BIR Ruling [DA-664-06]

November 13, 2006 BIR RULING [DA-664-06] RR No. 8-2005; DA-097-2006 Cambridge Electronics Corporation Plant Site, First Cavite Industrial Estate Special Export Processing Zone Langkaan, Dasmarias, Cavite Attention: Mr. Lance Y. Gokongwei President & Chief Operating Officer Gentlemen : This refers to your letter dated August 28, 2006 requesting for confirmation that the refund of excess electric utility payments by the Manila Electric Company (Meralco) to Cambridge Electronics Corporation (Cambridge for brevity) is exempt from the 25% withholding tax imposed under Revenue Regulations (Rev. Regs.) No. 8-2005. It is represented that Cambridge is a duly registered corporation with the Securities and Exchange Commission under Registration No. AS-092-007092 dated October 21, 1992. It is also registered with the Export Processing Zone Authority (EPZA) as an Export Enterprise under Registration No. 92-064 at the Special Export Processing Zone declared for the purpose at First Cavite Industrial Estate. It is your position that Cambridge is not subject to creditable withholding tax on the Meralco refund, which corresponds to the overpaid Meralco bills for the following periods, with their corresponding incentives entitlement: 1) July 1994 to March 1998 ITH 2) April 1998 to September 1999 5% Gross Income Tax 3) October 1999 to September 2002 ITH 4) October 2002 to May 2003 5% Gross Income Tax In reply, please be informed as follows: Section 2.57.5 (B)(2) of Rev. Regs. No. 2-98, as amended, provides: "Sec. 2.57.5. Exemption from withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments 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 under Republic Act 7916 and the Omnibus Investment Code of 1987 ; . . . ." (Emphasis supplied) The afore-quoted provision explicitly provides that the creditable withholding tax does not apply to income payments to person enjoying exemption from the payment of income taxes pursuant to the provision of any law, general or special. PEZA-registered enterprises are granted certain preferential treatment under Section 24 of Republic Act (RA) No. 7916, as amended by R.A. No. 8745, which provides that "except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be paid and remitted as follows. . . ." aDSIHc Consequently, the expanded withholding tax prescribed by Rev. Regs. No. 8-2005 does not apply to income payments to juridical person enjoying ITH (BIR Ruling No. DA-074-2006 dated March 9, 2006, BIR Ruling No. DA-174-05 dated April 20, 2005 and BIR Ruling No. DA-245-02 dated December 18, 2002). It does not apply to income payments made to corporations duly registered with PEZA enjoying exemption from income tax pursuant to Executive Order No. 226, as amended by RA No. 7916, and RA No. 7227. Since the excess utility payments pertain to expenses related to Cambridge's registered activity, then the refund which will be received by Cambridge incurred and paid during the time when Cambridge was entitled to the ITH covering the periods from July 1994 to March 1998 and October 1999 to September 2002 is not subject to the 35% regular corporate income tax, and consequently, to the 25% or 32% withholding tax imposed under Rev. Regs. No. 8-2005. (BIR Ruling No. DA-074-2006 dated March 2, 2006) The said refund covering the periods when Cambridge was enjoying an ITH, which will be released at present when Cambridge is enjoying the 5% preferential treatment, will not be included in its gross income subject to the 5% preferential tax under RA No. 7916. Cambridge will not have any tax benefit from the refund of the excess utility payments because it could not claim the same as deductions at the time said payments were incurred. (BIR Ruling No. DA-097-2006 dated March 8, 2006 and DA-100-2006 dated March 9, 2006) On the other hand, the refund pertaining to the periods when Cambridge was enjoying the 5% preferential treatment covering the periods from April 1998 to September 1999 and October 2002 to May 2003 is not subject to the 35% regular corporate income tax, and consequently, to the 25% or 32% withholding tax imposed under Rev. Regs. No. 8-2005. However, the said refund should be included in its gross income subject to the 5% preferential tax under Republic Act No. 7916. Cambridge will be benefited from the refund of the excess utility payments covering the periods from April 1998 to September 1999 and October 2002 to May 2003, when it was enjoying the 5% preferential treatment, because it has claimed the same as deductions during the time said payments were incurred. (BIR Ruling No. DA-074-2006 dated March 2, 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