BIR Ruling [DA-112-01]

June 18, 2001 BIR RULING [DA-112-01] RA 7916 DA-399-98; DA-064-99 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty . V. C. Mamalateo Tax Partner Gentlemen : This refers to your letter dated May 16, 2001 requesting on behalf of your client, R-II BUILDERS, INC., for confirmation of your opinion that its sale of real property located within the Manila Harbour Centre, Tondo, Manila City, is exempt from the expanded withholding tax prescribed under Revenue Regulations No. 2-98 dated April 17, 1998. It is represented that R-II BUILDERS, INC. is a domestic corporation organized and existing under the laws of the Philippines; that it has applied with the Philippine Economic Zone Authority (PEZA) for the development of a 400 hectare area (379 hectares of which have to be reclaimed) in Vitas, Tondo, Manila as an special economic zone (ECOZONE), subject to Presidential Proclamation of the area, and R-II BUILDERS, INC.'s registration as Developer/Operator of said ECOZONE; that on November 5, 1997, the PEZA Board of Directors approved the application of R-II BUILDERS' application through Resolution No. 97-359, subject to the following terms and conditions, to wit: "1. That to the extent of the area it shall develop, R-II BUILDERS, INC. shall be entitled to the following incentives upon its registration with PEZA which shall be after the subject areas are proclaimed as ECOZONE by the President: "Exemption from national and local taxes, after the Income Tax Holiday (ITH) has expired, and in lieu thereof, the enterprise shall pay five percent (5%) Gross Income Tax (R.A. 7916); "A. Tax Exemptions "1. Duty of 3% on imported capital equipment and its accompanying spare parts. "a. . . .; "2. Income Tax Holiday (ITH) "a. Income Tax Holiday (6 years regardless of status: pioneer or non-pioneer)" that on June 23, 1998, the President of the Philippines, pursuant to Republic Act No. 7916, its implementing rules and regulations and PEZA Board Resolution No. 97-359, issued Proclamation No. 1260 designating as a Special Economic Zone as an area located in Barangay Vitas, District of Tondo, City of Manila consisting of seven hundred ninety one thousand four hundred eighty five (791,485) square meters, henceforth to be known as Manila Harbour Centre Special Economic Zone; that on July 22, 1998 PEZA Director General Lilia B. de Lima issued Certificate of Registration No. E2-98-15, registering R-II BUILDERS INC. as the Developer Operator of Manila Harbour Center; and that you opined that as such, the sale or lease of lots by R-II BUILDERS, INC. is exempt from income tax and creditable withholding tax pursuant to Section 2-57.2(J) of Rev. Regs., as amended by Rev. 8-98. TEcAHI In reply, please be informed that pursuant to Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1995" which expressly provides as follows, to wit: "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code . Any provision of existing laws, rules and regulations to the contrary not withstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government . . ." However, entitlement and availment of incentives, in addition to the fiscal incentives provided in Section 24 and 42 of RA 7916, as provided for under par 2, Section 3 of Rule XIII in relation to Rule IV, both of the implementing Rules and Regulations of RA 7916, by " new and expanding ECOZONE Developers/Operators " is determined by the Board in accordance with the pertinent provisions of the Code and the Investment Priorities Plan prepared annually by the Board of Investments. Apparently, by virtue of said authority, the Board issued on November 5, 1997 Resolution No. 97-359, granting R-II BUILDERS, INC. a six-year income tax holiday (ITH). In the light of this grant of ITH, R-II BUILDERS, INC. is exempt from the creditable withholding tax (CWT) as for provided for under Section 2.57.5(B) of Rev. Regs. 2-98 relative to the CWT on the sale, exchange or transfer of real property classified as ordinary asset, as prescribed in Section 2.57.2(J) of the same. Regs. 2-98, as amended by Rev. Regs. 8-98. Thus, during the availment period of said ITH by herein taxpayer, R-II BUILDERS, INC. shall be exempt from the payment of income tax on its development, operation, sale or lease of lots located within the Manila Harbour Centre ECOZONE and consequently, from the creditable withholding tax being collected pursuant to Section 2.57.2(J) of Rev. Regs. No. 2-98, as amended by Rev. Regs. 8-98. (BIR Ruling DA-399-98 dated September 3, 1998; DA-064-99 dated February 5, 1999) With respect to the payment of documentary stamp tax (DST) on the sale of real property imposed under Section 196 of the 1997 Tax Code, please be informed that as provided for in Section 173 of same Tax Code, " whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax ." Thus, documentary stamp tax shall be paid by the other party not exempt from tax. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group