Preferential Tax Rate on Income Earned on the Sale of Ecozone Factory Building in the Course of Winding Up of Business

January 19, 1999 BIR RULING NO. 008-99 R.A. 7916-000-00-008-99 Atty. Maria Melina B. Saldajeno Lot 6 Lacor Royale Cabildo St. New Intramuros Village Commonwealth Avenue Quezon City M a d a m : This refers to your letter dated October 21, 1998 stating that your client, Kinshi Philippine Corporation (KPC), is registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise; that KPC was engaged in the manufacture and export of plastic consumer products; that KPC was originally registered with the Export Processing Zone Authority under Presidential Decree No. 66, as amended and is presently registered with PEZA under R.A. No. 7916; that KPC's factory is located at the Laguna Technopark, an export processing zone approved by and registered with the PEZA; that on September 24, 1997, the Board of Directors of KPC approved the dissolution of the company due to continued business losses incurred since the start of its commercial operation; that thereafter, KPC ceased commercial operations; that on October 24, 1997, the PEZA provisionally approved the cancellation of KPC's PEZA registration subject to fulfillment of certain conditions which included, among others, the sale to another PEZA registered company or a company qualified for registration with PEZA as an Ecozone Export Enterprise of its factory building located at the Laguna Technopark; that on September 9, 1998. KPC sold its factory building to Daiho Philippines Corporation (DPC), another PEZA registered company, for the price of P43,813,000.00; and that on October 7, 1998, KPC paid to the Bureau of Internal Revenue, San Pedro District Office the amount of P453,182.19 computed as follows: P43,813,000.00 - selling price 34,749,356.16 - depreciated cost of building as of October 1997 9,063,643.84 - taxable income x 5% - tax rate on PEZA companies P453,182.19 - tax due In connection therewith, you now request for a ruling that KPC paid the correct amount of tax and that no documentary stamp tax and value added tax are due on the above transaction. cdlex In reply thereto, please be informed as follows: (1) That under Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1995" no taxes, local and national, shall be imposed on business establishments operating within the Ecozone and that in lieu of paying taxes, five percent (5%) of the gross income earned by all business enterprises within the Ecozone shall be remitted to the national government. Additionally, under Section 2(nn), Rule I of the Rules and Regulations implementing R.A. No. 7916, "gross income" refers to gross sales or gross revenues derived from business activity within the Ecozone, net of sales discounts, sales returns and allowances minus cost of sales or direct costs but before deduction is made for administrative expenses or incidental losses during a given taxable period. Such being the case, and since R.A. 7916 is a special law which grants exemptions from payment of national taxes to PEZA-registered business establishments operating within the Ecozone, except payment of the preferential tax rate of 5% on the gross income earned, the gross income earned on the sale by KPC of its factory building located within the Ecozone in the course of winding up its registered business within the Ecozone is subject to the 5% preferential tax rate based on the gross selling price minus the depreciated cost of the building as of the date of cessation of commercial operations. (2) As a duly registered Ecozone export enterprise, KPC is not subject to value added tax and documentary stamp tax on the sale of its factory building. Since the buyer of the factory building is likewise a PEZA-registered company, no documentary stamp tax is payable on such sale transaction. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue