BIR Ruling [DA-356-06]

June 9, 2006 BIR RULING [DA-356-06] R.R. 8-2005; DA-100-2006; DA-097-2006 Intel Technology Philippines Inc. Gateway Business Park Javalera, General Trias Cavite Attention: Atty. Charlene O. Ang Gentlemen : This refers to your letter dated April 27, 2006 requesting, on behalf of Intel Technology Philippines, Inc. (ITPI), for a confirmation of your opinion that the refund of the excess utility payments to Manila Electric Company (Meralco) which were incurred and paid during the time that ITPI, a Philippine Economic Zone Authority (PEZA)-registered enterprise was enjoying Income Tax Holiday (ITH) 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 ITPI, is a corporation duly organized and existing under Philippine laws; that it is engaged in the assembly and test of microprocessor integrated circuits; that it is a PEZA-registered entity under Certificate of Registration No. 95-133 dated December 18, 1995; that it is enjoying both income tax holiday and 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 , GR No. 141344 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. 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 Reg ulations N o. 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: cCAIDS xxx xxx xxx "(U) MERALCO Refund arising from Supreme Court Case G.R. No. 1 48 14 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%);" 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 R R N o. 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. 7 91 6 and the Omnibus Inve stment Co de 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. 7 91 6, 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 business and enterprises within the ECOZONE shall be remitted to the national government." In BIR Ruling No. DA-259-05 dated June 16, 2005 and 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 ITPI's registered activity, the Meralco refund in its favor, therefore, is not subject to 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service