BIR Ruling [DA-510-06]

August 25, 2006 BIR RULING [DA-510-06] R.R. 8-2005; DA-418-2006; DA-074-2006 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. M.F.A. Balili Tax Division Gentlemen : This refers to your letter dated July 6, 2006 requesting on behalf of your client, Pentax Luzon Philippines, Inc . ("PLPI"), for a ruling confirming your opinion that the excess utility payments refunded by Meralco Electric Company ("Meralco") to PLPI are: 1. Exempt from the 32% regular corporate income tax, and consequently, from the withholding tax (WT) imposed under Revenue Regulations (RR) No. 8-2005 during the time that PLPI was enjoying the Income Tax Holiday (ITH) incentive; and 2. Subject to the 5% preferential tax rate, and consequently, exempt from the 25% or 32% WT imposed under RR 8-2005 during the time that PLPI was under the 5% gross income tax regime. It is represented that PLPI is a corporation duly organized and existing under Philippine laws to engage in the business of manufacturing, exporting, buying and selling, at wholesale, high index ophthalmic plastic lenses. It was registered as an Ecozone Export Enterprise at Gateway Business Park-Special Economic Zone ("PEZA") from April 1992 until the cancellation of its registration on April 30, 2005. PLPI was granted an ITH for an initial period of six (6) years plus a qualifying extension of one (1) year, or from January 1993 to December 1999. After the lapse of its 7-year ITH, it became exempted from the payment of national and local taxes and, in lieu thereof, was required to pay the preferential tax rate of 5% on gross income. It is further represented that PLPI is one of Meralco's industrial customers. As such, PLPI received a notice from Meralco informing that PLPI is qualified for the refund of excess utility payments in the amount of P10,453,490.25 for the period of February 1994 to May 2003 as mandated by the Supreme Court in Republic of the Philippines, represented by Energy Regulatory Board v. Manila Electric Company, G.R. No. 141314, April 9, 2003 . Meralco further advised PLPI that it will withhold 25% creditable income tax unless PLPI can submit a Certification of Exemption or ruling from this Office that it is exempt from the WT imposed under Revenue Regulations (RR) No. 8-2005, as prescribed by Revenue Memorandum Order (RMO) No. 22-2005. In reply, please be informed as follows: RR 8-2005 dated February 23, 2005, which further amended RR 2-98, includes Meralco refunds arising from SC case G.R. No. 141314 dated April 9, 2003, as among the items subject to creditable withholding tax, to wit: ATaDHC "SEC. 2. Income Payments Subject to Creditable Withholding Tax . Sec. 2.57.2 Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: Sec. 2.57.2. Income payments subject to creditable tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (U) MERALCO Refund arising from Supreme Court Case G.R. No. 141314 of April 9, 2003 to customers under Phase IV as approved by ERC On gross amount of refund given by MERALCO to Customers with active contracts as classified by MERALCO Twenty Five Percent (25%); To Customers with terminated contracts Thirty Two Percent (32%) ;" (Emphasis supplied) However, the above provision admits of exceptions and must be read in conjunction with Section 2.57.5(B)(2) of RR 2-98, to wit: "Sec. 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 (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:" (Emphasis supplied) Section 2.57.5(B)(2) of RR 2-98, as amended by RR 8-2005, 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 are entitled to certain preferential tax treatment under Sections 23 and 24 of RA 7916. Every PEZA-registered enterprise is entitled to the fiscal incentives granted by Section 24 of RA 7916, which provides for the 5% tax in lieu of all taxes and that provided under Executive Order (EO) No. 226, which is basically an ITH of 4 to 8 yrs. Thus, construing the above-cited provisions together, it is evident that the Meralco refund to PLPI arising from the Supreme Court decision in GR No. 141314 dated April 9, 2003 of excess utility payments which were incurred and paid during the time that PLPI was on ITH, or from February 1994 to December 1999, is exempt from the 32% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under RR 8-2005. For the same reason that the amount of refund attributable to said period is not also subject to the 5% gross income tax under RA 7916. PLPI will not have any tax benefit from the refund of said excess utility payments because it could not claim the same as deductions ( BIR Ruling No. DA-074-2006 dated March 2, 2006; BIR Ruling No. DA-100-06 dated March 9, 2006; BIR Ruling No. DA-226-06 dated April 10, 2006; BIR Ruling No. DA-295-06 dated May 3, 2006 ). Similarly, a PEZA-registered enterprise enjoying the 5% gross income tax regime preferential tax treatment under Section 24 of RA 7916 is exempt from the 25% or 32% expanded/creditable withholding tax imposed under RR 8-2005 during the time that it was under the 5% gross income tax regime. HEIcDT PEZA Memorandum Circular No. 2006-010 clarifies the tax treatment of Meralco refunds to PEZA-registered enterprises as follows: Income Tax Incentive Corresponding to Tax Treatment of the period covered by the MERALCO MERALCO Refund Refund Income Tax Holiday Income Tax Holiday 5% Gross Income Tax 5% Gross Income Tax None Normal Corporate Income Tax/2% MCIT whichever is lower In other words, the tax treatment of Meralco refunds corresponds to the tax regime governing the taxpayer during the period to which the refund relates. Thus, it is clear from the above circular that the refund of the excess utility payments incurred after the expiration of PLPI's ITH, or from January 2000 to May 2003, will form part of its gross income subject to the 5% preferential tax for the same reason that the amounts of utility payments were previously claimed as a deduction from the gross income amounting to a lower tax base for the years mentioned. Consequently, the said refund is not subject to the creditable withholding tax imposed under RR 8-2005 ( BIR Ruling No. DA-074-2006 ). 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