revenue taxes. (BIR Ruling Nos. 046-95 dated March 3, 1995 and 155-95 dated October 12, 1995) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. LLcd Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)