Nittetsu Micrometal Corporation Philippines

June 25, 2007 BIR RULING [DA-350-07] R.R. 8-2005 DA-100-2006; DA-097-2006 Nittetsu Micrometal Corporation Philippines First Philippine Industrial Park Brgy. Sta. Anastacia, Sto. Tomas Batangas Attention: Mr. Yoshikazu Izumihara Gentlemen : This refers to your letter dated January 19, 2007 requesting confirmation of your opinion that the refund of the excess utility payments to Manila Electric Company (Meralco) which were incurred and paid by Nittetsu Micrometal Corporation Philippines (NMCP), a Philippine Economic Zone Authority (PEZA)-registered enterprise is exempt from corporate income tax and consequently, from the 25% withholding tax imposed under Revenue Regulations (RR) No. 8-2005, or the gross income tax under Republic Act No. 7916, otherwise known as the "Special Economic Zone Act of 1995." It is represented that NMCP is a corporation duly organized and existing under Philippine laws; that it is engaged in the manufacture of gold bonding wires; that it is a PEZA-registered entity under Certificate of Registration No. 00-096 dated November 27, 2000; that it is enjoying the five percent (5%) preferential tax rate in lieu of all national and local taxes pursuant to the provisions of R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995; that in 2003, the Supreme Court ordered MERALCO to refund to its customers excess utility payments made to them in the case of Republic of the Philippines, as represented by Energy Regulatory Board vs. MERALCO , G.R. No. 141314 dated April 9, 2003; and that in relation to this, the Bureau of Internal Revenue (BIR) ordered MERALCO through Revenue Regulations No. 8-2005, to withhold the 25% creditable income tax on refunds due to industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts. ESTcIA In reply, please be informed that 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 for 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. 226, as amended by Republic Act No. 7916, the Omnibus Investments Code of 1997 and Republic Act No. 7227. Revenue Regulations 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: 'Sec. 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%);" SDITAC In BIR Ruling No. DA-245-02 dated December 18, 2002, this 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 ruling was recently reiterated in BIR Ruling No. DA-174-05 issued on April 20, 2005 and 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; CcAHEI "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 No. DA-259-05 dated 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, amended. In view of the foregoing and considering that the above excess utility payments pertain to expenses related to NMCP'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. (BIR Ruling No. DA-074-2006 dated March 2, 2006) Furthermore, the said refund is not subject to the 5% preferential tax under Republic Act No. 7916. 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. ACIDSc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service