BIR Ruling No. 135-10

December 1, 2010 BIR RULING NO. 135-10 RA 7916; RR 8-2005; DA-100-2006; DA-325-2006; DA-664-2006; DA-174-2005; DA-245-2002 Technofreeze, Inc. No. 114 East Science Avenue Laguna Technopark, Bian, Laguna Attention: Mr. Ryan Justin Chan Corporate Secretary Gentlemen : This refers to your letter dated May 20, 2010 which was indorsed by Revenue Region No. 9, San Pablo City on June 3, 2010, requesting for a Certificate of Exemption for purposes of exemption from the 25% expanded withholding tax on refunds from MERALCO pursuant to Revenue Regulations (RR) No. 8-2005 and Revenue Memorandum Order (RMO) No. 22-2005. From the documents submitted, it appears that Technofreeze, Inc. is a corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Registration No. A1997-22668 dated December 9, 1997; that it is registered with the BIR with TIN No. 005-242-673; that it is likewise a PEZA-registered entity with Certificate of Registration No. 05-11-F dated March 21, 2005; that Technofreeze, Inc. is organized to own, lease, operate and manage cold storage and warehouses; that it is enjoying the five percent (5%) preferential tax rate in lieu of all national and local taxes pursuant to the provisions of R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995; that Technofreeze, Inc. is one of the industrial customers of Meralco; that in Republic of the Philippines, represented by Energy Regulatory Board vs. Manila Electric Company , G.R. No. 141314, April 9, 2003, the Supreme Court ordered Meralco to refund its customers excess payments that were collected as far back as 1994; and that the Bureau of Internal Revenue (BIR) ordered Meralco, through RR No. 8-2005, to withhold a 25% creditable income tax on refunds due industrial and commercial customers with active accounts and 32% on refunds for customers with terminated accounts. DETACa In reply, please be informed that under Section 2.57 of RR No. 2-98, as amended, 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. RR 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: "SECTION 2. Income Payments Subject to Creditable Withholding Tax . Sec. 2.57.2 of Revenue Regulations No. 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 Office 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 rule was recently reiterated in BIR Ruling No. DA-174-05 issued on April 20, 2005, where the BIR held that "In reply please be informed that Section 2.57.5(B)(2) of RR No. 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: DHIETc xxx xxx xxx (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; "The afore-quoted provision explicitly provides that the creditable withholding tax does not apply to income payments to persons 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 tax treatment under Section 24 of R.A. No. 7916 which provides that "any provision of existing laws, rules and regulations to the contrary notwithstanding, not 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 DA-259-05 issued on 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, as amended. In view of the foregoing, and provided that the above excess utility payments pertain to expenses related to Technofreeze' registered activity or activities as a PEZA registered Ecozone Facilities Enterprise, 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) However, the said refund should be included in its gross income subject to the 5% preferential tax under Republic Act No. 7916. (BIR Ruling No. DA-100-2006 dated March 9, 2009) 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. acHITE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue