BIR Ruling [DA-743-06]

December 28, 2006 BIR RULING [DA-743-06] RR 8-2005; DA-418-2006 AMI Semiconductor Philippines, Inc. Lot C3-10, Barangay Punta Carmelray Industrial Park II Calamba, Laguna Attention: Mr. Wilfredo F. Franco Executive Director-Finance Gentlemen : This refers to your letter dated June 5, 2006 requesting for confirmation of your opinion that refund granted by Manila Electric Company (Meralco) attributable to previous years when you were under income tax holiday (ITH) and refunds attributable to the years where you had tax benefit over the deduction of the related electricity expense from its taxable income which were already declared/included in the taxable income subjected to 32% effective regular corporate income tax (RCIT) rate in your 2005 Annual Income Tax Return are exempt from EWT as provided under Revenue Regulations (RR) No. 8-2005. It is represented that AMI Semiconductor Philippines, Inc. ("ASPI") is a domestic corporation incorporated on November 19, 1980; that it is registered with the Board of Investments (BOI) as manufacturer/exporter of semiconductor devices until December 31, 2005; that as a BOI-registered enterprise, ASPI is entitled to the ITH incentive for 3 years commencing from January 1, 2001 until December 31, 2003; that on December 22, 2004, ASPI registered as PEZA-Ecozone Export Enterprise and as such, became entitled to tax incentives provided under RA 7916; and that on January 2006, ASPI received a letter from Meralco stating that ASPI's electric consumption from February 1994 to May 2003 is qualified for the refund under Phase IVB amounting to P18,001,330.80. In reply, please be informed that this Office hereby confirms your opinion, as follows: 1. The refund granted by Meralco which is attributable to previous years where ASPI is under ITH is not subject to the 25%/32% expanded withholding tax under RR 8-2005. Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as last amended by RR 30-2003 provides, 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: (A) . . . (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: (1) . . . (2) Corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A. 7916, the Omnibus Investment Code of 1997 and R.A. 7227, as amended, respectively;" The aforequoted provision is explicit in providing that the creditable withholding tax does not apply to income payments to persons enjoying exemption from the 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 Republic Act (RA) 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 ECOZONES shall be remitted to the national government. IHCacT Consequently, the expanded withholding tax prescribed by RR 8-2005 will not apply to income payments to juridical persons enjoying ITH under Executive Order No. 226. It does not apply also to income payments made to corporations duly registered with PEZA enjoying exemption from income tax under R.A. No. 7916. Therefore, since the refund granted by Meralco to ASPI is attributable to previous years where ASPI is under ITH from January 1, 2001 until December 31, 2003, such refund covering the period from January 1, 2001 until December 31, 2003 is not subject to the 25%/32% expanded withholding tax under RR 8-2005. ( BIR Ruling Nos. DA-418-2006 dated July 7, 2006; DA-356-2006 dated June 9, 2006 and DA-226-2006 dated April 10, 2006 ) On the other hand, the refund covering the period from February 1994 to December 31, 2000, when ASPI is not enjoying ITH, is subject to withholding tax under RR 8-2005. However, due to the fact that ASPI had accrued or recognized the electricity refund as revenue in its 2005 Income Tax Return (ITR) and the corresponding income tax due thereon was already paid upon filing of the ITR, ASPI should no longer pay the income taxes thereon through withholding tax. 2. The refund attributable to the years where ASPI had tax benefit over the deduction of the related electricity expense from its taxable income which were already declared/included in the taxable income and was already subjected to 32% effective regular corporate income tax (RCIT) rate in your 2005 Annual Income Tax Return is exempt from the EWT imposed under RR No. 8-2005. Pursuant to RR 8-2005, Meralco refund of excess utility payments payable to ASPI shall be subject to 25%/32% EWT. However, as represented, ASPI has already declared/included such refund attributable to years where ASPI had tax benefit over the deduction of the related electricity expense from its taxable income and was already subjected to 32% effective regular corporate income tax rate in its 2005 Annual Income Tax Return which was filed and paid on March 31, 2006. HCITcA Applying the tax benefit doctrine on the taxability of the refund from Meralco, the refund which is attributable to years where ASPI had tax benefit, should be included as part of the taxable income of ASPI in 2005, which the latter has already paid. Consequently, the amount of Meralco refund pertaining to the amount which was included in ASPI's 2005 income tax return, were the corresponding income tax thereon was already paid, should no longer be subjected to the 25%/32% EWT. ( BIR Ruling Nos. DA-257-2005 dated June 16, 2005 and DA-418-2006 dated July 7, 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.) GREGORIO V. CABANTAC Deputy Commissioner