Quiason Makalintal Barot Torres & Ibarra

November 18, 2009 BIR RULING [DA-(C-270) 678-09] RA 7916; DA-333-98; DA-710-99; DA-245-02; DA-174-05; DA-252-04; DA-242-03; DA-124-08 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Avenue 1605 Ortigas Center, Pasig City Attention: Attys. Benedict R. Tugonon and Amelia Cristina V. Martinez Gentlemen : This refers to your letter dated October 28, 2009 requesting on behalf of your client, FPIP Property Developers and Management Corporation ("FPDMC"), for a clarificatory ruling that the purchase price paid by FPDMC on its acquisition of a building located in First Philippine Industrial Park Economic Zone from Fujitsu Computer Products Corporation of the Philippines ("FCPCP") [now Toshiba Storage Device (Philippines), Inc.], a Philippine Economic Zone Authority (PEZA) registered company, is exempt from creditable withholding tax given that the disposition is among the registered activity of the seller. The facts, as represented, are as follows: FPDMC is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at the First Philippine Industrial Park Special Economic Zone and is a duly registered PEZA entity. FCPCP is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at Carmelray Industrial Park I Special Economic Zone, and is a duly registered PEZA entity. FCPCP is a wholly-owned subsidiary of Fujitzu Limited of Japan. It is a PEZA registered enterprise engaged in the manufacture of small form factor hard drives, components, parts and accessories. FCPCP sold a factory building ("Factory Building") located within the special economic zone of the First Philippine Industrial Park ("FPIP"), Tanauan, Batangas, to FPDMC. Last September 24, 2008, the BIR issued BIR Ruling No. DA(IL-024) 254-2008 confirming that the sale by FCPCP of its factory building to another PEZA-registered enterprise is covered by the 5% preferential tax regime. Thus, FCPCP is exempt from income tax, capital gains tax, value-added tax and all other national and internal revenue taxes in lieu of payment of the (5%) final tax on its gross income. cTSDAH Within the prescribed period from the execution of the sale, the appropriate tax returns were submitted to the BIR RDO No. 59 for the purpose of securing the Certificate Authorizing Registration ("CAR"). However, said BIR office has withheld the issuance of the CAR since it is the RDO's view that the buyer, FCPCP, has the obligation to withhold 5% creditable withholding tax, considering that BIR Ruling No. DA(IL-024) 254-2008 is not explicit in providing for the exemption from creditable withholding tax. While FPDMC already appraised the BIR RDO No. 59 that a BIR ruling has already been issued confirming that the sale of the Factory Building by FCPCP is covered by the 5% preferential tax regime, it claims that said Ruling is not enough, and insists that a separate tax ruling should be secured providing for the exemption from creditable withholding tax. In reply, please be informed that Section 24 of RA 7916, as amended, provides in part: "SECTION 24. Exemption from National and Local Taxes. Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ecozone. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ecozone shall be paid and remitted as follows: . . ." Likewise, Section 1 (A) of Rule XIV of the Rules and Regulations implementing RA 7916, and as promulgated by the PEZA Board pursuant to Sections 12 (c) and 55 of RA 7916, dealing specifically with ecozone developers and operators provides: "RULE XIV. Incentives to Ecozone Developers/Operators . "SECTION 1. ECOZONE Developers/Operators shall be entitled to the following incentives: "A. Exemption from National and Local Taxes and Licenses. An ECOZONE Developer/Operator shall, to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and all local government impost, fees, licenses or taxes, including but not limited to the following: "1. Internal revenue taxes such as gross receipts tax, Value-Added Tax, ad valorem and excise taxes; "2. Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises. aCcSDT "In lieu thereof, the ECOZONE Developer/Operator Enterprise shall pay a five percent (5%) final tax on gross income in accordance with the provisions of Rule XX of these Rules." (Emphasis supplied.) As a general rule, PEZA-registered enterprises are imposed a preferential tax rate of five percent (5%) based on gross income in lieu of all taxes except real property tax. The tax incentives granted to PEZA-registered enterprises applies only in respect of the enterprise's operation within the Ecozone that is being managed and operated by the PEZA as a separate customs territory. In BIR Ruling No. DA-333-98 dated July 21, 1998, this Office ruled that ". . . the development, operation, sale or lease of lots of your client, Balibago Land Corporation, as a PEZA Ecozone Developer or Operator is exempt from income tax, capital gains tax, value-added tax and all other national internal revenue taxes. In lieu thereof, your client is liable to pay the five percent (5%) final tax on its gross income from said activities computed in accordance with Subsection (2), Rule XX of the Rules and Regulations to implement R.A. No. 7916 . . ." Such being the case, development, operation, sale or lease of lots by the PEZA registered ecozone developer/operator, is exempt from income tax/creditable withholding tax, capital gains tax, value added tax and all other national internal revenue taxes. In lieu thereof, the ecozone developer/operator is liable to pay the five (5%) preferential rate on its gross income from said activities, in lieu of all taxes, including value-added taxes (VAT) pursuant to Section 1 (A) of Rule XIV, Rules and Regulations to Implement RA 7916. Thus, the income derived from the sale of building made by FCPCP, a PEZA-registered enterprise to FPDMC, which is likewise a PEZA registered enterprise, is subject only to the 5% preferential rate, based on its gross income from its registered activities. (BIR Ruling No. 333-98 dated July 21, 1998; BIR Ruling No. 070-97 dated June 9, 1997 and BIR Ruling No. DA-025-2008 dated January 22, 2008) Moreover, the law provides that the same sale transaction is exempt from VAT pursuant to Section 109 (K) of the Tax Code of 1997, as amended by Republic Act No. 9337, and in relation to Section 24 of RA 7916, as amended, which provides: "Sec. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: ISaCTE xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" Thus, FCPCP, being a PEZA registered enterprise, is not subject to VAT on the sale of its building but is subject to the 5% preferential tax in lieu of all taxes (VAT Ruling No. 076-02 dated November 11, 2002). In view thereof, the sale of the building located in First Philippine Industrial Park Economic Zone is not subject to the capital gains tax/creditable withholding tax on the sale of real property, as well as VAT but subject to the 5% preferential tax rate based on the gross income earned. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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