BIR Ruling [DA-520-06]

August 29, 2006 BIR RULING [DA-520-06] RR 8-2005; 076-89; DA-074-06 Canlubang Spinning Mills, Inc. 11/F, Suite 1122-1123 Tytana (Metrobank) Building Plaza Lorenzo Ruiz corner Oriente Street Binondo, Manila Attention: Mr. Victor Ong King President Gentlemen : This refers to your letters dated February 10, 2006 and July 5, 2006 requesting, on behalf of Canlubang Spinning Mills, Inc. (CASMI), an exemption from the withholding tax imposed under Revenue Regulations (RR) No. 8-2005 relative to its refund of excess utility payments incurred and paid for the period 1994 up to 2003. The facts as represented are as follows: CASMI was registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 162486 dated April 19, 1989. It was dissolved by shortening its term to December 31, 2003 as per Certificate of Filing of Amended Articles of Incorporation dated November 6, 2003. Its dissolution was due to the prolonged or continued financial losses it sustained. CASMI was registered with the Bureau of Internal Revenue (BIR) as a manufacturer of spun yarn 3211 and knitted fabrics. CASMI has already filed an application for cancellation of Taxpayer's Identification Number (TIN) in view of its dissolution and was already given a Tax Clearance Certificate by Revenue Region No. 9, San Pablo City. CASMI was one of Manila Electric Company's (Meralco) industrial customers. The electric services of Meralco to CASMI was disconnected on July 12, 2003. In view of the case of Republic of the Philippines, represented by Energy Regulatory Board vs. Manila Electric Company , G.R. No. 141314, April 9, 2003, wherein the Supreme Court ordered Meralco to refund to its customers excess payments made, CASMI now have a refund of excess utility payments in the aggregate amount of P17,529,155.00 covering the period 1993 up to 2003. IHDCcT The BIR had ordered Meralco, through RR No. 8-2005, to withhold a 25% creditable income tax on refunds due to industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts. In view, however, of CASMI's continued financial losses from the period 1994 up to the time it was dissolved in 2003, the refund of excess utility payments in its favor should not be subjected to the 32% creditable withholding tax. The Net Operating Loss Carry Over (NOLCO) of CASMI from taxable year 1994 up to the present, for purposes of winding up of its corporate affairs and to show its financial status, are as follows: Computation of Available Net Operating Loss Carry Over (NOLCO) Net Operating Loss Net Operating Loss Carry Over Net Operating Loss Year Applied Applied Current Incurred Amount Previous Year Expired Unapplied Year 1994 P11,609,082.93 P0.00 P0.00 P11,609,082.93 P0.00 1995 12,538,993.31 0.00 0.00 12,538,993.31 0.00 1996 31,246,865.15 0.00 0.00 31,246,865.15 0.00 1997 25,291,370.01 0.00 0.00 25,291,370.01 0.00 1998 10,117,526.74 0.00 0.00 10,117,526.74 0.00 1999 11,681,412.80 0.00 0.00 11,681,412.80 0.00 2000 8,900,644.57 0.00 0.00 8,900,644.57 0.00 2001 11,752,036.96 0.00 0.00 11,752,036.96 0.00 2002 61,176,413.27 0.00 14,183,017.73 46,993,395.54 0.00 2003 5,580,446.81 0.00 0.00 0.00 5,580,446.81 2004 13,027,340.64 0.00 0.00 0.00 13,027,340.64 2005 0 0.00 0.00 0.00 0.00 TOTAL P202,922,133.19 P0.00 P14,183,017.73 P170,131,328.01 P18,607,787.45 ============= ===== ============ ============= ============ The refund of the above excess utility payments is the last affair that CASMI is attending to, in the three-year period of winding up of its corporate affairs beginning in December 2003. cEaDTA In reply, please be informed that in BIR Ruling No. 076-89 dated April 17, 1989, this Office ruled that "the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue, 47 BTA 590 ) [Emphasis supplied]. When a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966 ). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. ( Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13 AFTR 930 ). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. . . . ." The situation above-mentioned is analogous to CASMI's circumstance. Thus, applying the foregoing in CASMI's case, the refund of excess utility payments in favor of CASMI is exempt from income tax. The refund of excess utility payments to CASMI will not give rise to or create a taxable income since CASMI was in a financial loss at the time the utility payments were made. (BIR Ruling No. DA-074-2006 dated March 2, 2006) Moreover, CASMI has long been dissolved due to continued financial losses, and that the only affair left for CASMI to settle, for purposes of winding up of its corporate affairs, is its business with Meralco relative to the refund of excess utility payments. Subjecting the said refund of its excess utility payments to the 32% creditable withholding tax imposed under RR No. 8-2005 would be just futile on the part of the government and a waste of time on the part of CASMI. It is so because if the said Meralco refund is subjected to the withholding tax, it is inevitable that CASMI would file a claim for refund with the BIR since it is not subject to income tax due to prolonged financial losses. In sum, the Meralco refund to CASMI arising from the Supreme Court decision in G.R. No. 141314 dated April 9, 2003 of excess utility payments which were incurred and paid during the time that CASMI was on a net operating losses is exempt from the 32% withholding tax imposed under RR No. 8-2005. Likewise, the said refund is not subject to the 32% regular corporate income tax imposed under Section 27(A) of the Tax Code of 1997, as amended. 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