BIR Ruling [DA-418-06]

July 7, 2006 BIR RULING [DA-418-06] RR No. 8-2005; DA-097-2006 SGV & Co . 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan-Torres Partner, Tax Services Gentlemen : This refers to the letter of your client, Samsung Electro-Mechanics Philippines Corporation ( Semphil for brevity), dated March 20, 2006 and your supplemental letter dated June 7, 2006 requesting for confirmation that the refund of excess electric utility payments by the Manila Electric Company (Meralco) to Semphil is exempt from the 25% withholding tax imposed under Revenue Regulations (Rev. Regs.) No. 8-2005, the 35% regular corporate income tax and the 5% tax on gross income under Republic Act (RA) No. 7916, otherwise known as the "Special Economic Zone Act of 1995." aDACcH It is represented that Semphil is a duly registered corporation with the Securities and Exchange Commission under Registration No. A1997-14224 dated July 31, 1997. It is also registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under Registration No. 97-074 dated October 16, 1997. Its primary purpose is to engage in the 1) manufacture of multi-layer chip capacitor and thick film chip resistor; 2) manufacture of micro-chip tantalum capacitor; 3) manufacture of crystal oscillator; and 4) trading and distribution of Samsung electronic parts and components for various electronic and communication devices to PEZA-registered export enterprises at Calamba Premier International Park in Calamba, Laguna. In October 1997, it was granted an income tax holiday (ITH) for an initial period of six (6) years for pioneer project and four (4) years for non-pioneer project effective at the start of its commercial operations plus a qualifying extension of two years pursuant to RA No. 7916. In August 2005, Semphil's six-year ITH for the pioneer projects was extended by a year or up to January 31, 2007, as its original ITH for the first and second registered activities had already lapsed in January 2006. The ITH for the third registered activity will lapse on March 31, 2007. On April 9, 2003, the Supreme Court, in G.R. No. 141314 ordered Meralco to refund to its customers excess payments that were collected since 1994. The BIR has required Meralco, through Rev. Regs. No. 8-2005, to withhold a 25% creditable income tax on refunds due to industrial and commercial users with active accounts. Being one of Meralco's customers, Semphil is entitled to be refunded its excess electric utility payments. In support of your request, you submitted the following documents: 1. Copy of the Company's certificate of registration with the Securities and Exchange Commission (SEC); 2. Copy of PEZA Certificate of Registration No. 97-074; and 3. Copy of the certified list of incentives that PEZA granted Semphil. In reply, please be informed as follows: Section 2.57.5(B)(2) of RR No. 2-98, as amended, provides: "Sec. 2.57.5. Exemption from withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments 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 under Republic Act 7916 and the Omnibus Investment Code of 1987; . . . ." The afore-quoted 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 provision of any law, general or special. PEZA-registered enterprises are granted certain preferential treatment under Section 24 of RA 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. aEHTSc Consequently, the expanded withholding tax prescribed by Rev. Regs. No. 8-2005 does not apply to income payments to juridical enjoying ITH (BIR Ruling No. DA-074-2006 dated March 9, 2006, BIR Ruling No. DA-174-05 dated April 20, 2005 and BIR Ruling No. DA-245-02 dated December 18, 2002). It does not apply to income payments made to corporations duly registered with. PEZA enjoying exemption from income tax pursuant to Executive Order No. 226, as amended by RA No. 7916, and Republic Act No. 7227. Since the excess utility payments pertain to expenses related to Semphil's registered activity, then the refund which will be received by Semphil incurred and paid during the time when Semphil was entitled to the ITH is not subject to the 35% regular income tax, and consequently, to the 25% or 32% withholding tax imposed under Rev. Regs. No. 8-2005. (BIR Ruling No. DA-074-2006 dated March 2, 2006) Moreover, if the said refund should be released after the expiration of Semphil's ITH in January 2007, the amount refunded will not be included in its gross income subject to the 5% preferential tax under RA No. 7916. Semphil will not have any tax benefit from the refund of the excess utility payments because it could not claim the same as deductions at the time said payments were incurred. (BIR Ruling No. DA-097-2006 dated March 8, 2006 and DA-100-2006 dated March 9, 2006) 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