BIR Ruling [DA-433-06]

July 19, 2006 BIR RULING [DA-433-06] R.R. 2-98; DA 094-2003 Fernandez Aguja Law Firm CPA-Lawyers Suite 5F JL Building Don Jose Avila Gil Garcia Streets Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated June 20, 2006 requesting, on behalf of your client Lexmark Research & Development Corp. (LRDC), for confirmation that its payments to PEZA registered enterprise enjoying the Income Tax Holiday (ITH) incentive is exempt from withholding taxes pursuant to Revenue Regulations Nos. 2-98 and 17-03. TaSEHD It is represented LRDC is a corporation duly organized and existing under Philippine laws. It is engaged in the business of research and development with respect to computer printers and related IT equipment. LRDC is registered with the Philippine Economic Zone (PEZA) pursuant to the provisions of Republic Act (RA) No. 7916 as an Information Technology Enterprise. Furthermore, LRDC is undergoing expansion of its activities and the PEZA has already approved the registration of its new activity, particularly, engineering design and hardware development of the entire printer at the proposed Lexmark Plaza. In connection with LRDC's New Project, it plans to enter into a Master Contract with Efficient Holdings, Inc. (EHI), as the Developer of the Lexmark Plaza. EHI is a corporation duly organized and existing under Philippine laws. It was registered with the PEZA on February 22, 2006 pursuant to the provisions of RA No. 7916 as the Developer/Operator of Lexmark Plaza. Under Article XIII of its registration, EHI is enjoying Income Tax Holiday (ITH) for four years on income earned from locator IT enterprises and related operations and after the ITH period, the option to pay a special 5% tax on gross income earned from locator IT enterprises and related operations, in lieu of all national and local taxes except real property taxes on land owned by the developer. Under the terms of the proposed Master Contract between LRDC and EHI, the latter undertakes, among others, to develop the Property (a parcel of land which has been designated as an Information Technology Park by virtue of Presidential Proclamation No. 986 dated February 6, 2006) with the use of all its financial and technical resources, into an office building and testing center appropriate for the needs of LRDC's research and development activities, complete with all the facilities and improvements and which shall be known as Lexmark Plaza. In consideration thereof, LRDC shall pay EHI for all the costs necessary to complete the Project. In reply, please be informed that Section 2.57.5 of Revenue Regulations No. 2-98, as amended, provides: "Section 2.57.5. Exemption from Withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to: 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." xxx xxx xxx The foregoing Section is explicit in its provision that the 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 Investments Code of 1987, such as the income tax holiday. Accordingly, since EHI is a PEZA registered enterprise enjoying ITH incentive under special law, 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-094-2003 dated March 26, 2003) 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. DSacAE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service