BIR Ruling [DA-023-03]

January 28, 2003 BIR RULING [DA-023-03] Sec. 109 (q), Sec. 24, R.A. 7916 DA 090-01 dated May 16, 2001 Punongbayan & Araullo 6th Floor, Vernida IV Building Alfaro Street, Salcedo Village Makati City Attention: Atty. Vic C. Mamalateo Gentlemen : This refers to your letter dated October 14, 1999 stating that your client, Seagate Technology (Philippines), Inc. (Seagate for brevity) with principal office at New Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu City is a branch office duly registered with the Securities and Exchange Commission (SEC) dated March 5, 1997; that Seagate is likewise registered with the Philippine Economic Zone Authority (PEZA) dated June 6, 1997 with Certificate of Registration No. 97-044 and a VAT-registered entity; that, although Seagate may legally operate its business for having complied with all the registration requirements, it has not commenced commercial operations in the Philippines due to a worldwide decrease in the demand presently experienced by the disk drive industry; that with no sign of the Asian economy improving, and after a long and tedious process of deliberation, Seagate's Board of Directors approved the closure of the operations in Cebu and eventual disposal of its facility; and that Seagate plans to sell its property consisting of the manufacturing plant and equipment such as generator sets and others. In connection therewith, you now request for confirmation of your opinion that "1. The sale of property, plant and equipment of Seagate, which includes the building and equipment used for production, is not subject to 10% value-added tax (VAT), whether the sale is made to foreign or to local buyers, since it is not in the course of trade or business; "2. The gain, if any, derived by Seagate from the sale of property, plant and equipment is subject to the regular corporate income tax of 33% and 32% if sold in 1999 and 2000, respectively, because such sale is not within the registered activity of the company. However, gains from the sale of movable properties of the company that will be sold outside the Philippines, are not subject to income tax, it being considered income from sources without the Philippines; "3. The loss on write-down of various assets based on the appraisal report dated September 1998 will not affect the computation of gain or loss on the disposal of such assets because such loss is not yet a closed and completed transaction as of 1998. Hence, the original acquisition cost less any depreciation allowance should be deducted from the selling price in computing the gain or loss of the property sold; and "4. The unused input VAT may be claimed as refund by Seagate due to retirement from or cessation of business." In reply, please be informed that your opinion is hereby confirmed as follows: 1. Section 109(q) of the Tax Code of 1997 provides that transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590 shall be exempt from value-added tax. In interpreting and applying the above-cited section of the Tax Code and in relation to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, this Office in Revenue Memorandum Circular No. 74-99 declared that sale of goods or property by a PEZA-registered enterprise to another PEZA-registered enterprise shall be exempt from value-added tax. Considering that Seagate is a PEZA-registered enterprise, the sale of its properties, consisting of the building and equipment, within the ECOZONE whether to foreign or local buyers shall be exempt from value-added tax pursuant to Section 109(q) of the Tax Code of 1997. ( BIR Ruling No. DA090-01 dated May 16, 2001 ) 2. Section 28(A)(1) of the Tax Code of 1997 provides that a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty three (33%) effective January 1, 1999; and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). Ordinarily, Seagate as a PEZA-registered enterprise is entitled to an income tax holiday of four (4) years. However, inasmuch as the sale of the above-mentioned properties is not within the registered activity of Seagate, the sale thereof is subject to an ordinary corporate income tax at the rate of 33% or 32%, as the case may be, based on its net taxable income ( i.e. , gross income less allowable deductions). On the other hand, Section 42(E) of the Tax Code of 1997 provides that gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: . . . Corollarily, Section 159 of Regulations No. 2, otherwise known as the Income Tax Regulations, provides that income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word "sold" includes "exchange". The "country in which sold" ordinarily means the place where the property is marketed. DEaCSA It is clear from the above-mentioned section that income derived from the sale of personal property except shares of stock shall be taxable in the country in which sold. This is true, considering that under the requisites or limitations on the power of taxation, person, property or interest taxed must be within the jurisdiction of the taxing authority. Considering that the movable properties such as generator sets, pumps and others are sold outside the Philippines and the title to said goods passes outside the Philippines, any gain derived by Seagate from such sale is not subject to income tax since the same is beyond the taxing jurisdiction of the Philippines. Furthermore, Seagate, as a resident foreign corporation, is taxable only on its income from Philippine sources. 3. Section 34(D)(1) of the Tax Code of 1997 provides in part that losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions. It is well established that a mere decline, diminution or shrinkage of the value of property does not constitute a deductible loss. In other words, fluctuations in market value are never to be accounted for in the computation of income until the gain or loss becomes an accomplished fact. [Reggio v. U.S., 151 F Supp 740 (Ct Cl, 1957)] Hence, the decline in the fair market value of Seagate's properties as appraised by an independent accredited appraiser and which was classified in its financial statements as "loss on write down of real estate held for resale" will not affect the computation of gain or loss on subsequent sale of its assets. Accordingly, the book value ( i.e. , original acquisition cost less any depreciation allowance) instead, should be deducted from the selling price in computing the gain or loss of the property sold. 4. Section 112(C) of the Tax Code of 1997 provides that a person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of the said Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his internal revenue taxes. ADHCSE Accordingly, since Seagate is a VAT registered entity, any unused input taxes as of the date of its retirement or cessation from business shall be allowed as credit against any output tax and the balance, if any, shall, subject to the filing of an application with the Revenue District Office (RDO) having jurisdiction over its principal place of business, be refunded to Seagate within two (2) years from the date of retirement or cessation of its business. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group