BIR Ruling [DA-254-02]

December 20, 2002 BIR RULING [DA-254-02] RR 2-98; DA-263-98 Siguion Reyna, Montecillo & Ongsiako 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas Makati City Attention: Atty. Cesar P. Manalaysay Atty. Jose Lis C. Leagogo Atty. Michael Felipe A. Mercado Gentlemen : This refers to your letter dated July 16, 2002 requesting for a confirmation of your opinion that since Heraeus Electronic Materials Philippines, Inc. (HEMPI) was granted by the Philippine Economic Zone Authority (PEZA) a pioneer status and a six (6) year Income Tax Holiday incentive commencing on the date of its commercial operation, HEMPI shall continue to be exempt from the payment of creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended. It is represented that HEMPI is a domestic corporation duly organized and existing under Philippine Laws with office address at Gateway Business Park Special Economic Zone (GBP-SEZ) and Certificate of Registration No. 97-026 dated March 21, 1997; that HEMPI is engaged in the manufacture of high grade gold bonding wire and stamped/etched lead frames at GBP-SEZ; that HEMPI was originally granted by PEZA an income tax holiday (ITH) for four (4) years effective on the date of the start of its commercial operations; that on January 1, 1998, HEMPI started its commercial operations; that on October 23, 1999, BIR Ruling No. DA-497-99 was issued stating that: "However, since Heraeus is entitled to an ITH for four (4) years from January 1, 1998, the start of its commercial operation, it is exempt from creditable withholding tax under Section 57(B) of the Tax Code of 1997 and as implemented by Section 2.57.2 of Revenue Regulations No. 2-98." that on December 31, 2001, the four (4) year ITH of HEMPI expired; that on January 31, 2002, the Board of Directors of PEZA passed Resolution No. 02-035 which states: "RESOLVED, That the application of HERAEUS ELECTRONIC MATERIALS PHILIPPINES, INC. (HEMPI) for the grant of PIONEER STATUS to its production of gold bonding wires is hereby APPROVED, subject to the signing of a Supplemental Agreement. RESOLVED FURTHER, That the above-mentioned project shall be entitled to a six-year Income Tax Holiday (ITH) incentive commencing on the date of start of commercial operations in accordance with PEZA's ITH Rules and guidelines. For this purpose, HEMPI shall use separate books of accounts for the 5th and 6th year of the project's Income Tax Holiday (ITH) entitlement. RESOLVED FINALLY, that should HEMPI fail to sign its Supplemental Agreement within thirty (30) days from receipt of this Certificate of Board Resolution without justifiable cause, the same shall be considered revoked or withdrawn without prejudice to the right of the company to file new application." and that on March 25, 2002, PEZA and HEMPI entered into a Supplemental Agreement, where the parties agreed as follows: SDIaHE "1. The REGISTRANT's production of gold bonding wires present at GBP-SEZ is hereby granted PIONEER STATUS." "2. The above-mentioned project shall be entitled to a six (6)-year Income Tax Holiday (ITH) incentive commencing on the date of start of commercial operations in accordance with PEZA ITH rules and regulations. For this purpose, the REGISTRANT shall set up separate books of accounts for the 5th and 6th year of the project's ITH entitlement." In reply, please be informed that Section 24 of R.A. No. 7916 provides: "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. 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. This five percent (5%) shall be shared and distributed as follows: "(a) Three percent (3%) to the national government; "(b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; and "(c) One percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE; . . . Thus, as a business establishment operating within the ECOZONE, HEMPI shall, in lieu of paying local and national taxes, be subject to payment of the preferential rate of 5% based on its gross income earned within the ECOZONE which shall be remitted to the national government. ( BIR Ruling No. DA-263-98 dated June 23, 1998 ) Moreover, considering that HEMPI has been granted by PEZA a pioneer status and of six (6) years ITH incentive commencing on the date of the start of commercial operation pursuant to PEZA Resolution No. 02-035 dated January 31, 2002, HEMPI shall continue to be exempt from the two (2%) percent creditable withholding tax pursuant to Section 2.57.5(B)(2) of Revenue Regulations No. 2-98, as amended by RR No. 6-2001 implementing Section 57(B) of the 1997 Tax Code from January 1, 2002 until December 31, 2003 (the 5th and 6th years, respectively, of its commercial operations). 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