Lufthansa Technik Philippines, Inc.

September 15, 2008 BIR RULING [DA-(C-064) 216-08] Rev. Regs. No. 8-2005; DA-074-2006 Lufthansa Technik Philippines, Inc. Villamor Air Base Pasay City 1309 Philippines Attention: Edison M. Que SVP and CFO Gentlemen : This refers to your letter dated May 26, 2006 stating that Lufthansa Technik Philippines, Inc. (LTP) is a corporation duly organized and existing under the laws of the Philippines; that it is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 00-070 dated August 31, 2000; that it is engaged in the maintenance, repair and overhaul of aircraft, engine and components at the MacroAsia Special Economic Zone; that as a PEZA-registered enterprise, LTP is enjoying the five percent (5%) preferential tax rate in lieu of all national and local taxes pursuant to Section 24 of Republic Act (R.A.) No. 7916, otherwise known as the "Special Economic Zone Act of 1995; that on December 9, 2005, LTP received a letter from Meralco informing that LTP is qualified for a refund of the excess utility payments that were collected as far back as 1994 under the Meralco Phase IVB of the Refund approved by the Energy Regulatory Commission (ERC) in ERC Case No. 201-2431 that LTP's computed Gross Refund Amount is P4,622,226.00; that however, the BIR ordered Meralco, through Revenue Regulations No. 8-2005 to withhold a twenty five percent (25%) creditable income tax on refunds due to industrial and commercial customers with active accounts and thirty two percent (32%) on refunds for customers with terminated accounts; that furthermore, Revenue Memorandum Order No. 22-2005 provides that customers claiming exemption from withholding tax under Revenue Regulations No. 8-2005 shall obtain and submit to Meralco a certified true copy of the Certificate of Exemption or BIR Ruling duly signed by the BIR for the purpose; and that, you are now requesting for a confirmation of your opinion that LTP is exempt from the thirty two percent (32%) regular income tax and consequently from withholding tax imposed under Revenue Regulations No. 8-2005 and that in case the tax has already been withheld from such refund, the same can be credited against LTP's gross income tax payments. In reply thereto, please be informed 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 provision 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 enterprise within the ECOZONE shall be remitted to the national government. Moreover, since the excess utility payments pertain to expenses related to LTP'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 LTP was on an ITH is not subject to the 5% gross income tax. LTP will not have any tax benefit from the refund of the excess utility payments. CTDHSE In sum, the Meralco refund to LTP 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 Revenue Regulations No. 8-2005 and is not subject to the 32% regular corporate income tax and the 5% gross income tax under R.A. No. 7916. 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