BIR Ruling [DA-132-01]

July 26, 2001 BIR RULING [DA-132-01] RR 2-98, RA 7227 DA-394-2000; DA-054-98 Philexcel Industrial Park, Inc . 1961st Area M. Roxas Highway Clark Special Economic Zone Pampanga Attention: Mr . Ian Packham General Manager Gentlemen : This refers to your letter dated August 30, 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 Philexcel Industrial Park, Inc. (formerly Philexcel Textiles, Inc. and Philexcel, for brevity) is a duly registered CSEZ enterprise, and has committed to engage in: 1) Medium and Light Manufacturing; 2) Warehousing and Distribution; 3) Business Offices; 4) Administration and Other Support Facilities 5) Facilities for eating, medical and recreational services which raise the well being of workers; and 6) Other related business activities located at M.A. Roxas Highway, CSEZ, Clark Field, Pampanga; that Philexcel holds a 52 hectare property for fifty-years in the CSEZ, pursuant to a Lease Agreement with the Clark Development Corporation (CDC); that the original land area covered by the aforesaid contract was reduced by 2.8432 hectares for the Perimeter Road as surveyed and approved and 5.2 hectares which was assigned to Berthaphil, Inc. by virtue of a Partial Assignment of Lease executed with the above-mentioned corporation on February 3, 1999; that your business plan is to construct speculative buildings and lease it out to locators mostly for light manufacturing and warehousing requirements; that you have constructed over 30 units totalling 42,000 sq. m.; that the locators presently subleasing portions of your leased property withhold 5% on 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 law 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, Philexcel 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 Philexcel's property. However, Philexcel 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