Luzon Electronics Technology, Inc.

March 2, 2007 BIR RULING [DA-135-07] Rev. Regulations No. 17-2003, DA-097-2006 Luzon Electronics Technology, Inc. Special Export Processing Zone, Gateway Business Park, Javalera, Gen. Trias, Cavite Attention: Ms. Luz Cuyco Finance Manager Gentlemen : This refers to your letter dated June 23, 2006 requesting for a confirmation that the refund of the excess utility payments which were incurred and paid during the time a PEZA-registered enterprise was on Income Tax Holiday (ITH) is exempt from the 35% regular income tax, and consequently, from the withholding tax imposed under Revenue Regulations No. 8-2005, or the 5% gross income tax under Republic Act (R.A.) No. 7916, otherwise known as the "Special Economic Zone Act of 1995." It is represented that Luzon Electronics Technology, Inc. is a PEZA-registered company with PEZA Certificate No. 98-121 located at SEPZ Gateway Business Park, Javalera, General Trias, Cavite; that you received from Meralco a notice of refund for Phase IV commercial and industrial customers on their excess utility billing and collection for the period on which you were on income tax holiday; and that you opine that you enjoy exemption from withholding tax pursuant to Revenue Regulations No. 2-98. In reply, please be informed that Section 2.57.5 (B) (2) of RR No. 2-98, as amended by RR Nos. 3-2004 and 8-2005, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of R.A. No. 7916, as amended, 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, three percent (3%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government and two percent (2%) to the municipality or city where the enterprise is located. Moreover, since the excess utility payments pertain to expenses related to Luzon Electronics Technology, Inc.'s registered activity, then the refund, which will be received by Luzon Electronics Technology, Inc., is not subject to the 35% regular corporate income tax nor to the 5% gross income tax because the refund pertains to excess utility payments made during the period when Luzon Electronics Technology, Inc. was on ITH. Consequently, it will not have any tax benefit from the refund of said utility payments because Luzon Electronics Technology, Inc. did not claim the utility payments as a deductible expense inasmuch as it was enjoying an income tax holiday. CHTAIc In sum, the Meralco refund to Luzon Electronics Technology, Inc. arising from the Supreme Court case with G.R. No. 141314 dated April 9, 2003 of the excess utility payments which were incurred and paid during the time it was on ITH, is exempt from the 35% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under RR No. 8-2005. (BIR Ruling No. DA-074-2006 dated March 2, 2006) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service