BIR Ruling [DA-090-01]

May 16, 2001 BIR RULING [DA-090-01] R.A. 7916 008-99 Daswani Enterprises Incorporation 2611 Cityland Cond. 10 Tower 1 6815 Ayala Avenue City of Makati Attention: Mr . S . G . Daswani Gentlemen : This refers to your letter dated June 20, 2000 requesting for a confirmatory ruling to the effect that the sale of your factory as a PEZA-registered enterprise is only subject to the 5% preferential tax rate based on the gross income earned, in lieu of national taxes and local taxes. It is represented that Daswani Enterprises, Inc. ("Daswani") was originally registered with Economic Processing Zone Authority (EPZA) now Philippine Economic Zone Authority (PEZA) as an Export Enterprise as per Certificate of Registration No. 91-043; that it was engaged in the manufacture and export of garments; that its factory is located at Phase II, Block I, Lot 9, Cavite Export Processing Zone, Rosario, Cavite; that on March 31, 1997, the Stockholders/Board of Directors of Daswani approved the closure of the garment factory due to continued business losses; the PEZA authorized Daswani to re-export the consigned machineries, equipment and inventories and thereafter approved the cancellation of Daswani's PEZA certificate of registration subject to the fulfillment of certain conditions which include the continuation of rental payments on the leased lot until the building is sold to another PEZA registered firm; that Daswani sold the factory to M/s Yong Sung Electronics, another PEZA-registered company, for the price of US$335,000.00 or equivalent to P13,400,000.00; that it is your opinion that the sale of the factory will fall under R.A. 7916, hence, subject to 5% preferential tax rate on the gross selling price or fair market value of the property as determined under Sec. 6(E) of the Tax Code of 1997, whichever is higher, less the depreciated cost of the building as of the date of the cessation of Daswani's commercial operations; and that this also exempt from the payment of documentary stamp tax. In reply, please be informed that under Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1996", no taxes, local and national, shall be imposed on business establishments operating within the Ecozone and that in lieu of paying taxes, five percent (5%) of the gross income earned by all business enterprises within the Ecozone shall be remitted to the national government. Additionally, under Section 2(nn), Rule I of the Rules and Regulations implementing R.A. No. 7916, "gross income" refers to gross sales or gross revenue derived from business activity within the Ecozone, net of sales discounts, sales returns and allowances minus cost of sales or direct costs but before deduction is made for administrative expenses or incidental losses during a given taxable period. Such being the case, and since R.A. 7916 is a special law which grants exemptions from payment of national taxes of PEZA-registered business establishments 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 Daswani Enterprises, Inc. of its factory located within 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 or fair market value of the property as determined under Sec. 6(E) of the Tax Code of 1997, whichever is higher, minus the depreciated cost of the building as of the date of the cessation of commercial operations. Furthermore, as a duly registered Ecozone export enterprise, Daswani Enterprises, Inc. is not subject to value added tax and documentary stamp tax on the sale of its factory building located within the Ecozone. Finally, since the buyer of the factory building is likewise a PEZA-registered company, no documentary stamp tax is payable on such sale transaction. (BIR Ruling No. 008-99 dated January 1, 1999) 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner (Legal & Inspection Group)