BIR Ruling [DA-120-05]

April 6, 2005 BIR RULING [DA-120-05] DA-348-2003 dtd 10/9/03 Daiwa Seiko Phils Corp . Lots 8 & 9, Block 5, Star Avenue Laguna International Industrial Park Mamplasan, Bian, Laguna Attention: Mr. Shogo Yoshida General Manager Administration Gentlemen : This refers to your letter dated October 11, 2004, in connection with your request for exemption on the 1% creditable withholding tax being deducted by your customers belonging to the top 5,000 corporations pursuant to Revenue Regulations 17-2003. It could be ascertained from the documents submitted that DAIWA SEIKO (Daiwa for short) is a PEZA-registered company, with Registration Certificate No. 95-104 dated October 4, 1995; that it has the following registered activities, (1) manufacture of motor vehicle transmission parts; and (2) manufacture and assembly of automotive transmission parts and machining of motorcycle necessary parts, namely Boss pedal gear change; that your office is located at Laguna International and Industrial Park (LIIP), Mamplasan, Bian, Laguna and was issued an ISO 9001-2000 Certification last September 1, 2003; that your Income Tax Holiday (ITH) had lapsed last August 2000, and that consequently, you became subject to 5% special tax on gross income in lieu of all taxes; that on October 16, 2003, the Revenue District Officer of San Pedro, Laguna, invited taxpayers, for a "DIALOGUE" among different locators in Laguna; that you raised the following questions for clarifications, to wit: 1. "After the lapse of the ITH, are we still exempt from the 1% Creditable Withholding Tax being deducted by the companies belonging to the top 5000 top corporation in every sale we have or in every payment they make?" 2. "How about the Franchise Tax imposed or charged by Manila Electric Company (MERALCO) for the companies who are subjected to 5% Special Tax on gross income (like DSPC)?" In reply, please be informed as follows: (1) Since your income tax holiday (ITH) had already lapsed in year 2000 you are now subject to the 5% preferential tax rate, in lieu of all internal revenue taxes, local and national, pursuant to the provisions of R.A. No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995." R.A. 7916 is a special law which grants exemptions from payment of national taxes to PEZA-registered business establishments operating within the Ecozone, except payment of the preferential tax rate of 5% on the gross income earned. Likewise, pursuant to Section 24, R.A. No. 7916, as amended by R.A. No. 8748, and as implemented by Revenue Regulations No. 1-2000, promulgated on November 12, 1999, 3% of the 5% special tax shall be remitted directly to the BIR while remaining 2% thereof shall be paid directly to the concerned City or Municipality where the enterprise is located (DA-348-2003 dtd Oct. 9, 2003). Accordingly, pursuant to Sec. 2 of Revenue Regulations No. 1-2000, as a PEZA-registered enterprise, DAIWA SEIKO is liable to the 5% preferential tax on gross income earned, in lieu of all internal revenue taxes, national or local. DAIWA SEIKO is thus still exempt from the 1% CWT deducted by the top 5,000 corporations. AIECSD (2) With regard to PEZA registered enterprises being recipients of the amount passed on by MERALCO or other electric utilities as franchise tax, this Office opines that they cannot invoke exemption from payment thereof. The 5% preferential tax rate based on the gross income earned by PEZA registered enterprises is limited to the exemption from payment of other national internal revenue taxes for which they are directly liable to pay. The 2% franchise tax imposed on electric utilities is not the direct liability of Ecozone enterprises. It is specifically imposed on MERALCO and other electric utilities for operating a business and is merely passed on to PEZA registered enterprises. The 2% franchise tax just like other business tax (or percentage tax) is an indirect tax which is being assessed and collected from a franchise grantee or seller of services. Since, it is an indirect tax, the grantee who is the seller of the goods or services may pass on the amount of tax to the buyer. In short, it is the end-user/buyer who pays the amount not as a tax but as part of the cost of the goods or services purchased. Finally, unlike the value-added tax system where the input tax can be credited against the output tax, and refunds or tax credits of the input tax attributable to zero rated sales are allowed, Title V of the Tax Code of 1997 under which franchise taxes fall does not have this mechanism of crediting the taxes passed on (input) against the buyer's tax liability (output). The 2% franchise tax is imposed outright on the gross receipts of electric utilities without allowance for offsetting of any input taxes that may have passed on to it. Thus, while the 2% franchise tax passed on by MERALCO to PEZA-registered enterprises is a national internal revenue tax, the same cannot be credited against the tax liability of the buyer/user of the service who is subject to a preferential tax rate. As PEZA-registered enterprise, DAIWA SEIKO is exempt only from payment of internal revenue taxes on their gross income derived from their operations by paying the 5% preferential tax rate. Finally, it was never contemplated by RA 7916, as amended by RA 8748 to exempt PEZA registered enterprises from indirect taxes the payment of which lie primarily with the seller of goods or services. 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. aCHDAE Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group