BIR Ruling [DA-029-01]

March 8, 2001 BIR RULING [DA-029-01] R.A. 7227 BIR Ruling Nos. 172-99; 204-99 Petroline Resources, Inc . Bgy. Mt. View Resort Mariveles, Bataan Attention: Mr . Arturo F . Lopez C.E.O. Gentlemen : This refers to your letter dated April 27, 2000 stating that you are a petroleum dealer and in the process of registering as Special Economic and Freeport Zone enterprise inside the Subic Bay Freeport Zone (SBF); that as a prospective special ecozone locator inside SBF, you wish to inquire of your possible tax liabilities in relation to RA 7227 ("The Bases Conversion and Development Act"), to wit: "1. As a locator pursuant to Article 12 of said RA 7227, I understand that we are entitled to a 5% preferential tax rate, in lieu of all taxes, with respect to all revenues/sales inside SBF? "2. Are my purchases from the producer/manufacturer, i.e., Coastal Petroleum, also a SBF locator, of my inventoriable petroleum products exempt from tax since we are both a locator enjoying the 5% preferential tax regime? "3. My prospective customers/clients may include tax exempt entities, persons, etc., both locator and non-locator. As provided for by RA 7227, the revenue/income derived from the sale of our products is subject to the preferential rate of 5% regardless of who the buyer is. The same RA 7227 provides, however, that in the event of removal or export of the products, the same shall be subject to customs duties and taxes under the Customs and Tariff Code and relevant tax laws of the Philippines. What are the possible internal revenue taxes that may be imposed on such exportation? In reply, please be informed of the following: I. Among the incentives and policies governing the Subic Bay Economic and Freeport Zone under Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act", are as follows: "(a) . . . "(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine Territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; "(c) The provisions of existing laws, rules and regulations to the contrary not withstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to the base areas. "In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter. " (Section 12, RA 7227) [Emphases supplied] II. For tax purposes, the operations of the Subic Bay Freeport is distinct and separate from the Customs Territory and is governed by special laws and regulations. Among the incentives and policies are the following: As a separate customs territory, the provisions of the Tax Code imposing and prescribing regular taxes upon persons and entities in the Customs territory will not apply to the SBF and SBMA administered zones insofar as the same is in conflict with provisions of R.A. No. 7227. (BIR Ruling No. 172-99 dated November 5, 1999; 204-99 dated December 27, 1999) IDcTEA As purchaser therefor and considering that other national internal revenue taxes in lieu of the 5% preferential tax rate, are not collected on said sale from Coastal Petroleum, also a special ecozone locator, no taxes may emanate from said transaction that may be collected from you, as the purchaser of the product. III. As a locator company inside Subic Special Economic and Freeport Zone, your gross income earned from your proposed sale of conventional petroleum products initially purchased tax-free from Coastal Petroleum to a non-locator, shall be subject to a preferential tax rate of five percent (5%) in lieu of local and national taxes, pursuant to the above-cited Section 12(c) of RA 7227. However, considering that the removal thereof from the special ecozone constitutes importation into the Customs Territory by a non-locator, the latter as the importer of the products shall be directly liable to pay the corresponding excise taxes on petroleum products imposed under Section 148 in relation to Sections 129 and 131, both of the 1997 Tax Code, as well as to the value-added tax on other petroleum products such as lubricating oil, processed gas, grease, wax and petrolatum pursuant to Sections 107 and 109 of the same Tax Code. Pertinent provisions of Section 131 of the Tax Code provides that "in the case of tax-free articles brought or imported into the Philippines by persons or entities or agencies exempt from tax which are subsequently sold transferred or exchanged in the Philippines to a non-exempt persons or entities the purchasers or recipients shall be considered the importers thereof and shall be liable for the duty and internal revenue tax due on such importation" Thus, the tax liability of Petroline Resources, as seller-ecozone locator, shall be limited to the five percent (5%) of the gross income earned, in lieu of local and national taxes, as provided for under Section 12(c) of R.A. No. 7227. On the other hand, the non-locator/purchaser, as the importer of the petroleum products from SBF, shall be taxed in accordance with the foregoing Section 131 in relation to Section 148, as well as to the value-added tax on other petroleum products such as lubricating oil, processed gas, grease, wax and petrolatum pursuant to Section 107, in relation to Section 109, all of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group