BIR Ruling No. 018-10

July 1, 2010 BIR RULING NO. 018-10 RA 7916; 000-00 Ms. Ng Wee Pin Group Finance Manager Gardella Coating Philippines, Inc. Cabangaan Pt., Bo. Cawag Subic, Zambales Gentlemen : This refers to your letter dated February 16, 2009 requesting on behalf of your client, Gardella Coating Philippines, Inc. ("GCPI" or the "Company" for brevity) for confirmation of your opinion that the sale of the Company's assets with zero book value, made during the course of winding up its business affairs, is income derived from its PEZA-registered activities subject to the preferential rate of five percent (5%) on the gross income, pursuant to Section 24 of Republic Act (R.A.) No. 7916, as amended. As represented, GCPI is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC Certificate of Registration No. ASO94-005202, dated June 9, 1994. It is also registered with the Philippine Export Zone Authority (PEZA) under Certificate of Registration No. 94-62, dated August 25, 1994. It was entitled to income tax holiday incentive up to 1998. Starting 1999, the Company became subject to the 5% tax on the gross income earned from its registered activities, in lieu of all taxes. GCPI was primarily engaged in the performance of tank and external coating, scaffolding, water jetting, tank cleaning and other related works, and operated its business at Cabangaan Pt., Bo. Cawag, Subic, Zambales. On February 20, 2002, the Board of Directors approved the dissolution of the Company by shortening its corporate life to March 1, 2002. As a consequence of the cessation of its operations, its PEZA registration was subsequently cancelled in 2002. In 2004, in the course of winding up its business activities, the Company assigned some of its assets, which were formerly used within its PEZA-registered activities, to Subic Shipyard and Engineering, Inc. (SSEI), a corporation organized and existing under the laws of the Philippines with principal office address at Cabangaan Pt., Bo. Cawag, Subic, Zambales. The assignments were made by way of dation in payment since the Company had an existing liability due to SSEI. The list of assets and the corresponding selling prices are as follows: SDHAEC Equipment Sale Price No. of Total Sales per Unit Units Price Container blasting units (d-blasting PO1 USD11,000 2 USD22,000 types) High Pressure Washing Machines USD5,000 2 USD10,000 Oracco Spray USD500 10 USD5,000 Consumables USD20,000 1 USD20,000 USD57,000 ========== The foregoing assets had zero book values at the time of the assignment. Accordingly, the total selling price of USD57,000 (or PhP3,207,219) was recognized as income. Since this resulted to the reversal of the corresponding liability, the income was presented in the financial statements as income from reversal of liabilities. In reply, please be informed that the Company's PEZA registration was cancelled in 2002. The Company sold/disposed of the aforementioned assets in 2004. Hence, at the time of the aforesaid sale/disposal, the Company was no longer entitled to the preferential tax rate of 5%. In view of the foregoing, the sale of the Company's assets, made during the course of winding up its business affairs but after the cancellation of its PEZA registration, is not subject to the preferential rate of five percent (5%) on the gross income under Section 24 of R.A. No. 7916, as amended. Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue