BIR Ruling [DA-381-00]

November 7, 2000 BIR RULING [DA-381-00] RR 2-98 349-99 Fernandez, Santos & Lopez Law Offices 8th Floor, Philbank Building 6778 Ayala Avenue 1226 Makati City Attention: Mr. Carlos G. Zulueta Gentlemen : This refers to your letter dated January 25, 2000 requesting for a ruling in behalf of your client, Globetronics Philippines Manufacturing, Inc. (GPMI) to the effect that GPMI is not subject to any income tax under its income tax holiday incentive. ECcDAH It is represented that GPMI is a domestic corporation registered with the Philippine Economic Zone Authority under PEZA Certificate of Registration No. 98-061, having been granted and enjoying,, among others, an income tax holiday incentive effective for four (4) years commencing from October 21, 1998; that as an ECOZONE enterprise enjoying ITH incentive, it is not be subject to any income tax, including withholding taxes, as long as its registration as a PEZA ECOZONE enterprise remains effective and valid; that one of GPMI's customers is Intel Technology Phils., Inc. (Intel), a domestic corporation situated at Gateway Business Park, Javalera, Gen. Trias, Cavite; that when Intel pays GPMI for the latter's billing for the sale/supply of goods, Intel deducts from its payment to GPMI a withholding tax of 1% pursuant to Section 2.57.2(M) of Revenue Regulations No. 2-98; that it is your position that GPMI is a PEZA-registered ECOZONE enterprise with an effective ITH incentive and to subject the income payments to the 1% withholding tax would render its ITH incentive inutile or useless; that you have secured from the PEZA, a ruling to the effect that RR 2-98 does not apply to income payments made to a PEZA-registered enterprise; and that Intel countered that the Bureau of Internal Revenue is still enforcing the administrative requirement of securing a Tax Exemption Certificate (TEC) in effect Intel is saying that it would continue to deduct and withhold the 1% tax on any payments to GPMI inspite of the PEZA ruling. In reply, please be informed that Section 2.57.5(B) of Revenue Regulations No. 2-98 is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. PEZA registered enterprises enjoy exemption from payment of income taxes pursuant to the provisions of Section 39(a)(1) of the Omnibus Investment Code of 1987, such as the income tax holiday. Likewise, PEZA registered enterprises are granted certain preferential tax treatment under Section 24 of Republic Act 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. . . ." HEDSCc Such being the case, GMPI is exempt from the 1% withholding tax on income payments made by the top five thousand corporations. Accordingly, since GMPI is a PEZA registered enterprise still enjoying its ITH incentive and enjoying certain preferential tax treatment, all payments received by it from its customers, whether ecozone registered or customs territory enterprises are exempt from the withholding tax. (BIR Ruling No. DA 349-99 dated June 16, 1999) 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group