Cebu Property Ventures & Development Corporation

December 9, 2009 BIR RULING [DA-(C-310) 762-09] RA 7916; 196, 57 (B); DA-025-08; DA-281-2007; DA-513-06; DA-433-2006; DA-636-04 Cebu Property Ventures & Development Corporation Cebu Holdings Center Cardinal Rosales St., Cebu City Attention: Attys. Mildo C. Sison and Elner A. Reyes Tax Counsels Gentlemen : This refers to your letter dated September 25, 2009 stating that Cebu Property Ventures and Development Corporation (CPVDC) is a domestic corporation duly organized and existing under Philippine laws with office address at 7th Floor, Cebu Holdings Center, Cardinal Rosales Avenue, Cebu Business Park, Cebu City. It is a Philippine Economic Zone Authority (PEZA)-registered enterprise and is principally engaged in real estate development and IT Park operation. CPVDC has acquired PEZA Registration on October 10, 2001 as an Ecozone Developer/Operator of Information Technology Special Economic Zone known as CCTC IT Park under Certificate of Registration No. EZ 01-006. Subsequently, its PEZA registration was amended on April 12, 2002 to include the development, construction, management, administration and operation of IT Special Economic Zone known as the Asiatown I.T. Park. As an Ecozone Developer, CPVDC is allowed to lease, sell, assign, mortgage, transfer or otherwise encumber the parcels of land within the said IT Park. CPVDC is likewise entitled to various fiscal and non-fiscal incentives given to PEZA-registered enterprises including, among others, the exemption from all national and local taxes, except real property taxes on the land owned by the company. In lieu of the national and local taxes, CPVDC is subject only to the payment of the five percent (5%) preferential tax rate based on the gross income earned. CPVDC now intends to sell a parcel of land having an area of six thousand two hundred sixty two (6,262) square meters located within the said IT Park to Asian I-Office Properties Inc. (AIO), another PEZA-registered enterprise. AIO is a domestic corporation likewise registered with PEZA under Certificate of Registration No. 07-13-F (IT) as an Ecozone Facilities Enterprise. As a PEZA-registered enterprise, AIO is also granted various fiscal and non-fiscal incentives, including among others, the exemption from all national and local taxes, except real property taxes on commercial spaces occupied by non-PEZA registered enterprises. Just like in the case of CPVDC, AIO is subject only to the payment of the 5% final tax on its gross income. On the basis of the foregoing facts, you now request for confirmation of your opinion that the sale of parcel of land within the IT park by CPVDC to AIO is not subject to capital gains tax (CGT)/creditable withholding tax (CWT) and value-added tax (VAT) but subject only to the 5% preferential tax rate based on gross income earned pursuant to Republic Act (RA) No. 7916, as amended. DcAaSI In reply, please be informed that under Section 24 of RA 7916, otherwise known as "The Special Economic Zone Act of 1995," as amended by RA 8748, no taxes, local and national, shall be imposed on business establishments operating within the Ecozone and that in lieu of paying taxes, 5% of the gross income earned by all business enterprises within the Ecozone shall be remitted as follows: (a) three percent (3%) to the national government; and (2) two percent (2%) to the municipality or city where the enterprise is located. In BIR Ruling No. DA-259-2005 dated June 16, 2005, this Office ruled as follows: ". . . Section 2.57.5(B)(2) of Revenue Regulations No. 2-98, as amended, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of Republic Act No. 7916 which provides that any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. Accordingly, since Ogami is a PEZA-registered enterprise enjoying preferential tax rate, income payments made to it with respect to its registered activity shall not be subject to 2% expanded creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended. . . ." (Emphasis supplied) Moreover, the above sale of parcel of land by CPVDC to AIO is not subject to VAT imposed under Section 106 of the 1997 Tax Code, as amended. In BIR Ruling No. DA-513-06 dated August 25, 2006, the BIR ruled on the exemption of a PEZA-registered enterprise from VAT, thus: ". . ., APEC, which is registered with PEZA as an Ecozone Utilities Enterprise, is exempt from national taxes, which include, among others, corporate income tax and VAT. Moreover, under Sec. 4.109-1 of Revenue Regulations (RR) No. 16-2005, implementing Section 109 of the 1997 Tax Code, as amended by RA 9337, transactions of persons or entities which are exempt under international agreements or special laws are exempt from VAT. In view thereof, the sale of a parcel of land located within the Ecozone between CPVDC and AIO is not subject to the CGT/CWT on sale of real property and VAT but subject only to the 5% preferential tax rate based on the gross income earned. TSaEcH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service