BIR Ruling [DA-394-00]

November 17, 2000 BIR RULING [DA-394-00] RR 2-98, RA 7227 046-95, 155-95 Duty Free Shoppers Inc . 1230 Hormiga cor. Cardona Sts. Brgy. Valenzuela, Makati City Attention: Ms . Shirley F. Santos Comptroller Gentlemen : This refers to your letter dated June 20, 2000 requesting for a ruling that the rental income from the lease of your property inside the Clark Special Economic Zone (CSEZ) is exempt from the 5% creditable withholding tax pursuant to Section 2.57.5 (B) of Revenue Regulations No. 2-98, in relation to Section 5 of Executive Order No. 80 and Section 12 (c) of Republic Act No. 7227, otherwise known as "Bases Conversion and Development Act of 1999". It appears that Duty Free Shoppers. Inc. (PX Club) is a duly registered recognized locator doing business within the Special Economic Zones of Clark and Subic; that you are in the business of duty free shopping since 1993, but the economic turmoil that swept the country did not exempt you from the collapse of various industries; that you resorted to downsizing of your operations particularly at Clarkfield, Angeles, Pampanga; and that in order to sustain your operations, the management decided to sublease the building which your company built in the Clark Development Corporation (CDC) leased properties to another duty free enterprise also a registered locator within the Clarkfield Ecozone. In reply, please be informed that Section 2.57.5(B) of Revenue Regulations No. 2-98, provides that: "Section 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 "(13) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, . . ." Pursuant to Sec. 5 of Executive Order No. 80, authorizing the establishment of the CDC as the implementing arm of the Bases Conversion and Development Authority (BCDA) for CSEZ, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free port Zone under R.A. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments law which may hereafter be enacted. EcHIDT On the other hand, Section 12 (c) of R.A No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992" provides, viz: "The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government unit affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contagious to the base areas. In case of conflict between national and local laws with respect to the exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter. Such being the case, as a CSEZ registered business enterprise, PX Club is exempt from paying the normal income tax. Thus, its lessees are not required to withhold the 5% creditable withholding tax on rental payments for the lease of PX Club's property. However, PX Club shall be liable to the 5% preferential tax rate based on its gross income earned from its registered activity, in lieu of local and national internal revenue taxes. 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