Isla Lipana & Co.

October 8, 2009 BIR RULING [DA-(C-228) 589-09] DA-392-07; DA-059-03; DA-302-04; DA-438-99 Isla Lipana & Co. 20th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Alexander B. Cabrera Managing Partner Gentlemen : This refers to your letter dated August 11, 2009 stating that your client, LINDBERG Subic, Inc. (LSI), is a domestic corporation organized and existing under the laws of the Philippines; that it operated within the secured area of the Subic Bay Freeport Zone (SBFZ) and was registered with the Subic Bay Metropolitan Authority (SBMA) under Republic Act (R.A.) No. 7227, otherwise known as the Bases Conversion and Development Act of 1992; that by virtue of its SBMA registration, its gross income earned from its registered activities was subjected to the preferential tax rate of five percent (5%) imposed in lieu of all other taxes; that on December 31, 2008, LSI sold all of its assets to LINDBERG AG A4; that on the same date, LSI's Retained Earnings (RE) amounted to P100 million, mostly arising from the sale of all its assets; that LSI included the sale among the income subjected to the 5% preferential tax rate and paid the tax thereon; that subsequently, LSI permanently ceased its business operations and in February 2009, its registration with the SBMA lapsed and was no longer renewed since it has no more operations to register with the authority; and that through the unanimous votes of all the members of its Board of Directors and the ratification of its stockholders, it has resolved to shorten its corporate existence to end on July 31, 2012. Based on the foregoing representations, you now request confirmation of your opinion that the RE of LSI from its gross income earned from registered activities pursuant to its registration with the SBMA and subjected to the preferential tax rate of five percent (5%) are not subject to the imposition of Improperly Accumulated Earnings Tax (IAET). In reply thereto, please be informed that Section 29 (A) and (B) of the Tax Code of 1997 on the imposition of IAET, states that "(A) In General. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporation Subject to Improperly Accumulated Earnings Tax. (1) In General. The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. IcDCaS (2) Exceptions. The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-listed corporations; (b) Banks and other non-bank financial intermediaries; and (c) Insurance companies." Corollarily, Section 4 of Revenue Regulations No. 2-2001 provides that Improperly Accumulated Earnings Tax shall not apply to xxx xxx xxx (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." In stressing the rationale of the above-mentioned principle, this Office elucidated the matter in BIR Ruling No. DA-302-04 dated June 1, 2004, as follows: "The Improperly Accumulated Earnings Tax (IAET) of 10% is in addition to other taxes imposed by Title II of the Tax Code for each taxable year. However, Section 4(g) of Revenue Regulations No. 2-2001 provides for the exception, wherein IAET shall not be made applicable, in cases where the corporation is entitled to a preferential tax rate or regime or because of the in lieu of all taxes proviso. In the latter case, this has already been clarified by the Court of Tax Appeals in the case of Davao Light and Power Company, Inc. v. CIR, CTA Case No. 5413 dated August 7, 1998 where the CTA has adopted the definition of the phrase "in lieu of any and all taxes" as follows: The phrase 'in lieu of' means instead of in a place of; or in substitution for (Black v. Barnes, 46 P. 2d 625, 626, 142 Kan. 361; Rutherland v. Oroville-Wyandotte Irr. Dist., 22 P. 2d 505, 218 Cal. 242; Words and Phrases, Vol. 21, p. 427) . It does not mean "in addition to" (Glassman Const. Co. v. Baltimore Brick Co., 246 Md. 478, 228 A. 2d 472, 474, Black's Law Dictionary, 6th ed., 1990, p. 787) . The "in lieu of" implies the existence of something for which a substitution is being made. Thus, the "in lieu of all other taxes" means that none other than the tax specified however described can be demanded. It limits the liability to the specific tax. (State of Tennessee v. Bank of Commerce, 53 p. 735, 736, Words and Phrases, Vol. 21, p. 474) " cTEICD Later, in BIR Ruling No. DA-392-07 dated July 18, 2007 citing BIR Ruling No. DA-059-03 dated February 28, 2003 , ruled that ". . . since EXAS is a PEZA-registered enterprise, it is exempt from payment of the IAET under Section 4 of Revenue Regulations No. 2-2001 implementing Section 29 of the Tax Code of 1997." WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that LSI is EXEMPT from the imposition and payment of IAET on its retained earnings as of December 31, 2008 until the time of its declaration of liquidating dividends. 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