JGC Philippines, Inc.

January 23, 2008 BIR RULING [DA-032-08] JGC Philippines, Inc. JGC Phil. Building 2109 Prime Street, Madrigal Business Park Ayala Alabang, Muntinlupa City Attention: Takanori Oyama President Gentlemen : This refers to your letter dated August 17, 2007 stating that JGC Philippines, Inc. (JGC) is engaged in the business of IT-enabled engineering, procurement and construction services; that it is a domestic corporation organized and existing under Philippine laws with Securities and Exchange Commission (SEC) Registration No. 167900 dated September 5, 1989; that its primary purpose is "To engage in the business of rendering specialty and technical services including consultation services to juridical or natural persons with respect to planning, management, procurement, construction, evaluation, estimation, supervision, inspection, maintenance, operation and other activities incidental thereto or in any way connected therewith, for overseas or domestic projects for industrial or other facilities in various fields and to engage in general construction business, including the constructing, enlarging, repairing, developing or engaging in work both here and abroad upon petroleum refineries, petrochemical plants, gas production and processing plants, storage facilities, power stations, food and pharmaceutical plants, automobile assembling plants and other industrial plants and facilities, buildings, houses and condominium roads, plants, bridges airfields, piers, waterworks, railroads and other structures and to enlarge in actual and direct procurement work for both domestic and overseas projects including, but not limited to sourcing, and commercial and technical evaluation of suppliers, vendor selection, order placement, expediting and inspection, direct importation and purchase, shipping arrangement and customs clearance and other related procurement activities." cCSDTI that on March 6, 2001, JGC was registered with the Board of Investments (BOI) as a New IT Service Firm in the Field of Information Technology Services (Engineering, Procurement and/or Construction Services) and was granted Pioneer status by the BOI; that as a BOI-registered company enjoying Pioneer status, it was given, among others, an Income Tax Holiday (ITH) incentive initially for a period of six (6) years from March 6, 2001 up to March 5, 2007; that this was subsequently extended for another two (2) years or up to March 5, 2009; that on August 3, 2006, the JGC Philippines Building was declared by PEZA as an IT Building under Certificate of Registration No. EZ-06-28 dated August 23, 2006, and therefore was considered a special economic zone under R.A. No. 7916, as amended; that on August 23, 2006, JGC applied for registration with the Philippine Economic Zone Authority (PEZA) as an Ecozone IT Enterprise, and requested that its ITH incentive currently enjoyed under its BOI registration be transferred to PEZA under the same terms and conditions; that JGC's application was approved by the PEZA Board of Directors on its regular meeting on December 28, 2006; that on February 27, 2007, JGC was registered with PEZA as an Ecozone IT (Export) Enterprise to provide engineering, procurement and construction (EPC) services; that on the same date, JGC signed the corresponding Registration Agreement with PEZA; that pursuant to said Registration Agreement, the scope of its registered activities shall be limited to the provision of engineering, procurement and construction (EPC) services and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the JGC Philippines Building; that under the said Registration Agreement, JGC was granted only the unavailed portion of its ITH incentive under its BOI registration, and to other remaining incentives also under its BOI registration; that upon the expiry of the ITH, JGC shall cease to be entitled to all the incentives under its BOI registration, and shall thereafter be entitled to the 5% tax on Gross Income, in lieu of all national and local taxes, and tax and duty-free importation privileges; that on March 28, 2007, PEZA issued the corresponding Certification that the Company is a PEZA-registered Ecozone IT (Export) Enterprise to provide engineering, procurement and construction (EPC) services; that on March 20, 2007, after having been registered with PEZA, JGC entered into an Agreement with Coral Bay Nickel Corporation (CBNC), a corporation organized and existing under Philippine laws with principal place of business at Rio Tuba, Bataraza, Province of Palawan, and which is also a PEZA-registered company authorized to engage in the manufacture of nickel-cobalt mixed sulfide as an Ecozone Export Enterprise at the Rio Tuba Export Processing Zone; that under the terms of said Agreement, CBNC engaged JGC to design, execute and complete its second hydrometallurgical processing plant to produce nickel-cobalt mixed sulfide in the Rio Tuba Export Processing Zone; that JGC has undertaken at the JGC Philippines Building the IT-enabled engineering, procurement and construction activities for the plant, while subletting all the construction activities to PCAB-licensed contractors; and that on March 12, 2007, under Letter of Authority No. 07-0479, PEZA approved JGC's request to sell its services to the local market to the extent of thirty percent (30%) of the total sales of its IT services, particularly to provide engineering, procurement and construction (EPC) services. In connection therewith, you now request confirmation of your opinion that 1. The sale by JGC, a PEZA-registered company, of EPC services ( i.e., to design, execute and complete CBNC's second hydrometallurgical processing plant to produce nickel-cobalt mixed sulfide in the Rio Tuba Export Processing Zone) to CBNC, another PEZA-registered company which services are performed within a special economic zone, i.e., the JGC Philippines Building, is considered being performed outside the Customs Territory, and is therefore not considered as a local sale; cHaCAS 2. During the period of the Company's ITH incentive, all income derived by the Company from its registered activity, i.e., providing engineering, procurement and construction (EPC) services, shall be covered by the ITH incentive, including income from services performed within the Customs Territory. In reply thereto, please be informed as follows: 1. Section 8 of R.A. No. 7916 provides that HSATIC "SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. The ECOZONE shall be managed and operated by the PEZA as separate customs territory. The PEZA is hereby vested with the authority to issue certificates of origin for products manufactured or processed in each ECOZONE in accordance with the prevailing rules of origin, and the pertinent regulations of the Department of Trade and Industry and/or the Department of Finance." In stressing the rationale of the above-mentioned principle, the Supreme Court in the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. G.R. No. 150154 dated August 9, 2005, declared that "This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory. It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone has been described as . . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IE), export processing zones (EPZs), free trade zones and tourist/recreational centers. SHADcT The National Territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory. Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the legal fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory." aIDHET SUCH BEING THE CASE, this Office holds that the sale by JGC, a PEZA-registered company, of services consisting of engineering, procurement and construction pursuant to its PEZA registration (formerly BOI) as an ECOZONE IT (Export) Enterprise, to CBNC, also a PEZA-registered company, which EPC services are performed by JGC within the JGC Philippines Building, which is a PEZA IT Zone, are deemed by fiction of law as being performed or rendered in foreign territory or foreign soil, and therefore not within the Customs Territory. Accordingly, the sale of such services should not be considered as local sales since the same took place by legal fiction in a foreign territory or foreign soil. 2. Paragraph 13.1 of the Company's Registration Agreement with PEZA dated February 27, 2007 states "13.1. The REGISTRANT (JGC) project subject of this Agreement shall be entitled only to the unavailed portion of the Income Tax Holiday (ITH) incentive under its BOI registration and to the other remaining incentives under its BOI registration, if any. Upon expiry of the ITH incentive, the REGISTRANT (JGC) shall cease to be entitled to all incentives under its BOI registration and shall then be entitled to the 5% tax on gross income (5% GIT) incentive, in lieu of all national and local taxes, duty and tax-free importation privileges in accordance with Article 77, Book VI of E.O. 226 and the applicable provisions in the PEZA Rules and pertinent guidelines." ETaSDc It is to be noted that the ITH incentive under JGC's BOI registration was based on its activity as a New IT Service Firm in the Field of Information Technology Services (Engineering, Procurement and/or Construction Services), and so long as JGC continues to be engaged in this registered activity, all its income derived from such sale of EPC services shall continue to be covered by the said ITH incentive. Accordingly, considering that PEZA has granted JGC the unavailed portion of its ITH under its BOI registration, as well as the other remaining incentives under its BOI registration, this Office holds that all income derived by JGC from its sale of EPC services as a PEZA-registered company, whether local sale or not, shall continue to be covered by the ITH subject to the 30% threshold allowed by PEZA. CDcaSA WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. The sale by JGC, a PEZA-registered company, of EPC services ( i.e., to design, execute and complete CBNC's second hydrometallurgical processing plant to produce nickel-cobalt mixed sulfide in the Rio Tuba Export Processing Zone) to CBNC, another PEZA-registered company, which services are performed within the special economic zone, e.g., the JGC Philippines Building, is considered as being performed outside the Customs Territory, and is therefore not considered as a local sale. 2. During the period of JGC's ITH incentive, all income derived by JGC from its registered activity, i.e., providing engineering, procurement and construction (EPC) services, shall be covered by the ITH incentive, including income from services performed within the Customs Territory, subject to the 30% threshold allowed by PEZA. aASEcH 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service