BIR Ruling No. 014-12

January 4, 2012 BIR RULING NO. 014-12 RA No. 7916; 00-000 Siguion Reyna Montecillo & Ongsiako 4th & 6th Floors, Citibank Center, 8741 Paseo de Roxas Makati City Attention: Attys. Ferdinand M. Hidalgo Ma. Corazon U. del Castillo Gentlemen : This refers to your letter dated August 9, 2010 stating that your client, Swedish Match Philippines, Inc. (SMPI), is a corporation organized and existing under the laws of the Philippines with principal office address at 104 Technology Avenue, Laguna Technopark-Special Economic Zone, Bian, Laguna, with TIN 000-363-177-000; that SMPI is a wholly-owned subsidiary of Swedish Match B.V., a company organized and existing under the laws of Netherlands; that SMPI's principal activities consist of the manufacture and sale of lighters mainly for the export market; that SMPI used to be registered with the Board of Investments (BOI) but transferred its registration to the Philippine Economic Zone Authority (PEZA) in April 2007; that it is registered with PEZA as an ecozone export enterprise; that under its Registration Agreement with PEZA, SMPI is entitled to the 5% gross income tax incentive, in lieu of all national and local taxes, duty and tax-free importation privilege of materials, machinery and equipment, and to incentives under Article 77, Book VI of Executive Order No. 226, otherwise known as the Omnibus Investments Code, and applicable provisions of the PEZA rules and guidelines, and to other remaining incentives under its BOI registration; that on the other hand, Swedish Match Lighters, BV (SMLBV) has intellectual property rights over 'Cricket Technology' which covers the technology that it has patented and other, patented/patentable knowledge directly related to the patents including technical information related to the manufacturing processes and know-how; that SMLBV also has intellectual property rights over 'Cricket Trademarks' which consist of the trademarks over the 'Cricket', 'Community' and 'Benelux' trademarks, all copyright protected material (including product designs and logos) used in the process of adapting to, imprinting on, or otherwise used to create the finished version of the Cricket patented products; that 'Cricket Technology' and 'Cricket Trademarks' are hereinafter collectively referred to as 'Cricket IP'; that SMPI manufactures and sells Cricket lighters which are based on the Cricket IP; that SMPI's use of the Cricket IP is covered by a Trademark License Agreement; that under the Trademark License Agreement, SMLBV granted SMPI the non-exclusive right to use 'Cricket Technology' and 'Cricket Trademarks' in the Philippines; that in consideration for granting the license on 'Cricket Technology' SMPI shall pay SMLBV a royalty calculated with the following formula: SMPI share in the worldwide production of Cricket lighters x Euros 500.00/year and that in consideration for granting the license on 'Cricket Trademarks',SMPI shall pay SMLBV a royalty calculated as follows: SMPI share in the worldwide production of Cricket lighters x Euros 841.24/year In support of your request, you have submitted the following documents, to wit: 1. SMPI's PEZA Certificate of Registration No. 07-25; 2. Copy of the Registration Agreement dated April 3, 2007 between SMPI and PEZA; and 3. Copy of the notarized and authenticated Trademark License Agreement between SMPI and SMLBV. Based on the foregoing representations, you now request confirmation of your opinion that the royalty payments made by SMPI to SMLBV under their Trademark License Agreement are deductible from gross revenues for purposes of computing its taxable income under the 5% preferential tax rate based on the gross income earned. In reply thereto, please be informed that Section 2, Rule 1 of the Implementing Rules and Regulations of Republic Act (RA) No. 7916 defines gross income as follows: EADSIa "Gross Income for purposes of computing the special tax due under Section 24 of the Act refers to gross sales or 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." Corollarily, Section 2, Rule XX of the PEZA IRR, on the other hand, provides for the following allowable deductions of ecozone export enterprises: 1. Direct salaries, wages or labor expenses; 2. Production supervision salaries; 3. Raw materials used in the manufacture of products; 4. Goods in process (intermediate goods); 5. Finished goods; 6. Supplies and fuels used in production; 7. Depreciation of machinery and equipment used in production and buildings owned or constructed by an ecozone enterprise; 8. Rent and utility charges associated with building, equipment and warehouses, or handling of goods; 9. Financing charges associated with fixed assets; xxx xxx xxx The above-mentioned enumerations are exclusive. Thus, under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. If a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect ( Tolentino v. Paqueo ,523 SCRA 377) . In the same vein, where the terms are expressly limited to certain matters, it may not by interpretation or construction be extended to other matters ( Sarmiento III v. Mison ,156 SCRA 549) . The rule proceeds from the premise that the legislature would not have made specified enumerations in a statute had the intention been not to restrict its meaning and to confine its terms to those expressly mentioned ( Romualdez v. Marcelo ,497 SCRA 89) . Accordingly, this Office regrets to inform you that the royalty payments made by SMPI to SMLBV under their Trademark License Agreement are NOT DEDUCTIBLE from gross revenues for purposes of computing its taxable income under the 5% preferential tax rate based on the gross income earned. 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 null and void. This REVOKES all other existing rulings inconsistent herewith. DHSaCA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue