BIR Ruling No. 049-10

September 1, 2010 BIR RULING NO. 049-10 EO 226; BIR Ruling No. 163-94; BIR Ruling No. DA518-99; BIR Ruling No. DA133-00; BIR Ruling No. UN205-95 Sapalo Velez Bundang & Bulilan Law Offices 11th Floor, Security Bank Centre 6776 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran and Atty. Alexius P. Tang Gentlemen : This refers to your letter dated April 7, 2010 stating that your client, JGC Philippines, Inc. (the Corporation), is engaged in the business of IT-enabled engineering, procurement and construction services; that it is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 167900 dated September 5, 1989; that it is organized primarily "To engage in the business of rendering specialty and technical services including consultation services to juridical or natural persons with respect to planning, management, procurement, construction, evaluation, estimation, supervision, inspection, maintenance, operation and any other activities incidental thereto or in any way connected therewith, for overseas or domestic projects for industrial or other facilities in various fields and to engage in general construction business, including the constructing, enlarging, repairing, developing or engaging in work both here and abroad upon petroleum refineries, petrochemical plants, gas production and processing plants, storage facilities, power stations, food and pharmaceutical plants, automobile assembling plants and other industrial plants and facilities, buildings, houses and condominium roads, plants, bridges, airfields, piers, waterworks, railroads and other structures and to engage in actual and direct procurement work for both domestic and overseas projects including, but not limited to sourcing, and commercial and technical evaluation of suppliers, vendor selection, order placement, expediting and inspection, direct importation and purchase, shipping arrangement and customs clearance and other related procurement activities." DaAETS that initially, the Corporation was registered with the Board of Investments (BOI) as a "New IT Service Firm in the Field of Information Technology Services (Engineering, Procurement and/or Construction Services)", and was granted "Pioneer" Status and Income Tax Holiday (ITH) incentive by the BOI; that on August 3, 2007, the JGC Philippines Building was declared by Philippine Economic Zone Authority (PEZA) as an IT Building under Certificate of Registration No. EZ-06-28 dated August 23, 2006, and therefore was considered a special economic zone under Republic Act (RA) No. 7916, as amended; that on August 23, 2006, the Corporation applied for registration with the PEZA as an Ecozone IT Enterprise, and requested that its ITH incentive currently enjoyed under its BOI registration be transferred to PEZA under the same terms and conditions; that on February 27, 2007, the Corporation was registered with PEZA as an Ecozone IT (Export) Enterprise; that pursuant to its Registration Agreement, the Corporation is engaged in the provision of engineering, procurement and construction (EPC) services and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the JGC Philippines Building; that moreover, under the same Registration Statement, the Corporation was also granted the unavailed portion of its ITH incentive and to other remaining incentives under its BOI registration; and that upon the expiration of the Corporation's ITH incentive on March 5, 2009, the Corporation became subject to the 5% preferential tax regime under Section 24 of RA No. 7916, as amended, which tax is in lieu of all national and local taxes. Based on the foregoing representations, you now request for confirmation of your opinion that income payments made to JGC Philippines, Inc., a PEZA-registered enterprise, enjoying a preferential tax rate of 5% in lieu of paying all national and local taxes, are exempt from income tax and consequently from withholding tax. In reply thereto, please be informed that Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, provides: "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: (A) National government and its instrumentalities, including provincial, city or municipal governments; (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: TAcSCH (1) Sales of real property by a corporation which is registered with and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed one hundred eighty thousand pesos (P180,000) in Metro Manila and other highly urbanized areas and one hundred fifty thousand pesos (P150,000) in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under Republic Act No. 7279 and its implementing regulations; (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987; (3) Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to wit: the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR); However, the income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax as prescribed in these regulations." Inasmuch as JGC Philippines, Inc., a PEZA-registered company, is granted certain preferential tax treatment under Section 24 of RA No. 7916, the income payments made to JGC Philippines, Inc. shall not be subject to creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended. DEAaIS This is fortified in BIR Ruling No. DA-245-02 dated December 18, 2002 , where this Office ruled that ". . . 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 Revenue Regulations No. 2-98, as amended." This was later reiterated in BIR Ruling No. DA-174-05 dated April 20, 2005 , where it was held that ". . . 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 RA 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." SUCH BEING THE CASE, this Office hereby confirms your opinion that income payments made to JGC Philippines, Inc. by its customers, whether ECOZONE registered enterprises or within the customs territory, for its registered activities, like the performance of engineering, procurement and construction (EPC) services, are EXEMPT from withholding tax imposed under Revenue Regulations No. 2-98, as amended. This ruling is being issued on the basis of the foregoing facts as presented. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue