Mahle Filter Systems Philippines Corporation

June 17, 2009 BIR RULING [DA-(C-094) 305-09] Sec. 29; RR 2-01 Mahle Filter Systems Philippines Corporation Block 8 Lots 5, 6, & 7 PEZA Drive First Cavite Industrial Estate Brgy. Langkaan, Dasmarias Cavite Attention: Eleonor F. Ledesma Department Head General Accounting and Tax Gentlemen : This refers to your letter dated June 8, 2009 requesting for a ruling that Mahle Filter Systems Corporation is not subject to improperly accumulated earnings tax imposed under Section 29 of the 1997 Tax Code. cHaICD It is represented that Mahle Filter Systems Philippines Corporation ("MFSP" for brevity) formerly, Mahle Tennex Philippines Corporation, was incorporated and registered with the Securities and Exchange Commission (SEC) on May 27, 1996. It was registered with the Philippine Economic Zone Authority (PEZA) on June 3, 1996 and the Bureau of Internal Revenue on December 23, 1996. MFSP is primarily engaged in the business of manufacturing of air filter elements and other automotive products. Majority of its product line are now subject to 5% regime in lieu of other taxes under Republic Act No. 7916 after its income tax holiday incentive expired on September 30, 2007. It is a 100% subsidiary company of Mahle Filter Systems Japan ("MFSJ"), a corporation duly organized and operating under the laws of Japan and a manufacturer of various kinds of automotive parts. You now request confirmation of your opinion that MFSP, being a PEZA-registered enterprise, should not be liable for improperly accumulated earnings tax ("IAET"). In reply, please be informed that Section 29 (A) and (B) of the Tax Code of 1997 provides that in addition to other taxes imposed by Title II of the Tax Code of 1997, there shall be imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. Thus, this kind of tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, IAET shall not apply to, among others, PEZA-registered enterprises. Section 4 of Revenue Regulations 2-01, in implementing Section 29 of the Tax Code, provides: "SEC. 4. Coverage . The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic corporations as defined under the Tax Code and which are classified as closely-held corporations. Provided, however, that Improperly Accumulated Earnings Tax shall not apply to the following corporations: a) Banks and other non-bank financial intermediaries; b) Insurance companies; aHICDc c) Publicly-held corporations; d) Taxable partnerships; e) General professional partnerships; f) Non-taxable joint ventures; and g) Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local ." (emphasis supplied) The foregoing provision is explicit in excluding PEZA-registered enterprises from the coverage of IAET. Accordingly, MFSP, being a PEZA-registered enterprise, is not subject to IAET. 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