BIR Ruling [DA-067-04]

February 12, 2004 BIR RULING [DA-067-04] Sec. 24, R.A. 7916 VAT-076-02, DA-333-98; DA-006-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. W.U. Villanueva Tax Division Gentlemen : This refers to your letter dated May 26, 2003 requesting for confirmation of your opinion that the income derived from the sale and/or lease of Lima Land Inc.'s Philippine Economic Zone Authority (PEZA) registered lots to PEZA registered and non-PEZA locators is subject to the 5% preferential rate under Republic Act No. 7916 ("RA 7916"), as amended, otherwise known as "The Special Economic Zone Act of 1995." IEAHca It is represented that your client, Lima Land, Inc. ("LLI"), is a domestic corporation primarily engaged in real estate development; that LLI is likewise registered with the Philippine Economic Zone Authority ("PEZA") as an economic zone ("ecozone") developer under Certificate of Registration No. EZ-97-06 dated February 6, 1998, mandated to establish, develop, construct, administer, manage and operate the Lima Technology Center Special Economic Zone located in Batangas City; that under its Registration, LLI is entitled to avail of the rate of 5% final tax on gross taxable income, in lieu of all national and local taxes after the expiration of its 4-year income tax holiday; that LLI's duly declared and registered 280.1684 hectares PEZA lots are part of the 441.1146 hectares of lands it had originally applied for declaration and registration with PEZA; that LLI intends to sell and/or lease its PEZA registered lots to PEZA and non-PEZA registered entities; that LLI now desires to be informed of the tax implications of the sale and/or lease of its PEZA registered lots. In reply, please be informed that Section 24 of RA 7916, as amended, provides in part: "SEC. 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: . . . " Likewise, Section 1(A) of Rule XIV of the Rules and Regulations implementing RA 7916, and as promulgated by the PEZA Board pursuant to Sections 12(c) and 55 of RA 7916, dealing specifically with ecozone developers and operators provides: "RULE XIV INCENTIVES TO ECOZONE DEVELOPERS/OPERATORS "SEC. 1. ECOZONE Developers/Operators shall be entitled to the following incentives: "A. Exemption from National and Local Taxes and Licenses . An ECOZONE Developer/Operator shall, to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and all local government impost, fees, licenses or taxes, including but not limited to the following : "1. Internal revenue taxes such as gross receipts tax, Value-Added Tax, ad valorem and excise taxes ; "2. Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises. " In lieu thereof, the ECOZONE Developer/Operator Enterprise shall pay a five percent (5%) final tax on gross income in accordance with the provisions of Rule XX of these Rules." (Emphasis supplied.) Such being the case, development, operation, sale or lease of lots by the PEZA registered ecozone developer/operator, is exempt from income tax, capital gains tax, value added tax and all other national internal revenue taxes, In lieu thereof, the ecozone developer/operator is liable to pay the five (5%) preferential rate on its gross income from said activities, in lieu of all taxes, including value-added taxes (VAT) pursuant to Section 1(A) of Rule XIV, Rules and Regulations to Implement RA 7916. Thus, income derived from the sale and/or lease of LLI's PEZA registered lots to PEZA registered and non-PEZA locators is subject to the 5% preferential rate, based on its gross income from its registered activities. (BIR Ruling No. 333-98 dated July 21, 1998 and BIR Ruling No. 070-97 dated June 9, 1997) Moreover, the law provides that the same sale transaction is exempt from VAT pursuant to Section 109 (q) of the Tax Code of 1997, in relation to Section 24 of RA 7916, as amended, which provides: Sec. 109. Exempt Transactions . The following shall be exempt from the value-added tax: "xxx xxx xxx "(q) 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; . . . " (Emphasis supplied) (VAT Ruling No. 076-02 dated November 11, 2002) Thus, LLI, being a PEZA registered enterprise, is subject to the 5% preferential tax in lieu of all taxes. It is also exempt from payment of the documentary stamp tax (DST) on the sale and/or lease of its PEZA registered lots to PEZA registered and non-PEZA locators, subject to the proviso of Section 173 of the Tax Code of 1997, that when one party to the transaction enjoys exemption from DST, the other party thereto who is not exempt shall be the one directly liable for the tax. (BIR Ruling No. 0062-02-dated January 19, 2002) 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 and Inspection Group