BIR Ruling No. 450-12

July 10, 2012 BIR RULING NO. 450-12 E.O. 226; Sec. 2.57.5 (B) (2) of RR 2-98, as amended; BIR Ruling No. 334-2011 Boracay Island Water Company, Inc. STP Compound, Near Bloomfield Road Station 2, Brgy. Balabag, Boracay Island Malay, Aklan Attention: Virgilio C. Rivera, Jr. President Gentlemen : This refers to your letter dated November 21, 2011 requesting for the exemption from the payment of the creditable withholding tax on the income payments made to BORACAY ISLAND WATER COMPANY, INC. pursuant to the provisions of the Omnibus Investments Code of 1987, as amended (Executive Order No. 226). Documents submitted show that BORACAY ISLAND WATER COMPANY, INC., with Taxpayer's Identification Number 007-515-707, is a stock corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CS200918909 dated December 7, 2009; that it is duly registered with the Board of Investments (BOI) with Certificate of Registration No. 2011-127 dated June 17, 2011 under registration/activity "New Operator of the Boracay Water Supply and Sewerage System (Brgy. Balabag, Boracay Island, Malay, Aklan)"; that it was granted an Income Tax Holiday (ITH) for four (4) years from June 2011 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration; that it shall observe the following sales schedule: Year Water Water Water % rate of Sewer Total Volume Rate/ Sales Wastewater Revenues Revenue (Million cu.m.* (Php Service to (PhP) (PhP cu.m.) (PhP) Million) Water Million) Million) Sales 1 2.20 62.13 136.8 16 21.9 158.7 2 2.31 68.77 159.0 13 20.8 179.8 3 2.43 75.68 184.0 11 20.7 204.7 4 2.56 82.87 212.1 10 21.5 233.6 5 2.70 86.18 232.3 11 24.8 257.1 * Average rate between residential (30%) and commercial (70%) customers * Note: the assumption that customers are connected to both water and wastewater of BORACAY ISLAND WATER COMPANY, INC. AcSHCD "The ITH entitlement for the Boracay Water Supply (Balabag, Boracay Island, Aklan) shall be limited to the water sales schedule reflected in item 5 of the specific terms and conditions of the registration. Further, the ITH entitlement for the wastewater/sewerage services shall be limited only to 10% of the total revenue derived from its water supply activity." (Item 7 of the Specific Terms and Conditions) In support of its request, BORACAY ISLAND WATER COMPANY, INC. has completely submitted on April 20, 2012 the following documents: 1) Letter application for tax exemption; 2) Certified true copy of Certificate of Registration 2011-127 dated June 17, 2011 issued by the Board of Investments; 3) Certified true copy of Specific Terms and Conditions; 4) Certified true copy of the Certificate of Registration with the SEC; 5) Certified true copy of the Articles of Incorporation; 6) Certified true copy of the By-Laws; 7) Certified true copy of the 2011 General Information Sheet; 8) Certified true copy of the 2009 and 2010 Annual Income Tax Return together with the Audited Financial Statements; and 9) List of Customers/Clients covered by the services of Boracay Island Water Co., Inc. with details as to Name, Account Number, and Address & Billing Classification (in CD Format). In reply, please be informed that under Sec. 2.57.5 (B) (2) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 implementing Section 57 (B) of the Tax Code of 1997, as amended, the withholding tax prescribed in the said Regulations shall not apply to income payments made to persons enjoying exemption from the income tax provided by the Omnibus Investment Code of 1987, as amended. aHTEIA Accordingly, since BORACAY ISLAND WATER COMPANY, INC. New Operator of the Boracay Water Supply and Sewerage System Project, is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by it in connection with the aforementioned project, BORACAY ISLAND WATER COMPANY, INC. New Operator of the Boracay Water Supply and Sewerage System Project, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001 for a period of four (4) years from June 2011 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. It must be emphasized, however, that the above exemption from the creditable withholding tax covers only revenues generated from its registered activity, BORACAY ISLAND WATER COMPANY, INC. New Operator of the Boracay Water Supply and Sewerage System Project. Furthermore, such exemption shall not cover revenues other than those specifically mentioned on the BOI's Specific Terms and Conditions as limitation of its ITH entitlement. Moreover, BORACAY ISLAND WATER COMPANY, INC. New Operator of the Boracay Water Supply and Sewerage System Project's entitlement to ITH is not automatic as it has still to comply with Section 7 (a) of the Specific Terms and Conditions of the BOI Registration, viz. : 1) File an application with the BOI Incentives Department within one (1) month from the filing of the final Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR) in order to validate claim of income tax exemption. The application shall be accompanied by a certification by Social Security System (SSS) that the enterprise is in good standing in the remittance of SSS contributions of its employees; and 2) Secure a Certificate of ITH Entitlement (CoE) from the BOI Supervision and Monitoring Department prior to filing of ITR with the BIR; otherwise, ITH for that particular taxable year without CoE shall be forfeited. Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under E.O. 226. In this regard, under the terms and conditions of its BOI registration, BORACAY ISLAND WATER COMPANY, INC. New Operator of the Boracay Water Supply and Sewerage System Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject to on its business transactions. AaITCS It should be understood that BORACAY ISLAND WATER COMPANY, INC. shall be constituted as withholding agent of the government if it acts as an employer and its employees receive compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as amended, and as implemented by Revenue Regulations (Rev. Regs.) No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the same Code, also as implemented by Rev. Regs. No. 2-98, as amended. Likewise, BORACAY ISLAND WATER COMPANY, INC. is required to file on or before the 15th day of the fourth month following the close of its accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the taxable year. Finally, BORACAY ISLAND WATER COMPANY, INC.'s books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. (BIR Ruling No. 334-2011 dated September 7, 2011) 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue