BIR Ruling [DA-227-02]

November 29, 2002 BIR RULING [DA-227-02] RA 7916 DA-399-98; DA-064-99 R-II Builders Incorporated R-II Building, 136 Malakas Street Diliman, Quezon City Attention: Mr. Leopoldo T. Sanchez President Gentlemen : This refers to your letter dated September 10, 2002 requesting for confirmation of your opinion that R-II BUILDERS, Inc. is subject to the 5% final tax on its gross income earned, in lieu of all national and local taxes, effective October 1, 2001. HEcSDa BACKGROUND OF THE CASE It is represented that R-II BUILDERS, INC. is a domestic corporation and existing under the laws of the Philippines; that it applied with the Philippine Economic Zone Authority (PEZA) for the development of a 400 hectare area (79 hectares of which is reclaimed) in Vitas, Tondo, Manila, as a special economic zone (ECOZONE), subject to the 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, INC. through Resolution No. 97-539, subject to the following terms and conditions: "1. That to the extent of the area it shall develop, R-II BUILDER, 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. . . . "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 Centre; that based on the above facts, the BIR issued BIR Ruling No. DA-112-2001 dated June 18, 2001, stating that pursuant to Section 24 of R.A. 7916, otherwise known "The Special Economic Zone Act of 1995", R-II BUILDERS, INC. shall, during the availment period of said ITH, be exempt from the payment of income tax on its development, operation, sale or lease of lots located in 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. No. 8-98 ; 1 that with respect to the payment of documentary stamp tax on the sale of real property imposed under Section 196 of the Tax Code, it shall be paid by the other party not exempt from said tax; that on September 20, 1999, Mr. Gonzalo P. Yuzon, corporate secretary of R-II BUILDERS, INC. wrote to the PEZA Director General, officially informing PEZA that the company has opted to avail of the PEZA Income Tax Holiday incentive to take effect on October 1, 1999 after the BOI four-year income tax holiday that began in October 1, 1995 and was set to expire on September 30, 1999; that on April 15, 2002, Mr. Anthony B. Padua, Department Manager III of PEZA, certified that R-II BUILDERS, INC. is a PEZA-registered Ecozone Developer/Operator with registration Certificate No. EZ-98-15 dated July 1998, and its exemption from all national and local taxes (and payment of the 5% special tax rate on gross income) shall only be availed of upon expiration of the income tax holiday; that the Project is previously registered with the Board of Investments (BOI) under Executive Order No. 226 (otherwise known as the Omnibus Investments Code of 1987) as new operator of industrial estate on preferred nonpioneer status and as new operator of incinerator and power generation plant on a preferred pioneer status; that under the first registration, the Project is entitled to certain tax and non-tax incentives which include, among others, ITH for four (4) years from October 1995; and, that there was no simultaneous availment of the ITHs under the BOI and PEZA laws as it merely continued its availment of the ITH under the PEZA law for two years to complete the six-year ITH granted to it under the incentive laws. R-II BUILDERS, INC. filed its corporate income tax return for taxable year 2001 and paid the 5% final tax on its gross income earned of P30,549,570 on April 15, 2002. ISSUE Whether or not R-II BUILDERS, INC. a PEZA-registered enterprise is subject to the 5% final tax on gross income earned, and accordingly, exempt from all national taxes, including the expanded withholding tax and documentary stamp tax on sale or transfer of real property beginning October 1, 2001, upon the expiration of its income tax holiday on September 30, 2001. POSITION OF R-II BUILDERS, INC. It is your opinion that R-II BUILDERS, INC., a PEZA-registered enterprise as Developer/Operator of Manila Harbour Centre Special Economic Zone, shall be subject to the 5% final tax effective October 1, 2001 upon the expiration of its six-year income tax holiday on September 30, 2001, and four years of which were under Executive Order No. 226 (BOI Incentives Law), and the remaining two (2) years under R.A. No. 7916 (PEZA Law). Consequently, R-II BUILDERS, INC. shall be exempt from all national and local taxes, including the expanded withholding tax (EWT) prescribed in Rev. Regs. No. 2-98, as amended, and documentary stamp tax prescribed in Section 196 of the Tax Code on any sale, or transfer of real property. 2 REQUESTED RULING Pursuant to Section 24 of Republic Act No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995" expressly provides that, except for real property taxes on land owned by developers, no taxes 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 as follows: (a) three percent (3%) to the National Government, (b) one percent (1%) to the local government units where the enterprise is located, and (c) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ecozone. 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). It is noted that R-II BUILDERS INC. had initially enjoyed an ITH for four (4) years as new operator of industrial estate on preferred nonpioneer status and as new operator of incinerator and power generation plant on a preferred pioneer status under E.O. No. 226 from October 1, 1995 and, thereafter, on November 5, 1997, before the expiration of the four-year period, it was also granted a six-year ITH under the PEZA Law. Considering therefore, that there is an overlapping of the period of ITH granted under E.O. No. 226 and that granted under PEZA law, the six years ITH granted under PEZA Law in November 1997 must include the years of ITH initially availed under E.O. No. 226. Such being case, the six years ITH must be reckoned from October 1, 1995 and therefore, expired on September 30, 2001. Accordingly, your opinion that R-II BUILDERS, INC., shall be subject to the 5% final tax effective October 1, 2001 upon the expiration of its six-year income tax holiday on September 30, 2001, and four years of which were under Executive Order No. 226 (BOI Incentives Law), and the remaining two (2) years under R.A. No. 7916 (PEZA Law), is hereby confirmed. Consequently, R-II BUILDERS, INC. shall be exempt from all national and local taxes, including the expanded withholding tax (EWT) prescribed in Rev. Regs. No. 2-98, as amended, and documentary stamp tax prescribed in Section 196 of the Tax Code on any sale, or transfer of real property. 3 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 & Inspection Group Footnotes 1. BIR Ruling No. DA-399-98 dated September 3, 1998; DA-064-99 dated February 5, 1999. 2. Sec. 24 of R.A. 7916, as amended. 3. Sec. 24 of R.A. 7916, as amended.