SGV & Co.

September 24, 2008 BIR RULING [DA-(IL-024) 254-08] R.A. 7916; 106; 196; DA-008-99; DA-013-07; DA-246-08 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Luis Jose P. Ferrer Gentlemen : This refers to your letter dated April 10, 2008 requesting in behalf of your client, Fujitsu Computer Products Corporation of the Philippines ("FCPCP" for brevity), confirmation of your opinion that the sale of FCPCP's factory building which is being used as a warehouse for its slow-moving items, raw materials, direct/indirect manufacturing items, and recyclable containers is covered by its Income Tax Holiday (ITH) incentive, and thus, exempt from income tax and value-added tax (VAT). It is represented that FCPCP, a wholly-owned subsidiary of Fujitsu Limited of Japan, with office address at Carmelray Industrial Park I-Special Economic Zone (CIP I-SEZ), is a Philippine Economic Zone Authority (PEZA)-registered enterprise primarily engaged in the manufacture of magnetic hard disk drives, magneto-optical disk drives, semi-finished computers and component parts and accessories and magneto-resistive heads for export. It was originally given a six (6)-year ITH for the said activities that started on March 3, 1995 and was extended by PEZA for another year based on the Net Foreign Exchange Earnings (NFEE) criteria set by PEZA. For the registration of an additional activity, that is, for the manufacture of aluminum media for computer hard disk drives, FCPCP was awarded another four (4)-year ITH on March 12, 1998 to expire on December 31, 2002. However, as exports of magnetic hard disk drives and magneto-optical disk drives slowed down in the latter part of 2001, FCPCP was compelled to temporarily close its media manufacturing project located at the First Philippine Industrial Park-Special Economic Zone (FPIP-SEZ) in Tanauan, Batangas. As a matter of business strategy, FCPCP decided to shift into another line of computer products and on November, 2002, FCPCP again applied for and was granted another four (4)-year ITH or until 2006, for the production of Media Level Servo Track. The success of the said products led to the extension of the said ITH for another year, that is, until December 31, 2007, when the Company again met the NFEE criteria of PEZA. HSTCcD To cater to the new demands of the international market, FCPCP applied for an ITH for an entirely new project, that is, the manufacture of small form factor hard disk drives, components, parts and accessories, and on September 24, 2007, through PEZA Board Resolution No. 07-451, FCPCP was granted a four (4)-year ITH that starts from January 1, 2008 for the said new product line. However, in order to prevent business reverses, to cut down maintenance costs, and prevent temporary closure, FCPCP decided that it would be in the best interest of the company to sell its factory building in the First Philippine Industrial Park-Special Economic Zone (FPIP-SEZ). It was decided that the said building will be sold to another PEZA-registered enterprise. It is represented that the sale of the said building will not impair the capacity of FCPCP to continue with its registered activity. In reply thereto, please be informed that in BIR Ruling No. 008-99 dated January 19, 1999, the Bureau ruled that the sale by a PEZA-registered enterprise of its building to another PEZA-registered company is covered by its 5% preferential tax incentive (BIR Ruling No. DA-013-07 dated January 11, 2007). Such being the case, and considering that FCPCP's building is being used in its PEZA-registered activity and the building will be sold to another PEZA-registered company, this Office hereby confirms your opinion that the sale of FCPCP's factory building is covered by its 5% preferential tax regime. Also, considering that the 5% preferential tax rate is a "commuted tax", the sale of said building by FCPCP is not subject to VAT (BIR Ruling No. 008-99 dated January 19, 1999; BIR Ruling No. 040-02 dated November 14, 2002). However, with respect to the documentary stamp tax on the sale of real properties imposed under Section 196 of the Tax Code of 1997, as amended, the same shall have to be paid. This is because the documentary stamp tax is an excise tax which is imposed upon the privilege to execute such documents and not on the income from FCPCP's business activity. While the documentary stamp tax is viewed as a tax on the document, it is in reality a form of excise tax. It is an excise tax upon the facilities used in the transaction of the business separate and apart from the business itself (BIR Ruling No. DA-699-99 dated December 21, 1999, citing Du Pont vs. U.S. , 300 US 150) Accordingly, the sale by FCPCP of its building shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-246-2008 dated April 15, 2008) EaHATD 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. (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service