Punongbayan & Araullo

March 4, 2008 BIR RULING [DA-124-08] BIR Ruling No. DA-363-04, DA-151-02 & DA-349-99 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue Makati City Attention: Mr. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated August 23, 2007 requesting on behalf of your client, Suminac Philippines, Inc. ("Suminac" for brevity), for confirmation of your opinion that it has no obligation to withhold expanded withholding taxes on its income payments to Washin Philippines Corporation, the latter being a PEZA-registered entity whose income is subject to the 5% preferential tax rate. As represented, Suminac is a domestic corporation duly organized and existing under the laws of the Philippines with principal office at the FCIE Compound, Brgy. Langkaan, Dasmarias, Cavite and is registered with Philippine Economic Zone Authority (PEZA). Suminac is engaged in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale such goods as forklift frame and components, frame of injection molding machine and other related products or goods of similar nature and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products. On the other hand, Washin Philippines Corporation ("Washin" for brevity) is a domestic corporation organized and existing under the laws of the Philippines and is likewise registered with PEZA. Washin is engaged in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale steel plates, steel products and other steel related goods of similar nature, and any and all equipment, materials, supplies used or employed in or related to the manufacturing of such finished products. HCSDca In relation to its business, Suminac entered into an agreement with Washin whereby the former subcontracted the latter to carry out the cutting process. The cutting process is one of the PEZA-registered activities of Washin, of which the income from such activity is subject to the 5% preferential tax. In reply, please be informed that Section 2.57.5 (B) of Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, is explicit in its provisions that the 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 specific income tax exemption under Section 24 of Republic Act (R.A.) No. 7916, as amended by R.A. No. 8748, otherwise known as the Special Economic Zone Act of 1995 (approved on June 1, 1999) which provides: "SEC. 24. Exemption from National and Local Taxes. Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) Three percent (3%) to the National Government; (b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." In view of the foregoing, this Office confirms your opinion that Suminac has no obligation to withhold expanded withholding taxes on its income payments to Washin since Washin is a PEZA-registered enterprise enjoying exemption from payment of income taxes on income payments received by it in connection with its registered activity. 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. aCITEH Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner