Pilipinas NM, Inc.

September 26, 2008 BIR RULING [DA-(IL-025) 267-08] RR 8-2005; DA-100-2006; DA-097-2006 Pilipinas NM, Inc. PEZA Drive cor. 11th Street First Cavite Industrial Estate Langkaan, Dasmarias, Cavite Attention: Ms. Teresita D. Tibayan Gentlemen : This refers to your letter dated May 15, 2008 requesting confirmation of your opinion that the refund of the excess utility payments to Manila Electric Company (Meralco) which were incurred and paid by Pilipinas NM, Inc. (PNMI), a Philippine Economic Zone Authority (PEZA)-registered enterprise is exempt from corporate income tax and consequently, from the 25% withholding tax imposed under Revenue Regulations (RR) No. 8-2005, or the gross income tax under Republic Act No. 7916, otherwise known as the "Special Economic Zone Act of 1995." It is represented that Pilipinas NM, Inc. is a domestic corporation organized and existing under the laws of the Philippines; that it is engaged in the manufacture of Glass Mat and Leaf Separators; that it is operating inside the First Cavite Industrial Estate, a PEZA registered enterprise with PEZA Registration Certificate No. 95-95; that as a PEZA registered enterprise, you are now covered with the five percent (5%) preferential tax rate in lieu of all national and local taxes pursuant to the provisions of R.A. 7916: that PNMI has received Meralco refunds last April 20, 2006 at staggered amounts up to December 31, 2010 through post dated checks; and that said Meralco refunds were subjected to 25% withholding tax. 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. Revenue Regulations 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: DaHcAS "SEC. 2. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of RevenueRegulationsNo.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, this 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 ruling was recently reiterated in BIR Ruling No. DA-174-05 issued on April 20, 2005 and held that "In reply please be informed that Section 2.57.5(B)(2) of RRNo.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 ActNo.7916 and the OmnibusInvestmentCodeof1987; HCSEcI "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 No. DA-259-05 dated 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 PNMI'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) Furthermore, the said refund is not subject to the 5% preferential tax under Republic Act 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service