BIR Ruling [DA-281-05]

June 23, 2005 BIR RULING [DA-281-05] RR 2-98; DA-349-99 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: R.C. Vinzon Gentlemen : This refers to your letter dated December 28, 2004 requesting on behalf of your client NEC Toppan Circuit Solutions, Inc. (TNCSI), for a confirmation of your opinion that a PEZA registered enterprise enjoying the preferential tax rate of 5% in lieu of paying all national and local taxes is exempt from withholding taxes under Revenue Regulations No. 2-98 and 17-03. It is represented that TNCSI is a corporation duly organized and existing under Philippine laws; that TNCSI is engaged in the business of designing, engineering, manufacturing, importing, buying and selling on wholesale or otherwise dealing in electronic components including but not limited to, printed wiring board; that the company is registered with the Philippine Economic Zone Authority (PEZA) pursuant to the provisions of Republic Act No. 7916, as an Ecozone Export Enterprise particularly engaged in the manufacture of electric components at the Light Industry and Science Park; that under said registration, TNCSI currently enjoys the preferential tax rate of 5% on gross income in lieu of the payment of all national and local taxes; that as already established by this office, such exemption from other taxes includes withholding taxes; that however, one of its clients, P. Imes Corporation, being certified as a top 10,000 corporation required to withhold 1% from its payments to its suppliers of goods pursuant to Revenue Regulations No. 17-2003, continues to withhold said amount from its payments to TNCSI; that TNCSI on an annual basis secures a certification from the PEZA stating that it is a bonafide PEZA-registered establishment entitled to the 5% special tax on gross income as required by Revenue Regulations No. 1-2000; that said certification was presented to P. Imes Corporation; that P. Imes however insists on withholding the 1% from its payment to TNCSI, using as basis, a letter prepared by the Bureau of Internal Revenue Region 9 dated October 12, 2004 and signed by Acting Regional Director Merlinda L. Ordoyo; that said letter advised P. Imes Corporation to withhold 1% from its payments to its suppliers of goods except when such supplier presents the appropriate exemption certificate from the Bureau. In reply, please be informed that Section 2.57.5(B)(2) of Revenue Regulations No. 2-98, as amended, 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 Republic Act 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. Accordingly, since TNCSI is a PEZA-registered enterprise enjoying preferential tax rate, income payments made to it with respect to its registered activity shall not be subject to 1% expanded creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended. (BIR Ruling No. DA-349-99 dated June 16, 1999) SDITAC 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