BIR Ruling No. 422-14

October 23, 2014 BIR RULING NO. 422-14 RA 7916; RR 2-98; BIR Ruling No. 142-10 Microprecision Calibration, Inc. Block 2 Lot 4 Calamba Premiere International Park (CPIP) Brgy. Batino, Calamba City, Laguna Attention: Glenn A. Patron Accounting Manager Gentlemen : This refers to your letter dated May 16, 2011 requesting for a Certificate of exemption from expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended on account of your registration with the Philippine Economic Zone Authority (PEZA). It is represented that Microprecision Calibration, Inc., with Tax Identification Number 244-583-121-000, is registered with PEZA as an Ecozone Export Enterprise under Certificate of Registration No. 06-48 dated May 30, 2006; that it has been granted by the PEZA Board an income tax holiday incentive of four (4) years for original project effective on the committed date of start of commercial operations, or the actual date of start of commercial operations, whichever is earlier, on its registered activity as indicated in the Registration Agreement to provide technical services including calibration and equipment repair. In reply, please be informed that Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended, 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 special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of Republic Act 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. (BIR Ruling No. 142-10 dated December 9, 2010) Moreover, the corporate income tax holiday (ITH) of Microprecision Calibration, Inc. has already lapsed, hence, it is liable to the payment of five percent (5%) of the gross income earned, in lieu of all taxes, national or local. 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." cEHSTC 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 entitled to the preferential tax rate of 5%. 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. Accordingly, since it is a PEZA registered enterprise enjoying the 5% preferential tax incentive, all payments received by it from its customers, whether ECOZONE registered or customs territory enterprises, which are derived from its registered activity are exempt from the withholding tax. It must be emphasized, however, that Microprecision Calibration, Inc. is constituted as withholding agent for the government. As such, it is required to withhold the tax on compensation income of its employees or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997, as amended. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue