NDE Digi-Tech, Inc.

June 10, 2010 BIR RULING [DA-(C-020) 091-10] RA 7916;DA-649-2004; DA-698-06; DA-347-06; DA-053-08 NDE Digi-Tech, Inc. 3rd Floor No. 2284 Allegro Center Don Chino Roces Avenue, Makati City Attention: Ms. Marita R. Magat Administrative Head Gentlemen : This refers to your letters dated September 14 and October 7, 2009 requesting for a certification on the following issues: cITAaD 1. That as a PEZA registered enterprise, it is exempt from the 5% expanded withholding tax on rental of real properties e.g. , office space as a PEZA Registered IT Enterprise; 2. VAT Zero Rating as a PEZA Registered IT Enterprise; 3. Change of accounting period from fiscal to calendar type. It is represented that you are registered with the Philippine Economic Zone Authority under PEZA Registration No. 03-21-IT dated September 12, 2003 as an Ecozone IT Enterprise. In reply, please be informed that firstly, pursuant to Section 4 (b) (2) of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 and as further amended by Section 2.57.5 (B) of Revenue Regulations No. 2-98 implementing Section 57 (B) of the Tax Code of 1997, the withholding tax prescribed in these regulations shall not apply to income payment to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. In connection therewith, under Section 24 of Republic Act (R.A.) No. 7916, as amended by R.A. No. 8748, otherwise known as the Special Economic Zone Act of 1995, no taxes, local or national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses or enterprises within the ECOZONE shall be remitted to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where the enterprise is located. Such being the case, and since you are a registered PEZA IT Enterprise enjoying income tax exemption, among others, pursuant to the provisions of Section 24 of R.A. No. 7916, as amended, your income payments from your rental are exempt from the creditable expanded withholding tax imposed under Revenue Regulations No. 2-98, as amended, pursuant to Section 4 (b) of the same regulations. (BIR Ruling No. DA-418-98 dated September 14, 1998) Secondly, Section 108 (B) (3) of the NIRC of 1997, as amended, provides: cTESIa "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; xxx xxx xxx." The Cross Border Doctrine provides that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority (Section 2, Revenue Memorandum Circular No. 74-99). Since, an ECOZONE is regarded as a foreign territory by RA 7916, the sales of goods and services therefore by VAT registered enterprises to PEZA-registered enterprises are subject to VAT at zero percent rate. Accordingly, no output VAT shall be shifted to or passed on to PEZA-registered enterprises; conversely, no input VAT shall be paid by PEZA-registered enterprises from said purchases. There being no input VAT paid by PEZA-registered enterprises, it necessarily follows that they are not entitled to refund, or issuance of tax credit certificate from their purchases of goods and services. Lastly, in the case of your intention to change your accounting period from fiscal to calendar type, you must comply with the provisions of Sections 46 and 47 of the Tax Code of 1997 which states: "SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47." SECHIA "SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. (A) Returns for Short Period Resulting from Change of Accounting Period. If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. (B) Income Computed on Basis of Short Period. Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final of adjustment return is made." In view of the foregoing, NDE Digi-Tech, Inc. should file a separate final or adjustment return corresponding to the period between the close of the last fiscal year and the following December 31. This will serve as authority for NDE Digi-Tech, Inc. to change its accounting period from fiscal year to calendar year upon compliance with the requirement of filing a short period return. 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. cSATEH Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group