BIR Ruling [DA-131-01]

July 26, 2001 BIR RULING [DA-131-01] RR 2-98, RA 7227 DA-394-200; DA-054-98 Berthaphil, Inc . Berthaphil Compound, Jose Abad Santos Avenue Clark Special Economic Zone Clarkfield, Pampanga Attention: Ms . Elizabeth M . Castro President/General Manager Gentlemen : This refers to your letter dated September 14, 2000 requesting for a ruling that the rental income from the lease of your property inside the Clark Special Economic Zone (CSEZ) is exempt from the 5% creditable withholding tax. Documents submitted disclosed that Berthaphil, Inc. (Berthaphil) is a duly registered CSEZ enterprise committed to engage in industrial park development within the CSEZ; that Philexcel Industrial Park, Inc. (Philexcel), an entity which is likewise a duly registered CSEZ enterprise and which holds a Lease Agreement with the Clark Development Corporation (CDC), in a Partial Assignment of Lease executed on February 3, 1999, assigned and ceded for good and valuable consideration a portion of its leased property containing an area of 4.75149 hectares to Berthaphil; that all the terms and conditions in Philexcel's Contract of Lease with CDC are deemed incorporated as integral part of the aforestated Partial Assignment of Lease; that your business plan is to construct buildings and lease them out to locators mostly engaged in manufacturing and warehousing activities; that so far you have constructed ten (10) units which are all currently occupied; that the locators leasing the said units withhold 5% from their gross rental payments to you; and that it is your position that the rental income from the lease of your property inside the CSEZ is exempt from the 5% creditable withholding tax. In reply, please be informed that Section 2.57.5(B) of Revenue Regulations No. 2-98, provides that: "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, . . . " Pursuant to Sec. 5 of Executive Order No. 80 authorizing the establishment of the CDC as the implementing arm of the Bases Conversion and Development Authority (BCDA) for CSEZ, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under R.A. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereafter be enacted. On the other hand, Section 12 (c) of R.A. No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992" provides, viz: "The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government unit affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter. Such being the case, as a CSEZ registered business enterprise, Berthaphil, Inc. is exempt from paying the regular income tax. Thus, its lessees are not required to withhold the 5% creditable withholding tax on rental payments for the lease of Berthaphil Inc.'s property. However, Berthaphil, Inc. shall be liable to the 5% preferential tax rate based on its gross income earned from its registered activity, in lieu of local and national internal revenue taxes. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group