Maynilad Water Services, Inc.

February 20, 2009 BIR RULING [DA-(C-028) 106-09] RMO 22-05; BIR Ruling No. DA-420-07 Maynilad Water Services, Inc. MWSS Compound, Katipunan Road, Balara, Quezon City Attention: Arturo Celso D. Baranda SAVP-Controller Gentlemen : This refers to your letter dated October 7, 2008 requesting for tax exemption on Meralco's refund to Maynilad to comply with the provisions of Revenue Memorandum Order No. 22-2005. DHcSIT It is represented that Maynilad Water Services Inc. (" Maynilad ") with Taxpayer Identification No. 005-393-442-000, is entitled to a refund under Meralco Phase IVB per notice from Meralco dated December 8, 2005; that Maynilad was advised to obtain a Certificate of Exemption pertaining to the receipt of the refund notwithstanding BIR Ruling No. DA-(IL-012) 110-2008 dated August 5, 2008, stating that Maynilad, being a BOI registered entity entitled to income tax holiday for 6 years from January 1, 2003 to December 31, 2008, is exempt from payment of the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 on income payments received by it during the specified period in connection with its registered activity for 6 years reckoned from January 1, 2003; and that the request is being made to comply with the requirements of Revenue Memorandum Order No. 22-05. 1 In reply thereto, please be informed that in BIR Ruling No. DA-100-06 dated March 9, 2006, this Office confirmed the opinion of the taxpayer that excess utility payments by the Manila Electric Company (Meralco) in its favor is exempt from the 35% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under Revenue Regulations (RR) No. 8-2005, and explained in this wise: "In reply, please be informed that under Section 2.57 of RR No. 2-98, withholding of creditable withholding tax as prescribed by such regulations shall not apply to income payments made for 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 by Republic Act No. 7916, the Omnibus Investments Code of 1997 and Republic Act No. 7227. Section 2.57 of RR No. 2-98, withholding of creditable withholding tax as prescribed by such regulations shall not apply to income payments made for 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 by Republic Act No. 7916, the Omnibus Investments Code of 1997 and Republic Act No. 7227. RR No. 08-2005 dated February 23, 2005 amended RR No. 2-98 by including among the income payments subject to the creditable withholding tax, payments by Meralco of refunds arising from Supreme Court case G.R. No. 14814 of April 9, 2003 to Customers under Phase IV as approved by Energy Regulatory Commission (ERC), to wit: "SEC. 2. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Income payments subject to creditable tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (U) MERALCO Refund arising from Supreme Court Case G.R. No. 14814 of April 9, 2003 to customers under Phase IV as approved by ERC On gross amount of refund given by MERALCO to Customers with active contracts as classified by MERALCO Twenty Five Percent (25%); To Customers with terminated contracts Thirty Two Percent (32%);" In BIR Ruling No. [DA-245-02] dated December 18, 2002, the Bureau had unequivocally ruled that a PEZA-registered business subject to the preferential tax rate of 5% in lieu of paying local and national taxes, based on its gross income earned within the Ecozone, is exempt from the creditable withholding tax imposed under RR No. 2-98. This rule was recently reiterated in BIR Ruling No. [DA-174-05] issued on April 20, 2005, where the BIR held that "In reply please be informed that Section 2.57.5(B)(2) of RR No. 2-98 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: 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 by Republic Act No. 7916 and the Omnibus Investment Code of 1987; "The aforequoted 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 provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential 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." In BIR Ruling [DA-259-05] issued on June 16, 2005 and in BIR Ruling No. [DA-281-2005] dated June 23, 2005, the BIR held that since TNCSI is a PEZA-registered enterprise enjoying preferential tax rate, income payments made to it with respect to its registered activity shall not be subject to 1% expanded withholding tax prescribed in Revenue Regulations No. 2-98, amended. In view of the foregoing and considering that the above excess utility payments pertain to expenses related to ATP's registered activity, the Meralco refund in its favor, therefore, is not subject to the 35% regular corporate income tax, and consequently, to the 25% or 32% withholding tax imposed under RR No. 8-2005. (BIR Ruling No. DA-074-2006 dated March 2, 2006) However, the said refund should be included in its gross income subject to the 5% preferential tax under Republic Act No. 7916." xxx xxx xxx This Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA-097-2006 dated March 8, 2006, that "Moreover, since the excess utility payments pertain to expenses related to Cypress's registered activity, then the refund, which will be received by CML, is not subject to the 32% regular corporate income tax nor to the 5% gross income tax because the refund pertains to the excess utility payments made during the period when Cypress was on an ITH. Consequently, CML will not have any tax benefit from the refund of said excess utility payments because Cypress could not claim the same as deductions. In sum, the Meralco refund to CML arising from the Supreme Court case with G.R. No. 141314 dated April 9, 2003 of the excess utility payments which were incurred and paid during the time when Cypress was on an ITH, is exempt from the 32% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under RR No. 8-2005. Moreover, it is not subject to the 5% gross income tax under R.A. No. 7916. (BIR Ruling No. DA-074-2006 dated March 2, 2006)" Later, in BIR Ruling No. DA-516-2006 dated August 25, 2006, this Office in reiterating the above-cited ruling, likewise ruled that "Applying the foregoing in the instant case, and considering that BITCAI is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under Revenue Regulations No. 8-2005. . . ." At this juncture, observation has to be made of the fact that since Maynilad was on ITH from January 1, 2003 to December 31, 2008, it did not benefit from the utilities expense which it incurred during such period. The receipt of the refund from MERALCO will not give rise to a taxable transaction, as Maynilad did not receive anything of exchangeable value from it. Such being the case, this Office is of the opinion and hereby holds that the refund which Maynilad will receive from MERALCO is not a taxable event and therefore not subject, to income tax, and consequently, to withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. HTSIEa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Prescribing the Guidelines and Procedures in the Implementation of Revenue Regulation (RR) No. 8-2005 on the Inclusion as Income Payments Subject to Creditable Withholding Tax the Manila Electric Company (MERALCO) Refund to Phase IV Customers as Approved by the Energy Regulatory Board (ERB) and Arising from the Supreme Court Case G.R. 141314 of April 9, 2003. DSETcC