Tax notes: Peza tax incentives cover ‘related activities’-A A +A
Monday, September 16, 2013
INCOME realized by an Information Technology (IT) enterprise registered with the Philippine Economic Zone Authority (Peza) from activities that are related to its PEZA-registered activities are entitled to income tax incentive and, hence, are exempt from withholding tax.
In a recent case decided by the Court of Tax Appeals (CTA) en banc, a Peza-registered IT enterprise under income tax holiday (ITH) entered into a master service provider agreement with a call center company for the lease of transmission facilities and the establishment of a contact center, including the provision of outsourced customer care services. The call center company withheld tax on its income payments to the PEZA-registered IT enterprise. However, when the call center company discovered that it erroneously withheld taxes on its income payments to the Peza-registered enterprise, it reimbursed the same to the enterprise. To recover its erroneously withheld and remitted tax, it filed a claim for refund.
As far as the Bureau of Internal Revenue (BIR) is concerned the income payments made by the call center company to the PEZA-registered enterprise, providing the lease of transmission facilities, is subject to withholding tax. BIR claimed that the lease of transmission facilities is not part of the listed activities in the IT enterprise’s registration agreement with Peza; hence, it should be considered a “new or additional product line” requiring a separate approval from Peza to avail of the tax incentives.
Without a Peza approval on such leasing activity, the rental income paid should be subject to income tax and creditable withholding tax.
In its decision, the CTA en banc upheld the decision of the court in division, which declared that the lease of transmission facilities is an activity necessarily related to the registered activities of the Peza IT enterprise. The CTA en banc cited the rulings issued by the BIR where it held that the grant of incentives to PEZA-registered entities covers not only activities explicitly listed under the entity’s certificate of registration, but extends to activities necessarily related to the registered activities (Commssioner of Internal Revenue v. JP Morgan Chase Bank, N.A. –
Philippine Customer Care Center, CTA EB No. 876 re CTA Case No. 7962, July 15, 2013).
Considering that the lease of transmission facilities is necessarily related to the registered activities of the PEZA IT enterprise, the CTA en banc held that it is covered by the IT enterprise’s registered activities; thus a separate Peza approval is not necessary to avail of the tax incentive. Thus, the rental income paid to the Peza IT enterprise for the lease of transmission facilities is not subject to withholding tax.
(Source: Punongbayan & Araullo)
Published in the Sun.Star Cebu newspaper on September 17, 2013.