BIR Ruling [DA-209-98]

June 1, 1998 BIR RULING [DA-209-98] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . Ma . Victoria A . Villaluz Gentlemen : This refers to your letter dated November 24, 1997 requesting confirmation of your opinion that the lease of equipments by SB Leasing (Singapore) Pte. Ltd. ( SB Leasing ) to your client, Omron Mechatronics of the Philippines Corporation ( Omron ), a domestic corporation duly registered with the Securities and Exchange Commission and a Subic Bay Freeport ( SBF) registered enterprise located within the Subic Bay Freeport Zone ( SBFZ ), is effectively a zero-rated transaction under Section 108(B)(3) of the Tax Code of 1997. cdlex It is represented that Omron, a SBF enterprise located within the SBFZ is engaged in the business of manufacturing parts, units/modules of ATMs, CDs and ticket vendors; that it has entered into a contract for the lease of machinery with SB Leasing, a non-resident foreign corporation duly organized under the laws of Singapore; and that the machineries are highly technical in nature and are not locally available. In reply, please be informed that Section 12(c) of Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992", provides that registered enterprises within the Subic Special Economic Zone as defined in Executive Order No. 97 dated June 19, 1993, shall, in lieu of local and national taxes, be liable to the payment of 5% preferential tax rate based on gross income earned distributed as follows: (a) To the National Government 3% (b) To the Local Government Units affected by the declaration of the ECOZONE 1% (c) To the Special Development Fund of each concerned LGU of municipalities/ cities contiguous to the base/ECOZONE areas and, for the SBMA, for such LGUs located outside and contiguous to the city of Olongapo and the Municipality of Subic, to be utilized for this development 1% The aforementioned 5% preferential tax is a commutation of all national and local taxes otherwise due from businesses and enterprises operating within the SBFZ. Such being the case, your client is considered exempt from all direct and indirect taxes hence, may not be legally passed-on with value-added tax otherwise due from its non-resident foreign lessor vis-a-vis the said rental payments. (BIR VAT Ruling 033-96 dated October 30, 1996) In view thereof and considering that your client's non-resident foreign lessor is a non-VAT registered person, your client's aforesaid rental payments are accordingly exempt from the value-added tax. Consequently, your client is also exempt from the obligation to withhold and remit the 10% value-added tax on its rental payments and remittances which otherwise would be due thereon pursuant to the provisions of Section 114 of the Tax Code of 1997 [previously Section 110 of the National Internal Revenue Code, as amended by R.A. No. 7716, and as implemented by Section 4.110-3 of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations]. (BIR Ruling No. 162-94 dated November 25, 1994; BIR VAT Ruling No. 09-98 dated February 5, 1998) This ruling is being issued based on 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. casia Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)