Samsung Electronics Philippines Manufacturing Corporation

June 20, 2007 BIR RULING [DA-340-07] R.R. 2-98; RMC 4-99 DA 094-03; DA 165-06 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park Barangay Batino, Calamba City Laguna Attention: Mr. Sang Ho Park Chief Financial Officer Gentlemen : This refers to your letter dated February 15, 2007 requesting confirmation of your opinion that the income derived by your company, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL), from domestic sales related to its registered activity qualifies for the ITH/5%GIT incentive. It is represented that SEPHIL [formerly Philippines Samsung Electronics Corporation (PSEC)] is a corporation duly organized and existing under Philippine laws with office address at the Calamba Premiere International Park-Special Economic Zone (CPIP-SEZ). It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under Registration Certificate No. 01-011 dated February 9, 2001. The registration certificate was amended on July 31, 2002 to change the name of the company from PSEC to SEPHIL. As a PEZA-registered entity, SEPHIL was initially granted a 4-year income tax holiday (ITH) effective November 1, 2001 for its registered activity consisting of the design, manufacture, and sale of electronic products, including optical disk drive products, their components and parts, and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the CPIP-SEZ. The ITH entitlement was extended for one year which incentive lapsed on October 31, 2006. At present, SEPHIL is subject to the 5% gross income tax (GIT) regime. DSAEIT SEPHIL was allowed by PEZA to sell the equivalent of 5% of its production of CD-rom and CD-RW and its parts to the domestic market from years 2002 to 2004 and, in fact, sold several items to Samsung Electronics Philippines Corporation (SEPCO), the domestic distribution company of the Samsung Electronics Group. The domestic sales made by SEPHIL during the said period were well within the 5% threshold prescribed by PEZA as shown in the table below: Year Month Domestic Sales Total Sales 2002 Feb-Nov. Php30,015,246.00 Php9,664,936,708.56 2003 Jan-Dec. 170,065,851.94 19,987,891,193.82 2004 Jan.-July 106,151,750.00 25,899,036,609.85 Total Php306,232,847.94 Php55,551,864,512.23 Beginning September 2004, all sales of SEPHIL are made to Toshiba Samsung Storage Technology Korea Corporation (TSSTK), a non-resident foreign corporation based in Korea. In the future, however, SEPHIL may again engage in the sale and distribution of its products to the local market. It is your opinion that the income derived by SEPHIL from domestic sales made from 2002 to 2004, at the time the company was enjoying ITH, is exempt from income tax and consequently from the creditable withholding tax (CWT) prescribed in Revenue Regulations (Rev. Regs.) 2-98. It is likewise your opinion that the income to be derived by SEPHIL from future domestic sales, within the threshold provided under PEZA rules and regulations, is not subject to the regular income tax but to the 5% GIT. In reply, please be informed that PEZA-registered enterprises enjoying ITH pursuant to the provisions of Article 39 Book VI of EO 226, (otherwise known as the Omnibus Investments Code of 1987) are exempt from the payment of CWT imposed under Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 6-2001, on income payments received by it during the ITH period in connection with the conduct of its registered activity. (BIR Ruling No. DA-300-03 dated September 11, 2003; BIR Ruling No. DA-060-2002 dated April 1, 2002 and BIR Ruling No. 143-91 dated August 2, 1991). Inasmuch as the sale of the CD-Roms and CD-RWs is a registered activity of SEPHIL, income derived therefrom at the time SEPHIL was enjoying its ITH incentive is exempt from income tax. Consequently, income payment made to SEPHIL by SEPCO is likewise exempt from CWT as Section 2.57.5 (B) (2) of RR 2-98, as amended, explicitly provides that CWT does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provision of any law, whether general or special. With respect to the future domestic sales to be made by SEPHIL, this Office confirms your opinion that the income to be derived from such sales is subject to the 5% GIT provided that they fall within the threshold authorized by PEZA, and provided, further, that the sales are made in connection with SEPHIL's registered activity. Section 5 of Revenue Memorandum Circular 74-99 (Prescribing the Tax Treatment of Sales of Goods, Property and Services Made by a Supplier from the Customs Territory to a PEZA Registered Enterprise; and Sale Transactions Made by PEZA Registered Enterprises Within and Without the ECOZONE), states as follows: "SEC. 5. Tax Treatment Of Sales Made By A PEZA Registered Enterprise . (1) Sale of goods (i.e., merchandise), by a PEZA-registered enterprise, to a buyer from the Customs Territory (i.e., domestic sales). This case shall be treated as a technical importation made by the Buyer. Such Buyer shall be treated as an importer thereof and shall be imposed with the corresponding import tax/es (i.e., VAT or VAT plus excise tax, as the case may be), pursuant to Sec. 107, Title IV and Title VI, NIRC, in relation to Sec. 26, R.A. No. 7916, as implemented by Sec. 2, Rule VIII, PART V of the PEZA rules and regulations entitled "Rules and Regulations to Implement Republic Act No. 7916." The registered enterprise's "gross income earned" therefrom shall be object to the 5% special tax pursuant to Sec. 24 of R.A. No. 7916: Provided, however, that its sales in the Customs Territory do not exceed the threshold allowed or permitted for such sales, pursuant to the pertinent provisions of the PEZA rules and regulations : Provided, further, that for income tax purposes, if such sales should exceed the aforesaid threshold, its income derived from such excess sales shall be imposed with the normal income tax pursuant to the provisions of Title II, NIRC: . . . ( emphasis supplied) " It is clear from the foregoing that a PEZA-registered enterprise's gross income from sales in the Customs Territory shall be subject to the 5% GIT for as long as such sales are made in connection with the entity's registered activity and that the same falls within the threshold authorized by PEZA. It is only the income derived from sales in excess of the threshold which shall be subject to the normal income tax. Thus, on the basis of the above provision, the income from future domestic sales of SEPHIL, which sales do not exceed the threshold authorized by PEZA, shall be subject to the 5% GIT. Consequently, income payments to be received by SEPHIL arising from such domestic sales shall likewise be exempt from the creditable withholding tax pursuant to Section 2.57.5 (B) (2) of RR 2-98, as amended. AaIDHS 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service