BIR Ruling [DA-325-06]

May 17, 2006 BIR RULING [DA-325-06] Rev. Regs. No. 8-2005; BIR Ruling No. DA-100-2006 EDS Manufacturing, Inc . 18B Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Ms. Andrea Eleanore L. Malit Manager, Accounting Department Gentlemen : This refers to your letter dated March 20, 2006 requesting for a Certificate of Exemption for purposes of exemption from the 25% expanded withholding tax on refunds from MERALCO pursuant to Revenue Regulations (Rev. Regs.) No. 8-2005 and Revenue Memorandum Order (RMO) No. 22-2005. As represented, EDS Manufacturing, Inc. (EMI) is a PEZA-registered Ecozone Export Enterprise located at the EMI Special Economic Zone. It is registered with the Philippine Economic Zone Authority (PEZA) under Registration Certificate No. 02-066 dated November 25, 2002, to engage in the: (1) manufacture of automotive wire harness and (2) increase in production capacity of its automotive wire harness (expansion project). In reply, please be informed that in BIR Ruling No. DA-100-2006 dated March 9, 2006, this Office ruled that the excess utility payments pertain to expenses related to the registered activity of the PEZA enterprise. Thus, the Meralco refund in favor of the PEZA enterprise is not subject to the 35% regular corporate income tax, and consequently, to the 25% or 32% withholding tax imposed under RR No. 8-2005. However, the said refund should be included in its gross income subject to the 5% preferential tax under Republic Act No. 7916, viz: ". . . under Section 2.57 of RR No. 2-98, withholding of creditable withholding tax as prescribed by such regulations shall not apply to income payments made to corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. No. 226, as amended by Republic Act No. 7916, the Omnibus Investments Code of 1997 and Republic Act No. 7227. RR No. 08-2005 dated February 23, 2005 amended RR No. 2-98 by including among the income payments subject to the creditable withholding tax, payments by Meralco of refunds arising from Supreme Court case G.R. No. 14814 of April 9, 2003 to Customers under Phase IV as approved by Energy Regulatory Commission (ERC), to wit: 'SEC. 2. Income Payments Subject to Creditable Withholding Tax . Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: EaTCSA Section 2.57.2. Income payments subject to creditable tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (U) MERALCO Refund arising from Supreme Court Case G.R. No. 14814 of April 9, 2003 to customers under Phase IV as approved by ERC On gross amount of refund given by MERALCO to Customers with active contracts as classified by MERALCO Twenty Five Percent (25%); To Customers with terminated contracts Thirty Two Percent (32%); xxx xxx xxx' In BIR Ruling No. [DA-245-02] dated December 18, 2002, the Bureau had unequivocally ruled that a PEZA-registered business subject to the preferential tax rate of 5% in lieu of paying local and national taxes, based on its gross income earned within the Ecozone, is exempt from the creditable withholding tax imposed under RR No. 2-98. This rule was recently reiterated in BIR Ruling no. [DA-174-05] issued on April 20, 2005, where the BIR held that 'In reply, please be informed that Section 2.57.5(B)(2) of RR No. 2-98 provides, to wit: Sec. 2.57.5. Exemption from withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: xxx xxx xxx (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx xxx xxx (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987; The aforequoted provision explicitly provides that the creditable withholding tax does not apply to income payments to person enjoying exemption from the payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential treatment under Section 24 of R.A. 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." . . .' In BIR Ruling [DA-259-05] issued on June 16, 2005 and in BIR Ruling No. [DA-281-2005] dated June 23, 2005, the BIR held that 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 withholding tax prescribed in Revenue Regulations No. 2-98, as amended. In view of the foregoing and considering that the above excess utility payments pertain to expenses related to EMI's registered activity, the Meralco refund in its favor, therefore, is not subject to the 35% regular corporate income tax, and consequently to the 25% or 32% withholding tax imposed under RR No. 8-2005. However, the said refund shall be included in its gross income subject to the 5% preferential tax under R.A. No. 7916 Moreover, in case the above Meralco refund was already subjected to the withholding tax under RR No. 8-2005 during the pendency of your request for ruling, EMI is hereby allowed to credit the same against its 5% gross income 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 as null and void. CAcIES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service