SGV & Co.

September 9, 2009 BIR RULING [DA-(C-203) 515-09] RA 7916;BIR Ruling 008-99; VAT Ruling 089-02; DA 248-03; DA 027-05; DA 013-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Jules E. Riego Principal, Tax Advocacy and Advisory Group Gentlemen : This refers to your letter dated August 18, 2009 requesting on behalf of your client, Nikko Metals Philippines, Inc . ("NMPH" for brevity), confirmation of your opinion that the sale of NMPH's 4 units of diesel-engine generators is covered by the 5% preferential gross income tax (GIT) incentive. It is represented that NMPH, a wholly owned subsidiary of Nippon Mining & Metals Co. Ltd. of Japan, with office address at 177 East Science Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna, is a Philippine Economic Zone Authority (PEZA)-registered enterprise primarily engaged in business of the manufacturing, importing, exporting and selling of copper foil which is being used in printed circuit boards, CD players, cameras, etc. Its main core business is the manufacturing and export of Electrodeposited Copper Foil (EDCF) which is under the 5% preferential tax regime on gross income, in lieu of all taxes. Its other registered activity is the manufacturing and export of Treated Rolled Copper Foil (TRCF) which is enjoying an Income Tax Holiday (ITH). Prior to 2008, NMPH was using four (4) units of 2.5 MW Daihatsu Diesel Engine-Generators as part of its Phase 1 Power Plant Generators that was supplying the electricity required by both of its PEZA-registered activities. As part of cost cutting measures, the said engine-generators which were being used in the registered business of NMPH were decommissioned as a result of the completion of transfer switches of electric power supply to the cheaper commercially available power source i.e. , Meralco. NMPH now intends to sell the said generators to curtail further incurring of maintenance costs and avail of less expensive source of power for its manufacturing activities. In connection with the foregoing, you now request for a ruling that any gain from the sale by NMPH of the aforementioned assets, previously used by NMPH in its PEZA-registered operations, is subject to the preferential rate of 5% GIT. In reply, please be informed that any gain from the sale by NMPH of diesel engine-generators is governed by the provisions of R.A. No. 7916, as amended, otherwise known as the Special Economic Zone Act of 1995. In BIR Ruling No. 008-99 dated January 19, 1999, this Office had to occasion to state that the sale of assets by a PEZA-registered enterprise, in the course of winding up its business, is subject to the 5% GIT. Subsequently, this Office ruled that if such incentive is available to PEZA-registered enterprise which is winding up its registered business, then it stands to reason that the sale of assets by a PEZA-registered enterprise, operating on a going- concern basis, is also subject to the special income tax regime. Thus, in VAT Ruling 089-02 dated December 17, 2002, it was ruled that: IAEcaH "Since the sale of fixed assets by a PEZA-registered enterprise in the course of winding up its business activities is embraced by the said 5% special tax regime, it stands to reason that P. IMES' sale of its fixed assets to its parent company, which the latter consigned back to P. IMES for its continued use in its PEZA-registered operations, must likewise be embraced by the said special tax regime. Consequently, this sale transaction is embraced by the 5% special tax, based on gross income earned therefrom by P. IMES, in lieu of all taxes." Such being the case, and considering that NMPH's diesel engine-generators were used in its PEZA-registered activity, this Office hereby confirms your opinion that the sale of NMPH's four (4) units of diesel engine-generators is covered by its 5% special GIT regime. Moreover, since the 5% preferential tax rate is a "commuted tax", the sale of said diesel engine-generators is not subject to value-added tax (VAT), provided that the sale is made to another PEZA-registered entity, a non-resident foreign buyer or an entity enjoying exemption from VAT. (BIR Ruling No. 008-99 dated January 19, 1999; BIR Ruling No. 040-02 dated November 14, 2002) This ruling is 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service