BIR Ruling [DA-604-06]

October 10, 2006 BIR RULING [DA-604-06] DA 074-06 Angara Abello Concepcion Regala & Cruz ACCRA Building 122 Gamboa Street, Legaspi Village Makati City Attention: Attys. Ruby Rose J. Yusi Eric R. Recalde Elaine Patricia S. Reyes Gentlemen : This refers to your letter dated August 2, 2006 stating that your client, Integrated Device Technology (Philippines), Inc. (IDTPI), is a corporation duly organized and existing under the laws of the Philippines; that it is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with Registration Certificate No. 95-84 dated September 5, 1995; that it is engaged in (a) the manufacture of leading edge Memory and Logic Integrated Circuits; and (b) die bank and backgrinding operations, until it formally ceased its operations in the year 2005; that when IDTPI was still in operation, it was granted a Corporate Income Tax Holiday (ITH) from September 5, 1995 up to October 31, 2003 by virtue of its aforementioned PEZA registration, which was extended as per PEZA Notice of ITH Extension Approval Nos. 3-011 and 3-090; that IDTPI was one of Meralco's industrial customers; that in Republic of the Philippines, represented by the Energy Regulatory Board vs. Manila Electric Company , GR No. 141315, April 9, 2003, the Supreme Court ordered Meralco to refund to its customers excess payments that were collected as far back as 1994; that pursuant thereto, Meralco notified IDTPI that the same was entitled to a Gross Refund Amount of P18,694,063.50; that IDTPI's excess utility payments (which were expenses related to its registered activities were made from August 1, 1996 to May 25, 2003 during the time that IDTPI was enjoying the ITH; that in the meantime, the BIR ordered Meralco, through Revenue Regulations No. 8-2005, to withhold a 25% creditable income tax on refunds due to industrial and commercial customers with active accounts and on 32% on refunds to customers with terminated accounts; that furthermore, Revenue Memorandum Order No. 22-2005 provides that customers claiming exemption from withholding tax under Revenue Regulations 8-2005 shall obtain and submit to Meralco a certified true copy of the Certificate of Exemption (COE) or BIR Ruling duly issued by the BIR for the purpose. Based on the foregoing representations, you now request for confirmation of your opinion that the refund by MERALCO to IDTPI of the latter's excess utility payments is exempt from creditable withholding tax pursuant to Revenue Regulations No. 8-2005 and the 5% gross income tax under Republic Act (R.A.) No. 7916, otherwise known as the Special Economic Zone Act of 1995 (or the 35% regular corporate income tax). In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. DA074-06 dated March 2, 2006 , that ". . . Section 2.57.5(B)(2) of Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 3-2004 and 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 granted certain preferential tax treatment under Section 24 of R.A. No. 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. "Moreover, since the excess utility payments pertain to expenses related to SPC's registered activity, then the refund is not subject to the 32% regular corporate income tax. Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments. Had Meralco not collected these excess utility payments from the Company, the latter's utility expenses would have been lower and consequently, its income would have been higher. However, the correct amount of utility expenses is immaterial since the Company was on an ITH and thus was exempted from paying income tax. IaEACT "xxx xxx xxx "In sum, the Meralco refund to SPC 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 the Company was on ITH is' exempt from the 25% or 32% withholding tax imposed under RevenueRegulationsNo.8-2005 and is not subject to the 32% regular corporate income tax and the 5% gross income tax under R.A.No.7916. "xxx xxx xxx" In the instant case, since it is undisputed that IDTPI made the excess utility payments (subject of the Meralco refund) during the time when it was still enjoying ITH, this Office holds that the Gross Refund Amount of P18,694,063.50 is not subject to the creditable withholding tax imposed under Revenue Regulations No. 8-2005 and to the 5% gross income tax under R.A. No. 7916 (or the 35% corporate income tax). 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service