BIR Ruling [DA-295-06]

May 3, 2006 BIR RULING [DA-295-06] RA 7916; RR No. 8-2005; DA-097-2006 SGV & Co . 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan-Torres Partner, Tax Services Gentlemen : This refers to your letter dated April 24, 2006 requesting on behalf of your client, Analog Devices Gen. Trias, Inc . (ADGT), for a confirmation of your opinion that income payments to the company are exempt from the expanded withholding tax prescribed under Revenue Regulations (RR) No. 2-98, as amended, and that the refund of excess utility payments by the Manila Electric Company (Meralco) to ADGT which were incurred and paid during the time when ADGT was entitled to the income tax holiday (ITH) and later, to the 5% tax on gross income, is exempt from the 25% withholding tax imposed under RR No. 8-2005 and from the 5% tax on gross income under RA 7916, otherwise known as the "Special Economic Zone Act of 1995". The facts of the case as represented are as follows: ADGT is a duly registered corporation with the Securities and Exchange Commission under registration No. 009031 dated September 13, 1995. ADGT is likewise registered with the Philippine Economic Zone Authority (PEZA) on December 8, 1995 as an Ecozone Export Enterprise under Registration No. 95-117 to engage in the manufacture, assembly and testing of semiconductor devices and inspection of dice and production of integrated circuits at Gateway Business Park Special Economic Zone in Javalera, General Trias, Cavite. TAIESD In 1995, it was granted an income tax holiday (ITH) for an initial period of four (4) years plus a qualifying extension of three years or up to the year 2003. After the lapse of its ITH, it was granted a 5% preferential tax rate based on its gross income "in lieu of all national and local taxes" pursuant to Section 24 of Republic Act No. 7916 or the Special Economic Zone Act of 1995 and Rule XX of its implementing rules and regulations. Pursuant to RR No. 14-2002, which amended pertinent provisions of RR No. 2-98, the income payments to PEZA-registered enterprises under the 5% gross income tax incentive are exempt from the expanded withholding tax. On April 9, 2003, the Supreme Court, in G.R. No. 141314 ordered Meralco to refund to its customers excess payments that were collected since 1994. The BIR has required Meralco, through RR No. 8-2005, to withhold a 25% creditable income tax on refunds due to industrial and commercial users with active accounts. Being one of Meralco's customers, ADGT is entitled to the refund of its excess utility payments. In support of your request, you submitted the following documents: 1. Copy of the Company's Securities and Exchange Commission (SEC) registration and bylaws; 2. Copy of PEZA certificate of registration; and 3. Copy of PEZA certification granting Analog a four-year income tax holiday and a three-year extension. In reply, please be informed that PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of RA 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 economic zone. 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. The exemption from the payment of national internal revenue taxes under Section 24 of RA No. 7916 is recapitulated in Section 1(A), Rule XIV of the Rules and Regulations to Implement R.A. No. 7916 and implemented through RR No. 12-97. Moreover, Section 2.57.5 (B)(2) of RR No. 2-98, as amended, provides that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment income taxes pursuant to the provisions of any law, general or special. (BIR Ruling No. DA-074-2006 dated March 8, 2006, BIR Ruling No. DA-174-05 dated April 20, 2005 and BIR Ruling No. DA-245-02 dated December 18, 2002) The exemption of PEZA-registered enterprises is further amplified in RR No. 14-2002 by providing that income payments to PEZA-registered enterprises under the 5% gross income tax incentive are exempt from being subjected to the expanded withholding tax. Based on the foregoing, the Meralco refund which will be received by ADGT is therefore exempt from the 25% or 32% withholding tax imposed under RR No. 8-2005 and is not subject to the 32% regular corporate income tax. Moreover, since the said excess utility payments pertain to expenses related to its registered activity and were incurred and paid during the time when ADGT was entitled to the ITH, the refund thereof is not subject to the 5% gross income tax imposed under R.A. No. 7916. ADGT will not have any tax benefit from the refund of said excess utility payments because it could not claim the same as deductions. (BIR Ruling Nos. DA-097-2006 dated March 8, 2006 and DA-100-2006 dated March 9, 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