BIR Ruling [DA-097-06]

March 8, 2006 BIR RULING [DA-097-06] RA 7916; RR 8-2005; DA-074-2006 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. R.C. Vinzon Gentlemen : This refers to your letter dated July 21, 2005 requesting on behalf of your client, Cypress Manufacturing Limited (CML for brevity), for a confirmation of your opinion that the refund of the excess utility payments which were incurred and paid during the time that a PEZA-registered enterprise was on an Income Tax Holiday (ITH) is exempt from the 32% regular corporate income tax, and consequently, from the withholding tax imposed under Revenue Regulations (RR) No. 8-2005, or the 5% gross income tax under Republic Act (R.A.) No. 7916, otherwise known as the "Special Economic Zone Act of 1995". It is represented that CML merged with Cypress Semiconductor Philippines, Inc. (Cypress for brevity) on January 1, 2002, with CML as the surviving corporation; that Cypress was organized under Philippine laws on March 30, 1995; that it was a PEZA registered entity which was granted an ITH for an initial period of six (6) years plus a qualifying extension of one (1) year pursuant to the provisions of R.A. No. 7916; that Cypress was one of Manila Electric Company's (Meralco) industrial customers; that 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; that the Bureau of Internal Revenue (BIR) had ordered Meralco, through RR No. 8-2005, to withhold a 25% creditable income tax on refunds due to industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts; that Cypress's excess utility payments were made during the time that it was on an ITH; that as one of Meralco's customers, pursuant to the Supreme Court's decision, Cypress is entitled to a refund of excess utility payments; and that since Cypress was absorbed by CML, CML now has the right to claim the said Meralco refund. 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 Cypress's registered activity, then the refund, which will be received by CML, is not subject to the 32% regular corporate income tax nor to the 5% gross income tax because the refund pertains to the excess utility payments made during the period when Cypress was on an ITH. Consequently, CML will not have any tax benefit from the refund of said excess utility payments because Cypress could not claim the same as deductions. ECaITc In sum, the Meralco refund to CML arising from the Supreme Court case with G.R. No. 141314 dated April 9, 2003 of the excess utility payments which were incurred and paid during the time when Cypress was on an ITH, is exempt from the 32% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under RR No. 8-2005. Moreover, it is not subject to the 5% gross income tax under R.A. No. 7916. (BIR Ruling No. DA-074-2006 dated March 2, 2006) 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