BIR Ruling [DA-010-06]

January 17, 2006 BIR RULING [DA-010-06] DA 090-01 May 16, 2001 Aranas Consunji & Barleta Law Office Unit 106, Le Metropole Tordesillas corner Dela Costa Sts. Salcedo Village, Makati City Attention: Jesus Clint O. Aranas Gentlemen : This refers to your letter dated October 10, 2005 requesting for confirmation of your opinion as follows: "1. The purchase of fixed assets, raw materials, work in progress and finished goods by Philippines Epson Optical Inc. from Pentax Luzon Philippines, Inc. is deemed part of the registered activity of the latter, and hence subject to the gross preferential income tax rate of 6% in lieu of all taxes, national and local. The said liability pertains to Pentax Luzon Philippines, Inc. and hence is not the liability of Philippines Epson Optical, Inc.; "2. The purchase of fixed assets, raw materials, work in progress and finished goods by Philippines Epson Optical Inc. from Pentax Luzon Philippines, Inc., both PEZA registered enterprises is exempt from value added tax." It is represented that Philippines Epson Optical, Inc. (hereinafter PEO for brevity) is a domestic corporation engaged in the business of making, manufacturing, assembling, importing, exporting, buying, trading and/or otherwise deal at wholesale in optical lenses and other optical related goods of whatever nature, and any and all equipment, material supplies, used, or employed in or related to the manufacture of such finished products; that it was incorporated with the Philippine Securities and Exchange Commission (SEC) on February 11, 2005 and was duly registered with the Philippine Export Processing Zone Authority (PEZA) on March 14, 2005; that sometime on April 1 & 14, 2005, PEO purchased fixed assets, raw materials, work in progress and finished goods from Pentax Luzon Philippines, Inc. (hereinafter "PLPI"); that the said acquisition was pursuant to the proposed winding down of business operations of PLPI; that PLPI is a domestic corporation duly registered with the PEZA; and that it is under the gross preferential income tax regime of 5%. EICScD In reply, please be informed that under Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1996", no taxes, local and national, shall be imposed on business establishments operating within the Ecozone and that in lieu of paying taxes, five percent (5%) of the gross income earned by all business enterprises within the Ecozone shall be remitted to the national government. Additionally, under Section 2(nn), Rule I of the Rules and Regulations implementing R.A. No. 7916, "gross income" refers to gross sales or gross revenue derived from business activity within the Ecozone, net of sales discounts, sales returns and allowances minus cost of sales or direct costs but before deduction is made for administrative expenses or incidental losses during a given taxable period. Such being the case, and since R.A. 7916 is a special law which grants exemptions from payment of national taxes of PEZA-registered business establishments operating within the Ecozone, except payment of the preferential tax rate of 5% on the gross income earned, the gross income earned on the sale by PLPI of fixed assets, work in progress, and finished goods, located within the Ecozone in the course of winding up its registered business within the Ecozone is subject to the 5% preferential tax rate based on the gross selling price or fair market value of the property as determined under Sec. 6(E) of the Tax Code of 1997, whichever is higher, minus the depreciated cost of the building as of the date of the cessation of commercial operations. The said liability pertains to PLPI and hence is not the liability of PEO. (BIR Ruling No. DA-090-01 dated May 16, 2001) Furthermore, as a duly registered Ecozone export enterprise, PLPI, is not subject to value added tax on the sale of its fixed assets, raw materials, work in progress and finished goods located within the Ecozone. Finally, since the buyer of the said assets is likewise a PEZA-registered company, no documentary stamp tax is payable on such sale transaction. (BIR Ruling No. 008-99 dated January 1, 1999)" Accordingly, we confirm your opinion as follows: 1. The purchase of fixed assets, raw materials, work in progress and finished goods by Philippines Epson Optical Inc. from Pentax Luzon Philippines, Inc. is deemed part of the registered activity of the latter, and hence subject to the gross preferential income tax rate of 5% in lieu of all taxes, national and local. The said liability pertains to Pentax Luzon Philippines, Inc. and hence is not the liability of Philippines Epson Optical, Inc. 2. The purchase of fixed assets, raw materials, work in progress and finished goods by Philippines Epson Optical Inc. from Pentax Luzon Philippines, Inc., both PEZA registered enterprises is exempt from value added tax. cCaATD 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue