Punongbayan & Araullo

February 1, 2008 BIR RULING [DA-062-08] RA 8748; DA-493-2006; 207-99 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Raymund S. Gallardo Tax Partner Gentlemen : This refers to your letter dated August 22, 2007 requesting on behalf of your client, Ube Electronics (Philippines), Inc. (Ube), for confirmation of your opinion that the sale of its scraps or rejects falls under the coverage of its registered activity and consequently, income realized therefrom shall be subject to the applicable income tax incentive, i.e., Income Tax Holiday (ITH) or 5% of gross income earned pursuant to Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, as amended by Republic Act No. 8748. It is represented that Ube Electronics (Philippines), Inc. is a domestic corporation organized and existing under the laws of the Philippines; that it is a duly registered Ecozone export enterprise with the Philippine Economic Zone Authority (PEZA) per Certificate of Registration No. 01-029 dated April 24, 2001; that it is operating its business at the Mactan Economic Zone II-Special Economic Zone (MEZ II-SEZ); that it was registered with the Bureau of Internal Revenue (BIR) on March 5, 2001; that Ube was incorporated and registered with the Securities and Exchange Commission (SEC) on February 22, 2001 primarily to engage in, operate, conduct and maintain the business of manufacturing, importing, exporting, buying, selling, or otherwise dealing in, at wholesale basis such goods as microwave dielectric ceramic filters and duplexers and other miscellaneous parts and goods of similar nature and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products; that it is a wholly-owned subsidiary of Ube Electronics, Ltd., a foreign company incorporated and based in Japan; that based on is Registration Agreement with PEZA dated April 24, 2001, the scope of Ube's registered activity shall be limited to the manufacture of microware dielectric filters and duplexers and other miscellaneous parts and goods of similar nature, for export, and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at MEZ II-SEZ; that as a non-pioneer firm, Ube was entitled to a four (4) year Income Tax Holiday (ITH) incentive from January 1, 2002 to December 31, 2005; that it was also granted a one-year extension of its ITH incentive until December 31, 2006 based on the net foreign exchange earnings criterion under Rule XV, Section 6, Paragraph A (6) of the Rules and Regulations Implementing R.A. No. 7916; that beginning January 2007, Ube shall be subject to the 5% preferential tax rate on gross income earned from its registered activities in lieu of all other taxes, national or local, except real property tax on land owned by developers, pursuant to Section 24 of R.A. No 7916, as amended by R.A. 8748; that the major stages/process in the manufacture of microwave dielectric filters and duplexers include, among others, the following: HITAEC 1. Coating; 2. Grinding and lapping; 3. Printing; 4. Tuning; 5. Assembly and checking; that when the materials undergo the above-mentioned production process, particularly the coating stage, some of the ceramic materials and silver pastes unavoidably become unusable; that likewise, the excess ceramic materials and silver pastes in the grinding and lapping stages can no longer be recycled; that moreover, in the course of manufacturing the products, it is inevitable that occasionally certain microwave dielectric filters and duplexers would not meet the specific quality and standards required for sale as finished goods; and that after undergoing the manufacturing process, the excess ceramic materials and silver pieces and the dielectric filters and duplexers that do not meet the quality control standards of Ube are considered scraps or rejects and are sold by Ube to recycling companies either based in the Philippines or in Japan. In reply, please be informed that Section 4 of Revenue Regulations No. 1-2000 dated November 12, 1999, implementing Section 24 of Republic Act (RA) No. 8748, entitled "An Act Amending Republic Act No. 7916", otherwise known as the Special Economic Zone Act of 1995, provides, viz .: "Section 4. Nature of the 5% Tax and Extent of Tax Exemption . The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character. Registered ECOZONE enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A. No. 7 91 6, as amended by R.A. No. 8 74 8." cAaTED Inasmuch as the reject or scrap items which, as represented, will inevitably arise at a certain stage of the registered manufacturing activity, the income derived from sale of said reject or scrap items will be included in computing the gross income earned from the registered activities of said P EZ A-registered enterprise. Consequently, during the ITH period, income derived from sale of scrap or reject items shall be exempt from income tax; and thereafter, upon expiration of ITH, subject to the 5% preferential income tax rate. (BIR Ruling No. 493-2006 dated August 10, 2006) However, the sale of scrap and reject items shall be subject to 12% VAT during the ITH period. 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. ITDHSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service