Lexmark Research & Development Corporation

September 14, 2009 BIR RULING [DA-(VAT-085) 535-09] Sec. 24, RA 7916; 109; DA 067-04; 006-02; 333-98; VAT 076-02 Lexmark Research & Development Corporation Innove I.T. Plaza, Samar Loop corner Panay Road Cebu Business Park, Cebu City Attention: Lilibeth E. Peralta Finance Director Gentlemen : This refers to your letter dated August 28, 2009 requesting confirmation of your opinion that the sale of outfitting services in favor of Lexmark Research & Development Company (LRDC) is subject to value-added tax (VAT) at zero percent (0%) rate. aAcDSC It is represented that LRDC is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) pursuant to the provisions of Republic Act (RA) No. 7916 as an Information Technology (IT) Enterprise; that it is engaged in the provision of engineering design and software development services as well as in the establishment of a Cebu Shared Service Center (a business process outsourcing); and that it is currently enjoying the preferential tax rate of 5% on gross income in lieu of payment of all national and local taxes. It is further represented that LRDC contracted the services of Creativo Property Development Corporation (CPDC) for the design, procurement and construction of the improvements or fitting up of the PEZA-registered IT building to be used by LRDC in its PEZA-registered IT service; that CPDC is a domestic corporation duly registered as VAT taxpayer with the BIR and as a PEZA Developer/Operator per PEZA Certificate of Registration No. EZ 09-17 also enjoying the preferential tax rate of 5% on gross income in lieu of payment of all national and local taxes; and that its registered activity consists of operating, conducting and maintaining the business of real estate property development of any kind or nature. Based on the foregoing, you now request for confirmation of your opinion that the sale of outfitting services by CPDC in favor of LRDC is subject to VAT at 0% rate. In reply, please be informed that Section 24 of RA 7916, as amended, provides in part: "SECTION 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: . . ." Likewise, Section 1 (A) of Rule XIV of the Rules and Regulations implementing RA 7916, and as promulgated by the PEZA Board pursuant to Sections 12 (c) and 55 of RA 7916, dealing specifically with ecozone developers and operators provides: "RULE XIV INCENTIVES TO ECOZONE DEVELOPERS/OPERATORS SECTION 1. ECOZONE Developers/Operators shall be entitled to the following incentives: A. Exemption from National and Local Taxes and Licenses. An ECOZONE Developer/Operator shall, to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and all local government impost, fees, licenses or taxes, including but not limited to the following: 1. Internal revenue taxes such as gross receipts tax, Value-Added Tax, ad valorem and excise taxes; 2. Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises. In lieu thereof, the ECOZONE Developer/Operator Enterprise shall pay a five percent (5%) final tax on gross income in accordance with the provisions of Rule XX of these Rules." In several BIR Rulings, this Office confirmed that the development, operation, and sale or lease of real property by a PEZA-registered ecozone developer/operator, is exempt from income tax, capital gains tax, value added tax and all other national internal revenue taxes. In lieu thereof, the ecozone developer/operator is liable to pay the five percent (5%) preferential rate on its gross income from said activities, in lieu of all taxes, including value-added taxes (VAT) pursuant to Section 1 (A) of Rule XIV, Rules and Regulations to Implement RA 7916. Thus, income derived from the PEZA-registered activities of an ecozone developer/operator is subject to the 5% preferential rate. (BIR Ruling No. 333-98 dated July 21, 1998; BIR Ruling No. 070-97 dated June 9, 1997; DA 067-04 dated February 12, 2004) Since CPDC is an ecozone developer/locator enjoying the 5% preferential tax rate, any income derived from its registered activity shall be subject to the 5% preferential tax in lieu of all taxes. Such being the case, its sale of outfitting services to LRDC for the improvement of the latter's PEZA-registered IT Building is not subject to VAT at zero percent (0%) rate but subject to the 5% preferential tax rate. Hence, it is exempt from VAT. cCSDaI In this regard, Section 109 (K) of the Tax Code of 1997, as amended by RA 9337, in relation to Section 24 of RA 7916, as amended, provides thus: "Sec. 109. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529." 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service