BIR Ruling [DA-074-06]

March 2, 2006 BIR RULING [DA-074-06] R.A. 7916; RR 8-2005 076-89 Shindengen Philippines Corporation 120 Excellence Avenue cor. Quality Drive Carmelray Industrial Park I Canlubang, Calamba City Attention: Mr. Gregorio L. Viado Finance Dept. Manager Gentlemen : This refers to your letter dated October 12, 2005 requesting, on behalf of Shindengen Philippines Corporation (SPC), confirmation of your opinion that a PEZA-registered enterprise enjoying the preferential tax rate of 5% on gross income in lieu of all national and local taxes is exempt from withholding tax under Revenue Regulations (RR) No. 8-2005 and that regarding the excess utility payments which were incurred and paid during the time that SPC was on an Income Tax Holiday (ITH), the refund thereof is exempt from the 32% regular corporate income tax and/or 5% gross income tax under Republic Act (R.A.) No. 7916, otherwise known as the Special Economic Zone Act of 1995. The facts as represented are as follows: SPC is a corporation duly organized and existing under Philippine laws. It is a PEZA-registered entity which was granted an ITH for an initial period of five (5) years plus a qualifying extension of one (1) year. After the expiration of its 6-year ITH, it became exempt from national and local taxes and, in lieu thereof, is paying a 5% tax pursuant to the provisions of R.A. No. 7916. SPC is one of Manila Electric Company's (Meralco) industrial customers. In Republic of the Philippines, represented by Energy Regulatory Board vs. Manila Electric Company ,G.R. No. 141314, April 9, 2003, the Supreme Court ordered Meralco to refund to its customers excess payments made. DHESca The Bureau of Internal Revenue (BIR) had ordered Meralco, through RR No. 8-2005, to withhold a 25% creditable income tax on refunds due industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts. SPC's excess utility payments were made during the time that it was on an ITH, and likewise, after the expiration of its ITH. As one of Meralco's Customers, pursuant to the Supreme Court's decision, SPC is entitled to a refund of excess utility payments. TCSEcI In reply, please be informed that Section 2.57.5(B)(2) of RR No. 2-98, as amended by RR Nos. 3-2004 and 8-2005, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of R.A. No. 7916 which provides that "any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. Moreover, since the excess utility payments pertain to expenses related to SPC's registered activity, then the refund is not subject to the 32% regular corporate income tax. Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments. Had Meralco not collected these excess utility payments from the Company, the latter's utility expenses would have been lower and consequently, its income would have been higher. However, the correct amount of utility expenses is immaterial since the Company was on an ITH and thus was exempted from paying income tax. This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that "the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue, 47 BTA 590 ) (Emphasis supplied).When a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966 ).However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. ( Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13 AFTR 930 ). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. . . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income. In sum, the Meralco refund to SPC arising from the Supreme Court decision in G.R. No. 141314 dated April 9, 2003 of excess utility payments which were incurred and paid during the time that the Company was on ITH is exempt from the 25% or 32% withholding tax imposed under RR No. 8-2005 and is not subject to the 32% regular corporate income tax and the 5% gross income tax under R.A. No. 7916. DaTICE The refund of the excess utility payments incurred after the expiration of SPC's ITH, however, will form part of its gross income subject to the 5% preferential tax. Consequently, the said refund is not subject to the creditable withholding tax imposed under RR No. 8-2005. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service