Asia Pacific Business Legal Consulting

December 10, 2009 BIR RULING [DA-(C-313) 767-09] R.A. 7916; DA-649-2004; DA-698-06 Asia Pacific Business Legal Consulting 2nd Floor Bldg., B. Mactan Marina Mall Mactan Economic Zone 1, Ibo, Lapu Lapu City Cebu Attention: Atty. Ma. Cristina L. Latonio Deputy Managing Partner Gentlemen : This refers to your letter February 19, 2009 which was received by this Office by way of 2nd Indorsement dated March 9, 2009 by Revenue Region No. 13, Cebu City requesting in behalf of your client, Tsunetetsu (Cebu) Inc., for a confirmation that income payments received by a PEZA-registered company from its registered activities are exempt from the creditable withholding tax. It is represented that Tsunetetsu (Cebu) Inc., (TCI) is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. C199600433 dated December 8, 1996; that TCI is registered as an Ecozone Export Enterprise West Cebu Industrial Park, Special Economic Zone with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 99-039 dated June 1, 1999; and that the scope of TCI's registered activity is: ". . . limited to the engaging of all outfitting works for the engine room of ships build or repaired by Tsuneishi Heavy Industries (Cebu), Inc., machining of steel, shape steel, pipe and other iron materials for export and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise, directly used in its registered operations at the WCIP SEZ. In the event the Registrant decides to engage in a new or additional product line, directly or indirectly related to its registered activity, it shall apply anew to the PEZA for the latter's approval." In reply, please be informed that Section 2.57.5 (B) of Revenue Regulations No. 2-98 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 provisions of any law, general or applied. PEZA registered enterprises enjoy exemption from payment of income taxes pursuant to the provisions of Section 39 (a) (1) of the Omnibus Investments Code of 1987, such as the income tax holiday. In particular, Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended by Section 4 of Revenue Regulations No. 14-02, provides as follows: aTICAc "SECTION 4. 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 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; xxx xxx xxx" Such being the case, TCI is exempt from the 1% withholding tax on income payments made by the top 10,000 corporations. Accordingly, since it is a PEZA registered enterprise and if it is still enjoying a four-year ITH incentive under a special law and the 5% preferential tax incentive from the PEZA, all payments received by it from its customers, whether ECOZONE registered or customs territory enterprises are exempt from the withholding tax. (BIR Ruling No. DA-381-2000 dated November 7, 2000) Further, Section 2 (nn), Rule I of the implementing Rules of RA No. 7916 defines the term "gross income" as follows: "(nn) "Gross Income" for purposes of computing the special tax due under Section 24 of the Act refers to gross sales and gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. The allowable deductions from "gross income" are specifically enumerated under Section 2, Rule XX of these Rules." The definition of "gross income" limits the application of the preferential tax rate of 5% to income derived from the registered activity by an ECOZONE enterprise. Thus, any income derived by a registered enterprise that is not related to its registered activity is not covered/entitled to the ITH or the preferential tax rate of 5% as the case may be. Instead, such income derived from an unregistered activity shall be subject to regular internal revenue tax as provided under Section 1 (1st par.) of Revenue Regulations No. 20-02 and consequently from the creditable 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. EcDSTI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service