Punongbayan & Araullo

May 19, 2008 BIR RULING [DA-303-08] Rev. Regs. No. 8-2005; DA-516-2006 Punongbayan & Araullo 20th Floor, Tower 1 Enterprise Center 6766 Ayala Avenue, Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated March 17, 2008 requesting in behalf of your client, ON Semiconductor Phils., Inc. formerly SCG Philippines, Incorporated and formerly Motorola Philippines, Inc. ("the Company"). Confirmation of your opinion that the refund that will be received by the Company from Manila Electric Company ("MERALCO" representing excess utility charges from 1995 to 2001, to the extent relating to its activities covered by income tax holiday, is exempt from corporate income tax and consequently from the 25% withholding tax imposed under Revenue Regulations No. 8-2005 and that said portion of the MERALCO refund is not subject to the 5% special tax in the year of receipt. It is represented that ON Semiconductor Phils., Inc. is a domestic corporation registered with the Securities and Exchange Commission in 1978 and is engaged to conduct, carry on, and operate the business of manufacturing, producing, assembling, processing, servicing, importing, exporting, buying, selling, distributing and marketing and/or contract manufacturing, toll manufacturing, or contractor for the manufacture, production, assembly, processing, servicing, import and export, of electronic products and the parts, components and accessories therefore, including specifically semiconductor devices of any type; that in 1993, the Company registered with the Board of Investments the expansion of its production of semiconductor devices; that it was granted a non-pioneer status by the BOI entitling it to an income tax holiday for a period of three (3) years starting 1993 to 1996; that in 1995, the Company registered its production of analog and advanced logic devices with the BOI; that it was again granted pioneer status and ITH for a period of six (6) years starting August, 1995 to July, 2001; that in July, 2007, the Company became PEZA registered and granted the incentives under Republic Act No. 7916; that from then on until the present, the Company is covered by the 5% preferential rate in lieu of all national and local taxes; and that on December, 2005, the Company received a notice from MERALCO regarding the refund approved by the Energy Regulatory Commission in ERC Case No. 2001-243, pursuant to the Supreme Court decision on the Energy Regulatory Board vs. MERALCO case, G.R. No. 141344 dated April 9, 2003, wherein such refund represents the overpayment of electricity charges for the period January 18, 1995 to May 20, 2003. In reply thereto, please be informed that this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA-097-2006 dated March 8, 2006, that "Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments. . . . This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that 'the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue, 47 BTA 590) (Emphasis supplied). When a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. ( Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue, 5 Cir. 70 F 2d 95, 13 AFTR 930). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e. , in a capital deficiency position. . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income." (Emphasis supplied) Later, in BIR Ruling No. DA-516-2006 dated August 25, 2006, this Office in reiterating the above-cited ruling, likewise ruled that "Applying the foregoing in the instant case, and considering that BITCAI is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under Revenue Regulations No. 8-2005. . . ." At this juncture, observation has to be made of the fact that since ON Semiconductor Phils., Inc. was on ITH from August, 1995 to July, 2001, it did not benefit from the utilities expense which it incurred during such period. The receipt of the refund from MERALCO will not give rise to a taxable transaction, as ON Semiconductor Phils., Inc. did not receive anything of exchangeable value from it. SUCH BEING THE CASE, this Office hereby confirms your opinion that the refund related to the excess utility charges for the period from August, 1995 to July, 2001 which ON Semiconductor Phils., Inc. will receive from MERALCO is not a taxable event and therefore NOT subject, to income tax, and consequently, to the withholding tax. 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