BIR Ruling [DA-267-03]

August 15, 2003 BIR RULING [DA-267-03] RMC 74-99 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Director Gentlemen : This refers to your letter dated August 4, 2003 stating that your client, American Power Conversion (Phils.), Inc. (APCP) with principal office address at the Cavite Ecozone, Rosario, Cavite; that APCP is a company registered with the Securities and Exchange Commission (SEC) with SEC Registration No. ASO96-005079 dated May 15, 1996, is a wholly-owned subsidiary of American Power Conversion BV (APBV), a holding company based in the Netherlands, fully-owned by American Power Conversion Corporation (APCC). of the United States; that APCP is registered with the Philippine Economic Zone Authority (PEZA) as an Export Enterprise with an Income Tax Holiday of four years, which expired on July 31, 2003; that beginning August 1, 2003, APCP is mainly under the 5% special tax regime; that there are, however, still certain activities covered by the Income Tax Holiday; that APCP is presently a contract manufacturer for APCC (i.e., APCP used APCC's technology without a charge, and APCP has no inventory risk), and sells to APCC at cost plus 15%; that the products that APCP manufactures for APCC are principally sold in the United States; that pursuant to APCC's worldwide restructuring, its Philippine operations would be converted from a subsidiary into a branch; that the Philippine operation will likewise be converted from a contract manufacturer to a full-line manufacturer that holds its own technology; that in connection with the conversion of the subsidiary, APCP, into a branch, APC Philippine branch, the assets of the APCP shall be transferred to the APC Philippine branch; and that these assets consist of inventories of taxable goods and manufacturing equipment and other properties. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The transfer of inventories of taxable goods by APCP to APC Philippine branch, at the time APCP is subject to the 5% preferential tax rate on gross income is exempt from VAT; and 2. The transfer by APCP to APC Philippine branch of inventories of taxable goods relating to the ITH-covered activity of APCP shall also be exempt from VAT pursuant to RMC No. 74-99. In reply thereto, please be informed that your opinion is hereby confirmed. Section 5(3) of RMC No. 74-99 provides that the sale of goods by a PEZA-registered enterprise to another PEZA-registered enterprise shall be exempt from VAT, pursuant to Section 109(q) of the Tax Code of 1997, in relation to Section 24 of Republic Act No. 7916, as implemented by Section 1, Rule, VIII, Part V, of the PEZA implementing rules and regulations. Proceeding from the above-cited section of RMC No. 74-99, it is clear that the sale or transfer of inventories of taxable goods by a subsidiary to a branch, like the case of APCP to APC Philippine branch, both are PEZA-registered enterprises, shall be exempt from value-added tax, the rationale for such treatment being that the PEZA-registered enterprises are outside of the customs territory. IN VIEW OF THE FOREGOING, this Office holds that the transfer of inventories of taxable goods by APCP to APC Philippine branch shall be exempt from the 10% value-added tax, pursuant to RMC No. 74-99. 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. cSTDIC Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group