BIR Ruling [DA-174-05]

April 20, 2005 BIR RULING [DA-174-05] Sec. 2.57.5 RR 2-98; DA-242-2003 Aichi Forging Company of Asia, Inc. Toyota Sta. Rosa (Laguna)-Special Economic Zone (TOYOTA-SEZ) Attention: Ms. Editha C. Descartin Accounting Manager And Mr. Takashi Nanva EVP-Finance & Treasurer Gentlemen : This refers to your letter dated July 15, 2004 requesting confirmation of your opinion that payments made in favor of Aichi Forging Company of Asia, Inc. ("AFCAI") are exempt from the 1% creditable withholding tax (CWT) pursuant to Section 2.57.5 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 17-2003. It is represented that AFCAI is an ECOZONE Export Enterprises with Philippine Economic Zone Authority (PEZA) Certificate of Registration No. 04-17 dated March 3, 2004; that it is engaged in the following PEZA-registered activities: (1) the manufacture of gorged products, specifically closed impression forging of steel for export, and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise directly, used in its registered operations; and (2) the manufacture of parts for engine and drive train; that among the incentives provided in the Registration Agreement between PEZA and AFCAI for activity No. 1 is that AFCAI is entitled to the 5% gross income tax which is in lieu of national and local taxes pursuant to Section 24 of Republic Act (RA) No. 7916 as amended by R.A. No. 8748; and that on the other hand, for activity No. 2, the PEZA Board granted AFCAI an Income Tax Holiday (ITH) incentive for four (4) years starting June 1, 2004, under the Supplemental Agreement between PEZA and AFCAI. Based on the above, AFCAI would like to confirm the following: 1. Payments to AFCAI by customers for purchases of products under its No. PEZA-registered activity which is covered by the 5% gross income tax regime is exempt from the 1% CWT imposed on regular purchases of goods by Top 10,000 private corporations under Section 2.57.2 (M) of RR No. 2-98 as amended by RR No. 17-2003; and 2. Payments to AFCAI by customers for purchases of products under its No. 2 PEZA-registered activity which is subject to ITH for the first four (4) years starting June 1, 2004 is also exempt from the 1% EWT imposed on regular purchases of goods by Top 10,000 corporations under Section 2.57.2 (M) of RR No. 2-98 as amended by RR No. 17-2003. Subsequently, after the expiration, of the ITH period, the same is still exempt from CWT since such activity will now be covered by the 5% gross income tax. In reply please be informed that Section 2.57.5(B)(2) of RR No. provides, to wit: "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, such as but not limited to the following: xxx xxx xxx (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987;" The aforequoted provision explicitly provides that the creditable withholding tax does not apply to income payments to persons enjoying exemption from the payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of R.A. No. 7916 which provides that "any provision of existing laws, rules and regulations to the contrary notwithstanding, not taxes, local and national shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. HSTCcD Accordingly, since AFCAI is a PEZA-registered enterprise enjoying exemption from national, taxes by virtue of Section 24 of RA 7916 and as well enjoying a four (4) year-ITH, income payments made to it with respect to its registered activities shall not be subject to the 1% creditable withholding tax prescribed in RR No. 2-98, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group