BIR Ruling [DA-206-00]

April 4, 2000 BIR RULING [DA-206-00] Atty. Rolando P. Nonato 3rd Floor, Tulips Center A.S. Fortuna Street Mandaue City S i r : This refers to your letter dated September 7, 1999 stating that your client, Far East Wire Harness Corporation is a corporation organized and existing under the laws of the Philippines with principal office address at Mactan Export Processing Zone (MEPZ), Lapulapu City, Cebu; that Far East Wire Harness Corporation is also registered with the Export Processing Zone Authority (EPZA) with Certificate of Registration No. 88-013 dated July 1, 1988; that after several years of operation in MEPZ and due to the change in the economic and business climate of its products, Far East Wire Harness Corporation reduced its manufacturing activity, resulting to excess factory space; that new investors, three (3) in all, were invited to set-up operations in MEPZ; and that these investors applied for registration with PEZA and was duly authorized to operate within the excess spaces in the factory of Far East Wire Harness Corporation. In connection therewith, you now request for a ruling that the rental income derived by Far East Wire Harness Corporation from the lease of its factory buildings is subject only to the 5% preferential tax rate. In reply, please be informed that Section 24 of R.A. 7916, otherwise known as "The Special Economic Zone Act of 1995" provides that 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. . . . . Similarly situated is BIR Ruling No. 008-99 dated January 19, 1999 where this Office ruled "xxx xxx xxx "(1) That under Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1995", 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 revenues 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 to 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 KPC of its factory building 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 minus the depreciated cost of the building as of the date of cessation of commercial operations. "(2) As a duly registered Ecozone export enterprise, KPC is not subject to value-added tax and documentary stamp tax on the sale of its factory building. Since the buyer of the factory building is likewise a PEZA-registered company, no documentary stamp tax is payable on such sale transaction. "xxx xxx xxx" Based on the foregoing and applying the above-cited ruling by analogy, it is the opinion of this Office as it hereby holds that the income derived by Far East Wire Harness Corporation, a PEZA registered enterprise, from the lease of its factory buildings is subject to the preferential tax rate of 5% on its gross income earned. 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. SCDaET Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)