SGV & Co.

August 6, 2008 BIR RULING [DA-(IL-013) 111-08] R.A. 8748; DA-493-2006; 207-99 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Ma. Victoria A. Villaluz Gentlemen : This refers to your letter dated May 15, 2008 requesting on behalf of your client, WuKong Singapore Pte. Ltd. Philippine Branch (WuKong), for confirmation of your opinion that as a PEZA-registered enterprise, its revenue or income from the sale of its scraps/rejects/defective materials is subject to the same tax regime that is applicable to the registered activities of the Company. It is represented that WuKong is a company organized under the laws of Singapore and is licensed to do business in the Philippines; that under its SEC Certificate of Registration No. 095-000018 dated February 14, 1995, the authorized business purpose of the branch office is "to engage in, conduct and carry on the business of manufacturing, importing, exporting, buying, selling on wholesale basis only, or otherwise dealing in, various wooden and non-wooden products for housing and construction industry purposes, and other housing parts and accessories, furniture, fixtures, and other goods of similar nature and character, and any and all equipments, materials, supplies used or employed in or related to the manufacturing of such finished products"; that WuKong is likewise registered with the PEZA as an Export enterprise per Certificate of Registration No. 95-21 dated February 17, 1995; that its business operations are located at the Cavite Export Processing Zone; that WuKong originally applied for registration with the PEZA for the manufacture of pre-assembled wooden frames for the complete house and wooden housing parts such as door frames, door cabinets, stairs, wall base, windows and others; that under this registration, WuKong was granted a non-pioneer status and was entitled to four (4) years income tax holiday (ITH); that on November 21, 1995, WuKong applied for the registration of its sawmill operations and the manufacture and/or processing of kiln-dried lumber as part of its registered activity; that this activity was likewise granted a non-pioneer status; that on March 23, 1998, the first two activities of WuKong was granted pioneer status per Board Resolution No. 98-066 and these activities were thus entitled to six (6) years income tax holiday; that on July 24, 2000, a new non-pioneer project, i.e., the manufacture of anti-vibration device/equipment and window sash, was registered as part of its PEZA activities; that for the first two activities, i.e., the manufacture of housing and construction industry products, as well as the sawmill operations, WuKong availed itself of the ITH from January 1, 1996 up to December 31, 2001; that by virtue of an expansion in these operations, Wukong was entitled to an ITH period extension from January 1, 2002 up to December 31, 2002; that by reason of its high Net Foreign Exchange Earnings, its ITH incentive for its first two activities was further extended from January 1, 2003 up to December 31, 2003, thus, for its first two registered activities, WuKong enjoyed an ITH incentive from January 1, 1996 to December 31, 2003; that beginning January 1, 2004, WuKong became entitled to the 5% preferential tax rate on gross income generated by the first two activities; that on the other hand, for its new project, WuKong was entitled to an ITH on January 1, 2001 which lasted until December 31, 2004; that by reason of high Net Foreign Exchange Earnings, per Notice of ITH Extension Approval No. 04-044, the period was extended from January 1, 2005 up to December 31, 2005; that on March 28, 2005, the new project of WuKong was granted pioneer status per Board Resolution No. 05-016 and was therefore entitled to six (6) years income tax holiday; that the extension period under Notice of ITH Extension Approval No. 04-044 dated November 2, 2004 was amended from January 1 to December 31, 2005 to January 1 to December 31, 2007. cEAIHa It is likewise represented that the manufacturing of wooden frames for complete house and wooden housing parts such as door frames, doors, cabinets, stairs, wall base, windows, and other products, as well as the manufacture of anti-vibration device/equipment and window sash require that the raw materials such as wood, steel, glass, plastic, and metal and paper be processed and cut in accordance with the specifications for the particular design of the products; that in the production of these products, as well as in its sawmill operations, and in the manufacture and/or processing of kiln-dried lumber, it is inevitable that scrap materials are produced; that when the particular raw materials are cut in accordance with the specifications, the trimmings are considered as scraps because they can no longer be used for finished products; that rejects/scraps also result if the materials are erroneously processed and not cut according to the required size, and are therefore defective and could not be used because the materials do not meet the quality control standards of WuKong; that for these activities, the wood scrap materials consist of wood trimmings, wood form, wood sticks, wood blocks (hari and dodai), thin wood and wood slabs, broken wood pallets, and defective log cut-outs; that for the production of glass windows, the scraps consist of reject glass mirror, coated glass trimmings, clear glass cullets with and without film; that the production of other products that use plastic and steel also produce scrap materials such as crushed PVC, PVC trimmings, plastic scrap, plastic pallets and KD sheets, metal scraps, CVT and CV cables; that the scrap materials also include paper and cartons used as packaging materials for these raw materials and the finished products; and that WuKong is able to dispose of these scrap materials by selling them. EScAHT In reply, please be informed that Section 4 of Revenue Regulations No. 1-2000 dated November 12, 1999, implementing Section 24 of Republic Act (R.A.) No. 8748, entitled "An Act Amending Republic Act No. 7916", otherwise known as the Special Economic Zone Act of 1995, provides, viz. : "Section 4. Nature of the 5% Tax and Extent of Tax Exemption. The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character. Registered ECOZONE enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A.No.7916, as amended by R.A.No.8748." Inasmuch as the reject or scrap items which, as represented, will inevitably arise at a certain stage of the registered manufacturing activity, the income derived from sale of said reject or scrap items will be included in computing the gross income earned from the registered activities of said PEZA-registered enterprise. Consequently, during the ITH period, income derived from sale of scrap or reject items shall be exempt from income tax; and thereafter, upon expiration of ITH, subject to the 5% preferential income tax rate. (BIR Ruling No. 493-2006 dated August 10, 2006) cDAEIH However, the sale of scrap and reject items shall be subject to 12% VAT during the ITH period. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service