Fujitsu Computer Products Corporation of the Philippines

March 21, 2007 BIR RULING [DA-167-07] R.A. 7916; R.R. 8-2005; DA-097-2006 Fujitsu Computer Products Corporation of the Philippines Special Export Processing Zone, Camelray Industrial Park Canlubang, Calamba City, Laguna Attention: Ms. Ma. Socorro A. Silva Director, Finance & Accounting Gentlemen : This refers to your letter dated May 18, 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 Fujitsu Computer Products Corporation of the Philippines (Fujitsu), is a corporation duly organized and existing under Philippine laws; that it is a PEZA registered entity (PEZA Registration No. 95-35) which was granted an ITH for six (6) years and an additional one year; that it was granted another four (4) years of ITH due to the new technology employed on its improved product line and an additional investment made pursuant to PEZA-ERD Form No. 03-01 and Certificate No. 2006-197 dated January 11, 2006; that after the expiration of its ITH, it will be exempt from national and local taxes and, in lieu thereof, it will be subject to the five percent (5%) tax pursuant to the provisions or R.A. No. 7916; that Fujitsu is one of Meralco's industrial customers; that in Republic of the Philippines, represented by Energy Regulatory Board vs. Manila Electric Company , G.R. No. 14134 dated April 9, 2003, the Supreme Court ordered Meralco to refund to its customers excess payments made; that the Bureau of Internal Revenue had ordered Meralco, through Revenue Regulations No. 8-2005, to withhold a 25% creditable withholding tax on refunds due to industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts; that since Fujitsu is one of Meralco's customers, it was entitled to the refund covering the period from January 2, 1996 to May 2, 2003; and that since Fujitsu incurred and paid excess utility payments during the time it was on ITH, then it is exempt from the 25% or 32% withholding tax imposed by Revenue Regulations No. 8-2005 and the 5% gross income tax on Meralco refund arising from the Supreme Court ruling. 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. DCAHcT Moreover, since the excess utility payments pertain to expenses related to Fujitsu's registered activity, then the refund, which will be received by Fujitsu, 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 Fujitsu was on ITH. Consequently, Fujitsu will not have any tax benefit from the refund of said utility payments because Fujitsu did not claim the utility payments as a deductible expense inasmuch as it was enjoying an income tax holiday. In sum, the Meralco refund to Fujitsu 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 Fujitsu 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