BIR Ruling [DA-487-03]

December 10, 2003 BIR RULING [DA-487-03] R.A. 7227 DA 54-98 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. M.F.A. Balili Gentlemen : This refers to your letter dated June 8, 2000 requesting, in behalf of your client, Yokohama Tire Philippines, Inc. (YTPI), for a confirmation of your opinion that income payments to YTPI are not subject to the 1% creditable withholding tax. It is represented that YTPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal office in the Clark Special Economic Zone (CSEZ), Pampanga; that YTPI is primarily engaged in the production/manufacture, importation and exportation of automobile, truck and aircraft tires, tubes and other articles produced in whole or in part from rubber, both natural and synthetic, compounds thereof, substitutes therefor, substances having properties or uses similar thereto, and all other rubber goods and automotive and aircraft parts and accessories; that YTPI is also duly registered with the Clark Development Corporation (CDC) as a CSEZ enterprise under CDC Certificate of Registration No. 98-48; that with the CDC's approval and pursuant to the terms and conditions of YTPI's registration as a CSEZ-registered enterprise, YTPI sells a portion of its finished tire production to buyers in the customs territory; as such, YTPI generates income from its sales of finished tires to the buyers in the customs territory; and that, however, the income derived by YTPI from its sale of finished tires to the customs territory does not exceed 30% of its total income from all sources. In reply, please be informed that Section 2.57.5 of Revenue Regulations No. 2-98, as amended, 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 cases: 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: (1) Sales of real property by a corporation which is registered with and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed One hundred eighty thousand pesos (P180,000) in Metro Manila and other highly urbanized areas and One hundred fifty thousand pesos (P150,000) in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under Republic Act No. 7279 and its implementing regulations; (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investments Code of 1987; (3) Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to wit: The Government Service Insurance System (GSIS), the Social Security System (SSS), The Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), the Philippine Amusement and Gaming Corporation (PAGCOR). However, the income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax as prescribed in these regulations: xxx xxx xxx" 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. No. 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. 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 contiguous to the base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter." HEaCcD Such being the case, as a registered business enterprise conducting business within the Secured Area of the CSEZ, income payments to YTPI are not subject to the 1% creditable withholding tax from the sale of its finished products to either buyers in the CSEZ or buyers in the customs territory , provided its total sale of finished tires within its calendar or fiscal year, as the case may be, to the customs territory does not exceed 30% of its total income from all sources. YTPI, however, shall be liable to the 5% preferential tax rate based on its gross income earned from its registered activities, in lieu of local and national internal revenue taxes. (BIR Ruling No. DA-54-98 dated February 12, 1998) While enterprises registered pursuant to RA 7227 are not expressly included in the enumeration provided under Section 2.57.5 of Revenue Regulations No. 2-98, as amended, the enumeration is not exclusive as indicated by the phrase "such as but not limited to." Moreover, CSEZ enterprises are taxed similarly to PEZA-registered enterprise under RA 7916 which entities are included in the enumeration in Sec. 2.57.5 of (Revenue Regulations No. 2-98, as amended. Therefore, where as in this case, the taxpayer is not subject to income tax, it should not be subject to creditable withholding tax in respect of income derived from its registered activity, to the extent such activity is subject to the 5% preferential tax rate. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group