BIR Ruling [DA-027-05]

January 24, 2005 BIR RULING [DA-027-05] R.A. 7916; DA 348-03 Fe-Tronic Manufacturing Phils . , Inc . Road J corner Road 7 Blk. 17 Phase IV CEZ, Rosario CAVITE Attention: Ms . Nenita P . Arriola Accountant Gentlemen : This refers to your letter dated November 6, 2004 stating that Fe-Tronic Manufacturing Phils., Inc. (Fe-Tronic) is a domestic corporation engaged in the manufacturing of magnetic and other electrical components; that it is also a Philippine Economic Zone Authority (PEZA) registered corporation since February 1997 and as such, it has enjoyed an income tax holiday for four years which ended last January 2001; that at present, it is subject to a 5% income tax rate on the gross income earned from its registered activities; that for the past three years, the country's economic difficulties had adversely affected the company's operations; and that the management had decided to sell its building being occupied for the business, to recover somehow the cost of construction. In connection therewith, you now request for a ruling that any gain from the sale of the aforesaid fixed asset (building), previously used in its PEZA-registered operations, is subject to the preferential rate of 5% based on gross income pursuant to Section 24 of Republic Act (R.A.) No. 7916. In reply thereto, please be informed that gains from the sale by Fe-Tronic of its building is governed by the provisions of R.A. No. 7916, as amended, otherwise known as the Special Economic Zone Act of 1995. Fe-Tronic's gross income earned therefrom shall be subject to the 5% special tax, in lieu of all taxes, pursuant to Section 24 of RA 7916, as amended, as held in VAT Ruling No. 089-02 dated December 17, 2002, citing BIR Ruling No. 008-99 dated January 19, 1999: ADSTCa "Such being the case, and since RA 7916 is a special law which grants exemptions from payment of national taxes to PEZA-registered business establishment 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 KPC of its factory building located with 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 minus the depreciated cost of the building as of the date of cessation of commercial operations. (emphasis supplied) Since the sale of the building by a PEZA-registered enterprise in the course of winding up its business activities is embraced by the said 5% special tax regime, it stands to reason that Fe-Tronic's sale of its building is embraced therein. Consequently, the sale transaction is subject to the 5% preferential tax rate based on the gross income earned by Fe-Tronic, in lieu of all taxes. Likewise, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, and as implemented by Revenue Regulations No. 1-2000, promulgated on November 12, 1999, 3% of the 5% special tax shall be remitted directly to the BIR while the remaining 2% thereof shall be paid directly to the concerned City or Municipality, as follows: "Section 24. Exemption from National and Local Taxes . Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: "(a) Three percent (3%) to the National Government; "(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located.." AaIDCS 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