BIR Ruling [DA-663-06]

November 13, 2006 BIR RULING [DA-663-06] RR 8-2005; DA-520-2006 Alliance Textile Mills, Inc . Bo. Banay-Banay, Cabuyao Laguna Attention: Mr. Paulino Yap President Gentlemen : This refers to your letters dated October 23, 2006 requesting 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 during the period February 1, 1994 until November 28, 2000. It is represented that ATMI was registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 56606 dated June 27, 1974; that ATMI was registered with the Bureau of Internal Revenue (BIR) as a manufacturer of textile years; that its manufacturing operation was already closed and presently, receiving a modest monthly rental income by leasing its building which is subjected to monthly withholding tax by the lessee; and that in view of the fact that the said Meralco refund will not create a taxable income since ATMI was in a financial loss at the time the utility payments were made, hence your request. 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, ATMI now have a refund of excess utility payments in the aggregate amount of P19,667,834.71 covering the period up to 2005. HCDAcE 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 ATMI's continued financial losses from the period 1999 up to December 2004. 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 ATMI from taxable year 1999 to 2005, 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 Incurred Amount Previous Current Year Expired Unapplied Year 1999 24,297,597.41 0.00 0.00 24,297,597.41 0.00 2000 49,619,945.88 0.00 0.00 49,619,945.88 0.00 2001 23,205,124.58 0.00 0.00 23,205,124.58 0.00 2002 61,750,420.07 0.00 698,996.63 61,051,423.44 0.00 2003 8,756,926.01 0.00 0.00 0.00 8,756,926.01 2004 10,910,908.70 0.00 0.00 0.00 10,910,908.70 2005 0 0.00 0.00 0.00 0.00 TOTAL P78,540,922.65 P0.00 P698,996.63 P158,174,091.31 P19,667,834.71 =========== ===== ========== ============= ============ 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 ). In sum, the Meralco refund to ATMI 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 ATMI 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. ADCIca Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service