Aerotech Industries Philippines, Inc.

July 12, 2007 BIR RULING [DA-372-07] R.A. 7227 DA-649-2004 Aerotech Industries Philippines, Inc. NCP Compound, Pasong Tamo Extension Western Bicutan, 1630 Taguig City Attention: Ms. Teresa C. Parian Chief Operating Officer Gentlemen : This refers to your letter dated February 2, 2007 requesting for tax exemption of your Clark related transactions as a requirement of your customers in processing their payments to you. It is represented that AEROTECH INDUSTRIES PHILIPPINES, INC. (AEROTECH) is a PEZA-registered Ecozone Export Enterprise located at the Clark Special Economic Zone engaged in aircraft and components repair/service station as one of the Lessee's activities, warehousing of spares, tools, equipment for aircraft repair/maintenance activities and for sales and distribution, workshop areas and venue to perform aircraft servicing, aircraft hangarage and warehousing; that it is located at Building 7242 (former SWFA Bldg.) Civil Aviation Complex, CSEZ, Clark Field, Philippines; and that you opine that you are entitled to all the incentives available to all PEZA/CSEZ-registered enterprises pursuant to Section 15, Republic Act No. 7227, Section 5 of Executive Order No. 80, and Proclamation No. 163, to wit: (a) exemption from customs and import duties and national and internal revenue taxes on importation of capital goods, equipment, raw materials, supplies and other articles including household and personal items; and (b) exemption from all local and national taxes, including but not limited to corporate withholding income taxes and value-added taxes. In reply, please be informed that Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended by Section 4 of Revenue Regulations No. 14-02, provides as follows: SEC. 4. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: xxx xxx xxx (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx xxx xxx (2) Corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A. 7916, the Omnibus Investment Code of 1997, and R.A. 7227, as amended, respectively; xxx xxx xxx Such being the case, AEROTECH is exempt from the 1% withholding tax on income payments made by the top 10,000 corporations. Accordingly, if AEROTECH, a PEZA registered enterprise still enjoys ITH incentive under a special law or the 5% preferential tax incentive from the PEZA, all payments received by it from its customers, whether ECOZONE registered or customs territory enterprises are exempt from the withholding tax. (BIR Ruling No. DA-381-2000 dated November 7, 2000) Further, Section 2(nn), Rule I of the implementing Rules of R.A. No. 7916 defines the term "gross income" as follows: "(nn) "Gross Income" for purposes of computing the special tax due under Section 24 of the Act refers to gross sales and gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. The allowable deductions from "gross income" are specifically enumerated under Section 2, Rule XX of these Rules." The definition of "gross income" limits the application of the preferential tax rate of 5% to income derived from the registered activity by an ECOZONE enterprise. Thus, any income derived by a registered enterprise that is not related to its registered activity is not entitled to the preferential tax rate of 5%. Instead, such income derived from an unregistered activity shall be subject to regular internal revenue tax as provided under Section 1 (1st par.) of Revenue Regulations No. 20-02. Further still, this Office has already ruled that Republic Act No. 7916 or the PEZA Law is one of the special laws falling under the coverage of Section 108 (B) (3) of the Tax Code of 1997, as amended. This is more clearly reiterated in Revenue Memorandum Circular No. 74-99, particularly Section 3, which states that: "(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended: . . ." "Sale of service This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated November 5, 1998." Lastly, Section 2 of Republic Act No. 9400 which amended Republic Act No. 7227 as circularized in Revenue Memorandum Circular No. 27-2007, provides as follows: "SEC. 2. Section 15 of Republic Act No. 7227, as amended, is hereby amended to read as follows: xxx xxx xxx "Duly registered business enterprises that will operate in the Special Economic Zones to be created shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic Zones." Based on the above provision, CSEZ enterprises registered with the PEZA are entitled to the applicable incentives granted under RA 7227, as amended by Section 2 of RA 9400. EaCSHI Accordingly, we hereby confirm that any sale made by a VAT-registered taxpayer of goods or services to AEROTECH located within the secured area of the Clark Special Economic Zone and which enjoys the incentives under RA 7227, as amended by Section 2 RA 9400, is legally entitled to zero percent (0%) VAT. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner