Tekno Logika Pilipinas, Inc.

December 22, 2009 BIR RULING [DA-(IL-046) 797-09] R.A. 7916; DA-649-2004; DA-698-06 Tekno Logika Pilipinas, Inc. Unit 4 TBI Bldg., UP TechnoPark, C.P. Garcia cor. Katipunan Ave., Diliman, Quezon City Attention: Mr. Robert S. dela Cruz President/CEO Gentlemen : This refers to your letter August 11, 2009 requesting confirmation that as a PEZA-registered company, Tekno Logika Pilipinas, Inc., it is entitled to incentives granted under R.A. 7916 (Special Economic Zone Act of 1995). It is represented that Tekno Logika Pilipinas, Inc. with Taxpayer Identification No. 007-206-995-000, is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200900274 dated January 29, 2009; that Tekno Logika Pilipinas, Inc. is registered as an Ecozone IT Enterprise at the UP Science and Technology Park (South) with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 09-35-IT dated May 13, 2009; that the scope of Tekno Logika Pilipinas, Inc.'s registered activity is: ". . . limited to the provision of IT software development and knowledge-based application to global companies and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the UP Science and Technology Park (South). In the event the registrant decides to engage in a new or additional activity, directly or indirectly related to its registered activity, it shall apply anew with PEZA for the latter's approval." and that Tekno Logika Pilipinas, Inc. now seeks confirmation of the following incentives granted to PEZA registered enterprises as stated in its Certification No. 2009-956 dated August 19, 2009: "1. Corporate income tax holiday for four (4) years for original projects effective on the committed date of start of commercial operations, or the actual date of start of commercial operations, whichever is earlier; ITH entitlement for the original project can also be extended for another three (3) years provided specific criteria are met for each additional year and prior PEZA approval is obtained; duly approved and registered "Expansion" and "New" projects are entitled to a three-year, and four-year ITH, respectively; 2. Tax and duty free importation of merchandise which includes raw materials, capital equipment, machinery and spare parts; 3. Exemption from wharfage dues and export tax, impost and fees; DTAHSI 4. VAT zero-rating of local purchases subject to compliance with BIR and PEZA requirements; and 5. Exemption from the payment of any and all local government imposts, fees, licenses or taxes except real estate tax; however, machinery installed and operated in the ecozone for manufacturing, processing or for industrial purposes shall not be subject to payment of real estate taxes for the first three (3) years of operation of such machinery, production equipment not attached to real estate shall be exempt from such real property taxes." In reply, please be informed that Section 2.57.5 (B) of Revenue Regulations No. 2-98 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 applied. PEZA registered enterprises enjoy exemption from payment of income taxes pursuant to the provisions of Section 39 (a) (1) of the Omnibus Investments Code of 1987, such as the income tax holiday. In particular, Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended by Section 4 of Revenue Regulations No. 14-02, provides as follows: "SECTION 4. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: xxx xxx xxx (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx xxx xxx (2) Corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A. 7916, the Omnibus Investment Code of 1997, and R.A. 7227, as amended, respectively; xxx xxx xxx" Such being the case, Tekno Logika Pilipinas, Inc. is exempt from the 1% withholding tax on income payments made by the top 10,000 corporations. Accordingly, since it is a PEZA registered enterprise still enjoying ITH incentive under a special law and the 5% preferential tax incentive from the PEZA, all payments received by it from its customers, whether ECOZONE registered or customs territory enterprises are exempt from the withholding tax. (BIR Ruling No. DA-381-2000 dated November 7, 2000) Further, Section 2 (nn), Rule I of the implementing Rules of RA No. 7916 defines the term "gross income" as follows: "(nn) "Gross Income" for purposes of computing the special tax due under Section 24 of the Act refers to gross sales and gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. The allowable deductions from "gross income" are specifically enumerated under Section 2, Rule XX of these Rules." The definition of "gross income" limits the application of the preferential tax rate of 5% to income derived from the registered activity by an ECOZONE enterprise. Thus, any income derived by a registered enterprise that is not related to its registered activity is not entitled to the preferential tax rate of 5%. Instead, such income derived from an unregistered activity shall be subject to regular internal revenue tax as provided under Section 1 (1st par.) of Revenue Regulations No. 20-02. Further still, this Office has already ruled that Republic Act No. 7916 or the PEZA Law is one of the special laws falling under the coverage of Section 108 (B) (3) of the Tax Code of 1997. This is more clearly reiterated in Revenue Memorandum Circular No. 74-99, particularly Section 3, which states that: "(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended: . . ." "Sale of service This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated November 5, 1998." Accordingly, we hereby confirm that any sale of goods or services to Tekno Logika Pilipinas, Inc., a PEZA registered enterprise, is legally entitled to zero percent (0%) VAT. And lastly, this Office will not rule on item no. 5 as it is within the jurisdiction of the local government where the registered enterprise is located. DSAEIT 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service