BIR Ruling [DA-100-06]

March 9, 2006 BIR RULING [DA-100-06] R.A. 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 February 9, 2006 requesting on behalf of your client, Amkor Technology Philippines, Inc. (ATP), for a confirmation of your opinion that the refund of the excess utility payments by the Manila Electric Company (Meralco) in its favor is exempt from the 35% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under Revenue Regulations (RR) No. 8-2005, and that in case the tax was withheld from such refund, ATP can credit the tax withheld against its 5% gross income tax. It is represented that ATP is a corporation duly organized and existing under Philippine laws; that it is a PEZA-registered entity enjoying the five percent (5%) preferential tax rate in lieu of all national and local taxes pursuant to the provisions of R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995; that ATP is one of the industrial customers of Meralco; 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 its customers excess payments that were collected as far back as 1994; that the Bureau of Internal Revenue (BIR) 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; and that the excess utility payments pertain to expenses related to ATP's registered activity. In reply, please be informed that under Section 2.57 of RR No. 2-98, withholding of creditable withholding tax as prescribed by such regulations shall not apply to income payments made for corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended by Republic Act No. 7916, the Omnibus Investments Code of 1997 and Republic Act No. 7227. RR No. 08-2005 dated February 23, 2005 amended RR No. 2-98 by including among the income payments subject to the creditable withholding tax, payments by Meralco of refunds arising from Supreme Court case G.R. No. 14814 of April 9, 2003 to Customers under Phase IV as approved by Energy Regulatory Commission (ERC), to wit: "SEC. 2. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Income payments subject to creditable tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (U) MERALCO Refund arising from Supreme Court Case G.R. No. 14814 of April 9, 2003 to customers under Phase IV as approved by ERC On gross amount of refund given by MERALCO to Customers with active contracts as classified by MERALCO Twenty Five Percent (25%); To Customers with terminated contracts Thirty Two Percent (32%);" HaEcAC In BIR Ruling No. [DA-245-02] dated December 18, 2002, the Bureau had unequivocally ruled that a PEZA-registered business subject to the preferential tax rate of 5% in lieu of paying local and national taxes, based on its gross income earned within the Ecozone, is exempt from the creditable withholding tax imposed under RR No. 2-98. This rule was recently reiterated in BIR Ruling No. [DA-174-05] issued on April 20, 2005, where the BIR held that "In reply please be informed that Section 2.57.5(B)(2) of R R N o. 2-98 provides, to wit: "Sec. 2.57.5. Exemption from withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: xxx xxx xxx (B) 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) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7 91 6 and the Omnibus Inve stment Co de of 1987; "The aforequoted provision explicitly provides that the creditable withholding tax does not apply to income payments to person enjoying exemption from the payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential treatment under Section 24 of R.A. No. 7 91 6 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." In BIR Ruling [DA-259-05] issued on June 16, 2005 and in BIR Ruling No. [DA-281-2005] dated June 23, 2005, the BIR held that since TNCSI is a PEZA-registered enterprise enjoying preferential tax rate, income payments made to it with respect to its registered activity shall not be subject to 1% expanded withholding tax prescribed in Revenue Regulations No. 2-98, amended. In view of the foregoing and considering that the above excess utility payments pertain to expenses related to ATP's registered activity, the Meralco refund in its favor, therefore, is not subject to the 35% regular corporate income tax, and consequently, to the 25% or 32% withholding tax imposed under RR No. 8-2005. (BIR Ruling No. DA-074-2006 dated March 2, 2006) However, the said refund should be included in its gross income subject to the 5% preferential tax under Republic Act No. 7916. Moreover, in case the above Meralco refund was already subjected to the withholding tax under RR No. 8-2005 during the pendency of your request for a confirmatory ruling, ATP is hereby allowed to credit the same against its 5% gross income tax. 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. STaCcA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service