BIR Ruling [DA-302-04]

June 1, 2004 BIR RULING [DA-302-04] Sec. 29; 024-01 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Francisco G. Tagao Principal, Tax & Corporate Services and Charlene O. Ang Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated March 1, 2002 stating that your client, McConnell Dowell Philippines, Inc. (McConnell) is a corporation duly organized and existing under Philippine laws; that it is a subcontractor of Shell Philippines Exploration BV (SPEX), a petroleum service contractor of the Philippine Government pursuant to the Oil Exploration and Development Act of 1972 (P.D. No. 87, as amended); that as such subcontractor, it is subject to a final income tax equivalent to eight percent (8%) of its gross income derived from petroleum operations which is in lieu of any and all taxes, national or local, pursuant to the provisions of Presidential Decree No. 1354; and that since it is subject to the 8% final income tax on its subcontract jobs, it does not pay the 32% normal corporate income tax on such subcontracts. Based on the foregoing representations, you now request confirmation of your opinion that the income derived by McConnell from petroleum subcontracting operations subject to the 8% final tax under P.D. No. 1354 is in lieu of all taxes, and, therefore, exempt from the improperly accumulated earnings tax imposed under Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001. In reply thereto, please be informed that Section 1 of P.D. No. 1354 provides that "Sec. 1. Tax on subcontractors . Every subcontractor, whether domestic or foreign, entering into a contract with a services contractor engaged in petroleum operation in the Philippines shall be subject to a final income tax equivalent to eight percent (8%) of its gross income derived from such contracts, such tax to be in lieu of any and all taxes, whether national or local. Provided , however , that any income received from all other sources within and without the Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign subcontractors shall be subject to regular income tax imposed under the National Internal Revenue Code. The term "gross income" means all income earned or received as a result of the contract entered into by the subcontractor with a service contractor engaged in petroleum operation in the Philippines under Presidential Decree No. 87." The Improperly Accumulated Earnings Tax (IAET) of 10% is in addition to other taxes imposed by Title II of the Tax Code for each taxable year. However, Section 4(g) of Revenue Regulations No. 2-2001 provides for the exception, wherein IAET shall not be made applicable, in cases where the corporation is entitled to a preferential tax rate or regime or because of the in lieu of all taxes proviso .In the latter case, this has already been clarified by the Court of Tax Appeals in the case of Davao Light and Power Company, Inc. v. CIR , CTA Case No. 5413 dated August 7, 1998 where the CTA has adopted the definition of the phrase "in lieu of any and all taxes" as follows: "The phrase "in lieu of" means instead of in a place of; or in substitution for ( Black v. Barnes ,46 P. 2d 625, 626, 142 Kan. 361; Rutherland v. Oroville-Wyandotte Irr. Dist .,22 P. 2d 505, 218 Cal. 242; Words and Phrases, Vol. 21, p. 427).It does not mean "in addition to" ( Glassman Const. Co. v. Baltimore Brick Co. ,246 Md. 478, 228 A. 2d 472, 474, Black's Law Dictionary, 6th ed.,1990, p. 787).The "in lieu of" implies the existence of something for which a substitution is being made. Thus, the "in lieu of all other taxes" means that none other than the tax specified however described can be demanded. It limits the liability to the specific tax. ( State of Tennessee v. Bank of Commerce ,53 p. 735, 736, Words and Phrases, Vol. 21, p. 474) Considering that McConnell is deriving income from petroleum subcontracting operations under P.D. 1354 which is subject to the 8% final withholding tax on its gross income earned in lieu of any and all other taxes, whether national or local, McConnell is in the same category as the above enterprises mentioned in Section 4(g) of Revenue Regulations No. 2-2001 which are excluded from the imposition of the 10% IAET prescribed in Section 29 of the Tax Code of 1997. Accordingly, McConnel is not subject to the 10% IAET imposed under Section 29 of the Tax Code of 1997. ( BIR Ruling No. 024-01 dated June 13, 2001 ) It shall be understood however, that the exemption from the 10% IAET shall be limited only to income derived from petroleum subcontracting operations under P.D. No. 1354. Income earned by McConnell from sources other than petroleum subcontracting operations shall be subject to the normal income tax rate of 32% or 2% MCIT, as the case may be, and likewise to IAET. IDTHcA 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group