BIR Ruling [DA-493-06]

August 10, 2006 BIR RULING [DA-493-06] RA 8748; 207-99 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated February 9, 2005 requesting on behalf of your client, Hitachi Cable Philippines, Inc. (Hitachi), for confirmation of your opinion that the sale of its scrap is subject to 5% preferential rate and not to the regular corporate income tax of 32% pursuant to Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, as amended by Republic Act No. 8748. It is represented that Hitachi is a domestic corporation organized and existing under Philippine laws and is a duly registered enterprise with the Philippine Export Zone Authority (PEZA) per Certificate of Registration No. 97-087 dated December 18, 1997; that it is operating its business at Lima Technology Center, Special Economic Zone, Lipa City, Batangas; that it was registered with the Bureau of Internal Revenue on February 4, 1998; that Hitachi availed of the income tax holiday for the first four (4) years of its commercial operations which lasted until November, 2002; that beginning December 1, 2002, Hitachi became entitled to the 5% preferential tax rate on gross income imposed on PEZA registered entities; that Hitachi was formed with the primary purpose of carrying on and engaging in the business of "manufacturing, exporting, importing or otherwise dealing in all kinds of wires, cables, rubber hoses for automotive use, wires and leadframes" for use in semiconductor products, fiber optic cables and devices for use in telecommunications and insulated wires and cables, power cables and accessories for infrastructure purposes and related products, parts or components thereof and generally to perform any and all acts connected with the business aforementioned or arising therefrom or incidental thereto as may be allowed by law; that in the course of manufacturing the above-mentioned products, it is inevitable that certain wires and cables, together with their rubber coatings, would occasionally not be in accordance with specific lengths required to be sold as finished goods, hence they are regarded as rejects or scraps; and that these scrap items sales represent as estimated three percent (3%) of the Company's registered revenue. In reply, please be informed that Section 4 of Revenue Regulations No. 1-2000 dated November 12, 1999, implementing Section 24 of Republic Act (RA) No. 8748, entitled "An Act Amending Republic Act No. 7916," otherwise known as the Special Economic Zone Act of 1995, provides, viz: CTcSAE "Section 4. Nature of the 5% Tax and Extent of Tax Exemption . The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character. Registered ECOZONE enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748." As provided under Article II of its Certificate of Registration with the PEZA, the Scope of Registrant's registered activity shall be limited to the manufacture of wires and rubber hoses for automotive, and wires and leadframes for semiconductor and the importation of raw materials, machinery, equipment, tools, goods, wares, articles or merchandise directly used in its registered operations at the LTC-SEZ. In the event the Registrant decides to engage in a new or additional product line, directly or indirectly related to its registered activity, it shall apply anew to the PEZA for the latter's approval. Likewise, its Articles of Incorporation states that the primary purpose of the corporation is "to engage in and carry on the business of manufacturing, exporting, importing or otherwise dealing in all kinds of wires, cables, rubber hoses for automotive use, wires and leadframes for use in semiconductor products, fiber optic cables and devices for use in telecommunications and insulated wires and cables, power cables and accessories for infrastructure purposes and related products, parts or components thereof and generally to perform any and all acts connected with the business aforementioned or arising therefrom or incidental thereto as may be allowed by law." Inasmuch as the reject or scrap items which, as represented, will inevitably arise at a certain stage of the manufacturing activity, the sale of such reject or scrap items will fall under the same registered activity subject to the 5% preferential tax rate pursuant to Section 24 of RA 7916, as amended by RA 8748. 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