Reversion of the Modified Rates of Import Duty on Crude Petroleum Oil and Refined Petroleum Products Covered by EO 113 to Zero Percent (0%)

July 2, 2007 BIR RULING [DA-352-07] DA 516-06 Steel Asia Manufacturing Corporation 6/F 8101 Pearl Plaza Building 5 Pearl Drive, Ortigas Center Pasig City Attention: Ms. Bernadette P. Narciso Senior Accounting Associate Gentlemen : This refers to your letter dated June 15, 2007 stating that Steel Asia Manufacturing Corporation is a Board of Investments (BOI) registered enterprise with Certificate of Registration No. DP-97-139 dated June 27, 1997; that it is registered as New Domestic Producer of Long Steel Products on a preferred Pioneer Status under the Omnibus Investments Code of 1987 (E.O. 226); that it is entitled to income tax holiday for a period of six (6) years starting October 1, 1999; that Steel Asia Manufacturing Corporation has received Meralco refund for the period covered from October 16, 1999 to May 16, 2003 during which the company was enjoying income tax holiday; and that Meralco withheld the amount of 25% representing creditable withholding tax. Based on the foregoing representations, you now request confirmation of your opinion that the refund to be given by MERALCO to Steel Asia Manufacturing Corporation, which at that time is enjoying an income tax holiday for a period of six (6) years, for excess utility payments is exempt from withholding tax. In reply thereto, please be informed that this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA 097-2006 dated March 8, 2006 , that "Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments . . . . EISCaD This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that 'the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. ( Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue, 47 BTA 590 ) (Emphasis supplied). When a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966 ). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. ( Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13 AFTR 930 ). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income ." (emphasis supplied) Later, in BIR Ruling No. DA 516-2006 dated August 25, 2006, this Office in reiterating the above-cited ruling, likewise ruled that "Applying the foregoing in the instant case, and considering that BITCAI is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under Revenue Regulations No. 8-2005. . . ." At this juncture, observation has to be made of the fact that since Steel Asia Manufacturing Corporation is exempt from income tax, it did not benefit from the utilities expense which it incurred. The receipt of the refund from MERALCO will not give rise to a taxable transaction, as Steel Asia Manufacturing Corporation did not receive anything of exchangeable value from it. SUCH BEING THE CASE, this Office hereby confirms your opinion that the refund which Steel Asia Manufacturing Corporation will receive from MERALCO is not a taxable event and therefore NOT subject, to income tax, and consequently, to withholding tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service