Punongbayan & Araullo

September 19, 2008 BIR RULING [DA-(C-072) 237-08] R.A. 7227 as amended; DOF Order No. 03-08 dtd. Feb. 13, 2008; DA-493-06 Punongbayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Atty. Raymund S. Gallardo Tax Partner Gentlemen : This refers to your letter dated June 25, 2008 requesting tax exemption confirmation of your opinion that the sale of scrap materials by the Company is subject to the preferential rate of 5% of its gross income. It is represented that Sanyo Denki Philippines, Inc. (hereinafter referred to as "Sanyo Denki"), a wholly owned subsidiary of Sanyo Denki Co., Ltd. of Japan, is a corporation duly organized and existing by virtue of Philippine laws with business address at No. 2, Blk. F-1, Subic Techno Park, Argonaut Highway, Boton Area, Subic Bay Freeport Zone, Philippines; that Sanyo Denki was registered with the Securities and Exchange Commission (SEC) on January 25, 2000; that per Sanyo Denki's Amended Articles of Incorporation, it is primarily engaged in the business of manufacturing, processing, producing, repairing, importing, exporting, buying, selling or otherwise dealing in at whole sale electric machineries, electronic appliances, electronic materials, computer wares, and all equipment, parts, accessories, materials and supplies used or employed in or related to the manufacture of such goods or products, including the planning and installation thereof; that on February 12, 2000, Sanyo Denki was given a license and a permit to operate within the Subic Bay Economic and Freeport Zone (SBEFZ); that the Implementing Rules and Regulations of Republic Act No. 7227, otherwise known as "Bases Conversion and Development Act of 1992 provides that SBEFZ enterprises shall pay a final tax of 5% of their gross income earned from sources within the SBEFZ, in lieu of all national and local taxes; that on March 23, 2008, Sanyo Denki became a duly registered Subic Bay Freeport Enterprise and the Subic Bay Metropolitan Authority (SBMA) issued a Certificate of Registration and Tax Exemption No. 2000-0021 in accordance with R.A. 7227, thereby entitling Sanyo Denki to certain preferred rights, privileges, and benefits indicated in the aforementioned Certificate of Registration; and that Sanyo's registered activities stated in its Certificate of Registration as a Freeport Enterprise include the manufacture of electronic machineries, electric appliances, computer wares, electronic materials and all parts and accessories and to engage in the sale of scrap materials resulting from the foregoing activities. aTADcH You now request confirmation of your opinion that the sale of the scrap materials arising from by-products of Sanyo Denki's manufacturing process and/or are incidental to the company's production of finished goods is subject to the preferential rate of 5% of its gross sales. In reply, please be informed that under Section 4 of DOF Order No. 03-08 1 provides, viz. : "Section 4. Tax Incentives in Ecozone and Freeport Zones. Ecozone and Freeport Enterprises shall be entitled to the following tax incentives: xxx xxx xxx b) Subic Freeport Zone Freeport Enterprises in the SFZ shall be entitled to (i) the Freeport status of the zone; and (ii) the 5% special tax on Gross Income Earned, in lieu of national and local taxes." Relative thereto, Section 5(a)(1) of the same Department Order states: "Section 5. The Special Five Percent (5% Tax on Gross Income Earned (GIE) . a. For purposes of implementing the special 5% tax on Gross Income Earned, in lieu of national and local taxes, granted to Ecozone Enterprises and Freeport Enterprises in SSEZ, SFZ, CFZ, PPFZ, and MSEZ the following shall apply: ATcEDS 1. Gross Income Earned (GIE) shall refer to gross sales or gross revenue derived from business activities within the subject Ecozone or Freeport, net of sales discounts, sales returns and allowances minus cost of sales or direct costs but before any deduction for administrative, marketing, selling, and/or operating expenses or incidental losses during a given taxable year; Provided, that, in the case of financial enterprises within Freeports, gross income shall include interest income, gains from sales, and other income, net of costs of funds." As represented by the Process Flow Chart of Sanyo Denki, in the manufacturing, processing, repairing and production of electric machineries, electric appliances, electronic materials, computer wares, as well as, the equipment, pats, accessories, materials and supplies used, scrap materials such a metal trimmings, solder dross, novallo, coil and magnet wires are likewise produced in the course of the different stages thereof. caHCSD These scrap materials appear to be by-products of Sanyo Denki's manufacturing process and/or are incidental to the company's production of finished goods and are not results of a separate process. Considering that Sanyo Denki's registered activities include the "manufacture of electric machineries, electric appliances, computer wares, electronic materials and all parts and to engage in the sale of scrap materials resulting from the foregoing activities from its registered address within the Subic Bay Freeport Zone, the proceeds generate by Sanyo Denki in the sale of said scrap materials shall form part of its gross income subject to the 5% preferential tax rate mainly because it was found that such materials were inevitable results of the company's registered activities. This Office, in BIR Ruling No. DA-493-06 dated August 10, 2006, has ruled that: "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 55 preferential tax rate pursuant to Section 24 of R.A. 7916, as amended by R.A. 8748." Again, in BIR Ruling No. DA-071-08 dated February 6, 2008, this Office had occasion to rule as follows: AEDISC "Since the manufacturing of Tom's product is a registered activity and the reject or scrap items only inevitably resulted at a certain stage, the sale thereof will definitely fall under the registered activity. Accordingly, the sale of these scraps or reject items constitutes acts connected with the registered activity for which Toms was given authority to do business by PEZA under its Certificate of Registration and therefore, Toms is entitled to 5% preferential rate on the sale of reject or scrap items imposed under Section 24 of R.A. No. 7916, as amended . . . ." Based on the foregoing, this Office is of the opinion and hereby holds that the sale of scrap materials connected with Sanyo Denki's registered activity is entitled to the special five percent (5%) tax on the gross income earned therefrom. 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, and/or any of the requirements set forth in this letter are not complied with, 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 Footnotes 1. Rules and Regulations to Implement Republic Act No. 9400, "An Act Amending Republic Act No. 7227, Otherwise Known as the Bases Conversion and Development Act of 1992, and for Other Purposes". aDECHI