BIR Ruling [DA-226-06]

April 10, 2006 BIR RULING [DA-226-06] R.A. 7916; R.R. 8-2005; DA-097-2006 dtd 3/8/06 PSI Technologies, Inc. FTI Special Economic Zone Electronics Avenue, Taguig Metro Manila Attention: Thelma G. Oribello SVP-Chief Finance Officer Gentlemen : This refers to your undated letter, requesting a ruling to the effect that the refund of the excess utility payments which were incurred and paid by PSI Technologies, Inc., being a PEZA-registered enterprise, is exempt from the 32% regular corporate income tax, and consequently, from the withholding tax imposed under Revenue Regulations (RR) No. 8-2005, or the 5% gross income tax under Republic Act (RA) No. 7916, otherwise known as the "Special Economic Zone Act of 1995." It is represented that PSI Technologies, Inc. is a corporation duly organized and existing under the laws of the Philippines; that it is a PEZA-registered enterprise operating at the FTI Special Economic Zone; that it provides comprehensive package design, assembly and test services for power semiconductors used in computers, consumer electronics, automotive systems and industrial products; that it is further disclosed in the Certification No. 2006-070 issued by PEZA that PSI Technologies, Inc. was granted an income tax holiday; that it has been existing as a juridical entity since January 28, 1988; that it is one of Manila Electric Company's (Meralco) industrial customers; that in the case of Republic of the Philippines, represented by Energy Regulatory Board vs. Manila Electric Company, G.R. No. 141314, April 9, 2003 , the Supreme Court ordered Meralco to refund to its customers excess payments made; that the Bureau of Internal Revenue (BIR) had ordered Meralco, through RR No. 8-2005 to withhold a 25% creditable income tax on refunds due to industrial and commercial customers with active accounts; that as one of Meralco's customers, pursuant to the Supreme Court's decision, PSI Technologies, Inc., being a PEZA-registered enterprise is entitled to a refund of excess utility payments. 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 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, no 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." Moreover, since the excess utility payments pertain to expenses related to PSI Technologies' registered activity, then the refund which will be received by PSI Technologies is not subject to the 32% regular corporate income tax nor to the 5% gross income tax because the refund pertains to the excess utility payments made during the period when PSI Technologies was on an ITH. In sum, the Meralco refund to PSI Technologies 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 when PSI Technologies was on an ITH, is exempt from the 32% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under RR No. 8-2005. Moreover, it is not subject to the 5% gross income tax under R.A. No. 7916. ( 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.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service