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June 13, 2007 BIR RULING [DA-326-07] R.A. 7916; DA-263-98; VAT 009-98 Law Offices Santiago & Santiago Ground floor, Ortigas Building Ortigas Ave., cor. Meralco Avenue Pasig City Attention: Frances Marie Leslie M. Lopez Lawyer Gentlemen : This refers to your letter dated March 15, 2007 requesting, on behalf of your client Philippine Batteries, Inc. (PBI) for confirmation of your opinion that PBI is entitled to pay a preferential tax rate of five percent (5%) of gross income in lieu of all other local and national taxes beginning June 8, 2006. It is represented that PBI is a domestic corporation and existing under the laws of the Republic of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) under Resolution No. 05-124 dated April 26, 2006 which approved the application of PBI as a PEZA Registered ECOZONE Export Enterprise operating at Agus Industrial Estate-Special Economic Zone (AIE-SEZ). It is primarily engaged in the business of manufacturing goods such as, but not limited to, batteries, industrial equipment, machinery tools, implements, electrical and mechanical appliance, their parts, accessories, instruments and supplies, and trading them on wholesale/retail basis. On April 26, 2005, the Board of Directors of PEZA passed a Resolution No. 05-124 approving the application of PBI as a PEZA Registered ECOZONE Export Enterprise operating at Agus Industrial Estate-Special Economic Zone (AIE-SEZ). On June 8, 2006, the Board of Directors of PEZA and PBI entered into a Registration Agreement. Paragraph 13.1 of the Registration Agreement, reads: DECSIT "13.1 The REGISTRANT's existing activity shall not be entitled to Income Tax Holiday (ITH) incentive. Instead, the project shall be covered by the 5% gross income tax (5% GIT) incentive, in lieu of all national and local taxes. " cAHIST In reply, please be informed that Section 24 of R.A. No. 7916 provides: "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code . Any provision of existing laws, rules and regulations to the contrary notwithstanding, 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. This five percent (5%) shall be shared and distributed as follows: "(a) Three percent (3%) to the national government; "(b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; 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: . . ." Accordingly, as a business establishment operating within the ECOZONE, Orient shall, in lieu of paying local and national taxes, be subject to the payment of the preferential tax rate of 5% based on its gross income earned within the ECOZONE beginning June 8, 2006, the date of registration, which shall be remitted to the national government. (BIR Ruling No. DA-263-98 dated June 23, 1998) In addition, the aforementioned 5% preferential tax is a commutation of all the national and local taxes otherwise due from the businesses and enterprises operating within the ECOZONE. Such being the case, your client is considered exempt from all direct and indirect taxes hence, PBI may not legally be passed-on with the value added tax. (BIR VAT Ruling No. 033-96 dated October 30, 1996) (BIR VAT Ruling No. 009-98 dated February 05, 1998) 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. STaCcA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service