SGV & Co.

December 11, 2008 BIR RULING [DA-(IL-045) 516-08] R.A. 7916 & 8748; RR 1-00 & 2-05; DA-340-07; DA-526-06 & DA-115-05 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated November 12, 2008 requesting confirmation of your opinion that the gross income derived by Accenture, Inc. ("Accenture") from services rendered from within PEZA-registered IT Buildings to clients located within the Customs Territory ( i.e., local sales), which income does not exceed thirty percent (30%) of Accenture's total income from all sources, is subject to the 5% gross income tax (GIT) under Republic Act ("R.A.") No. 7916, as amended by R.A. No. 8748 (the "PEZA Law"). aEDCAH The facts as represented are as follows: Accenture is a corporation duly organized and existing under Philippine laws. It is also duly registered with the Philippine Economic Zone Authority ("PEZA") as an ECOZONE Information Technology ("IT") Enterprise with Registration Certificate No. 06-37-IT dated July 18, 2006, as amended and supplemented, to engage, among others, in the business of software development ("SD"), business process outsourcing ("BPO") and call center ("CC"). SD involves the creation and delivery of custom software that is tailored specifically to the requirements of the client. As part of SD, Accenture also renders application management services to support and ensure the integrity of existing client applications. In BPO, Accenture carries out in the Philippines business processes activities outsourced by foreign companies such as accounting and finance, healthcare transaction processing and utilities transaction processing. Accenture also performs inbound and outbound call center operations. Accenture conducts SD, BPO and CC operations in the following locations, all of which are PEZA-registered IT Buildings: TcHCIS 1. GT Tower International; 2. Makati Stock Exchange (MSE) Center; 3. Union Bank Plaza; 4. Gateway Office Tower I; 5. Robinsons Cybergate Towers I, II and III; 6. Libran House; 7. Philam Life Tower; 8. McKinley Hill Cyberpark (Building A); and, 9. Pioneer House Cebu. Essentially, as an ECOZONE IT (Export) Enterprise, Accenture is entitled to the preferential rate of five percent (5%) on gross income derived from SD and BPO activities. The SD activities conducted in Pioneer House Cebu, however, are covered by ITH incentive. On the other hand, all revenues derived from CC operations are currently subject to ITH. CC services undertaken at Robinsons Cybergate Tower II, under Supplemental Agreement with PEZA dated July 12, 2007, is entitled to six (6) years ITH incentive while the ITH incentive of the CC services undertaken at Pioneer House Cebu, under Supplemental Agreement with PEZA dated March 31, 2008, is co-terminus with the ITH entitlement of its SD project, under Supplemental Agreement with PEZA dated July 30, 2007. Accenture's Supplemental Agreements with PEZA provide that upon expiry of its ITH incentives, gross income from CC operations shall be subject to the preferential rate of five percent (5%) GIT. DAaIHT Accenture generates income primarily and substantially from services rendered within Accenture's locations in PEZA-registered IT Buildings to non-resident foreign clients not engaged in business in the Philippines ( i.e., export sales). It also derives income from services rendered from within Accenture's locations in PEZA-registered IT Buildings to clients located within the Customs Territory ( i.e., local sales) subject to the local sales threshold authorized by the PEZA. The Letter of Authority issued by the PEZA authorizes the company to engage in software development and business process outsourcing, including call center services, to clients within the Customs Territory, to a maximum of 30% of its actual total sales for the year. The PEZA mandated that the company's local sales in excess of the 30% threshold shall be subject to the payment of the standard corporate income tax and such other taxes and charges as the PEZA Board may prescribe. On the basis of the foregoing representations, you are requesting confirmation of your opinion that the gross income derived by Accenture from its SD and BPO services, as well as from CC operations (after expiration of its ITH incentive), rendered from within PEZA-registered IT Buildings to clients located within the Customs Territory ( i.e., local sales), the aggregate amount of which does not exceed thirty percent (30%) of Accenture's total income from all sources, is subject to 5% GIT. HICATc In reply thereto, please be informed as follows: Special Economic Zones ("ECOZONES") refer to selected areas with highly developed or which have the potential to be developed into agri-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers established in accordance with the Republic Act No. 7916 or the PEZA Law. 1 On the other hand, ECOZONE Registered Enterprise refers to any business entity or concern within the ECOZONE duly registered with and/or licensed by the PEZA to operate any lawful economic activity within the ECOZONE. For purposes of administering incentives, the PEZA considers ECOZONE IT Enterprises as export enterprises. In the PEZA Certification issued to Accenture dated November 10, 2006, the PEZA refers to Accenture as an ECOZONE IT (Export) Enterprise. Section 24 of the PEZA Law provides that an ECOZONE Enterprise shall enjoy the preferential tax rate of 5% on gross income earned, as follows: "SEC. 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: (a) Three percent (3%) to the National Government; and (b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." aScIAC Section 4, Revenue Regulations (RR) No. 1-2000, 2 implementing Section 24, PEZA Law, also provides that: "Section 4. Nature of the 5% Tax and Extent of Exemptions. The above 5% tax is imposed on "gross income", 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." The term "gross income" on which the 5% tax is imposed is defined in Section 7 of RR No. 2-05, thus: "Section 7. Gross income earned. For purposes of the application of these Regulations "gross income earned" shall refer to gross sales or gross revenue derived from registered business activity within the Zone net of sales discounts, sales returns and allowances minus cost of sales or direct costs but before any deductions for administrative, marketing, selling, operating expenses or incidental losses during a given taxable period. For financial enterprises, gross income shall include interest income, gains from sales, and other income." (emphasis ours) TAaHIE On the other hand, Section 1 of Revenue Regulations (RR) No. 20-2002 provides, as follows: "Section 1. Tax Treatment. Income derived by an enterprise registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority (CDA), or the Philippine Economic Zone Authority (PEZA) from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration ( i.e., the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be). . . . " (emphasis ours) Thus, in BIR Ruling No. DA-340-07 dated June 20, 2007, the BIR ruled that a PEZA-registered enterprise's sales to the Customs Territory, i.e., local sales, are subject to the 5% gross income tax for as long as such sales are made in connection with the entity's registered activity and that the same are within the threshold authorized by PEZA. The excess of the threshold shall be subject to normal corporate income tax. The BIR held as follows: TaCDcE ". . . It is clear from the foregoing that a PEZA-registered enterprise's gross income from sales in the Customs Territory shall be subject to the 5% GIT for as long as such sales are made in connection with the entity's registered activity and that the same falls within the threshold authorized by PEZA. It is only the income derived from sales in excess of the threshold which shall be subject to the normal income tax. Thus, on the basis of the above provision, the income from future domestic sales of SEPHIL, which sales do not exceed the threshold authorized by PEZA, shall be subject to the 5% GIT. . . . ." Moreover, in BIR Ruling No. DA-526-06 dated August 31, 2006, the BIR ruled that income of Federal Express Corporation (FEC) from deliveries of documents, packages, and cargo made to airports outside of the Subic Bay Freeport shall qualify for the special rate of 5% on gross income earned as long as such income does not exceed 30% of FEC's entire income from all sources, viz. : "2. Income derived by FEC-Phil. from all sources i.e., both from the Secured Area and Customs Territory shall be entitled to the 5% preferential tax rate, in lieu of other taxes, local and national, provided its income from sources within the Customs Territory does not exceed 30% of its total income from all sources in accordance with Section 44 of the IRR and Section 4(f) of Revenue Regulations No. 1-95." STIcaE The BIR has ruled that by virtue Section 51 of R.A. No. 7916, the privileges extended to SBF enterprises are also extended to PEZA enterprises (BIR Ruling DA-017-05 dated January 19, 2005 and BIR Ruling DA-115-05 dated April 5, 2005) . The Supreme Court has also recognized the same rule in Commissioner of Internal Revenue v. Seagate Technology (Phils.) (G.R. No. 153866, February 11, 2005), to wit: ". . . No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to the fiscal incentives and benefits provided for in either PD 66 or E.O. 226. It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844. . . ." (Emphasis ours) Based on the foregoing, we confirm your opinion that the gross income derived by Accenture from SD and BPO services, as well as from its CC operations (after expiration of ITH incentives), rendered within PEZA-registered IT Buildings to clients located within the Customs Territory ( i.e., local sales), the aggregate amount of which does not exceed thirty percent (30%) of Accenture's total income from all sources, is subject to the 5% GIT. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. AIaHES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Revenue Regulations (RR) No. 2-05 which now governs the tax treatment of all activities conducted within the different ECOZONES. EaISTD 2. Dated November 12, 1999.