Taxability of Lease of Property Outside PEZA and Purchase of Services by SBMA and SBF-Accredited Enterprises

March 23, 1999 BIR RULING NO. 033-99 R.A. 7916-R.A. 7227-000-00-033-99 Clarion Manufacturing Corporation of the Philippines 3/F Cacho Gonzales Building 101 Aguirre St., Legaspi Village 1200 Makati City Attention: Mr . Kuniaki Noya Acctg . Dept . Manager Gentlemen : This refers to your letter dated October 23, 1997 stating that your company is located at Phase II, Block 7, Philippine Economic Zone, Rosario, Cavite, with Certificate of Registration No. 89-047 dated October 13, 1989; that you started paying the quarterly and annual income tax based on the preferential tax rate of 5% Gross Income Taxation, upon expiration of your Income Tax Holiday, in lieu of payment of national and local taxes pursuant to Section 24 of R.A. No. 7916; that you would like to be clarified on some issues on the taxability of lease of your Liaison office space and Expats house located outside PEZA's boundaries or within the Customs territory for VAT purposes; that the taxability for VAT purposes has already been addressed in BIR VAT Ruling No. 033-96 dated October 30, 1996 and BIR Ruling No. 035-97 dated April 3, 1997; that in said BIR Rulings, you noted that it is not clearly stated whether the services are rendered within or without the zone: that Section 51 of R.A. No. 7916 reads: "SEC. 51. Ipso-Facto Clause . All privilege, benefits, advantages or exemptions granted to special economic zones under Republic Act No. 7227, shall, ipso-facto , be accorded to special economic zones already created or to be created under this Act. The free port status shall not be vested upon the new special economic zones." that under Section 4(A)(e) of Revenue Regulations No. 1-95, otherwise known as the Rules and Regulations implementing the tax incentives under R.A. No. 7227, purchases of raw materials, capital goods and equipment and services by SBMA and SBF accredited enterprises from enterprises in the Customs Territory shall be considered effectively zero-rated for VAT purposes; that this was confirmed in BIR Ruling No. 162-94 dated November 25, 1994; and that again, you noted that it did not clarify whether the services were rendered within or without the zone, hence, your company is having difficulty in determining the proper treatment of the applicability of incentives by a PEZA-registered enterprise. Based on the foregoing representations and documents submitted, you are now requesting for a ruling whether or not the lease of your Liaison office space and Expats house located outside PEZA's boundaries or within the customs territory are subject to VAT; and whether purchases of services by SBMA and SBF-accredited enterprises from enterprises in the Customs territory are to be considered effectively zero-rated for VAT purposes. In reply, please be informed that pertinent portion of Section 24, Chapter III of R.A. No. 7916, otherwise known as the "Special Economic Zone Act of 1995", provides that no taxes, local and national, shall be imposed on business establishments operating within the Ecozone. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the Ecozone shall be remitted to the national government. Moreover, Section 4(A)(e) of Revenue Regulations No. 1-95, otherwise known as the Rules and Regulations to Implement the Tax Incentives Provisions under paragraphs (b) and (c) of Section 12, Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992", reads: "SEC. 4. Exemptions and Incentives. "A. All SBMA-registered enterprises doing business within the Secured Area in the Zone shall enjoy the following: xxx xxx xxx "e) Purchases of raw materials, capital goods and equipment and services by the SBMA and SBF-accredited enterprises from enterprises in the Customs territory shall be considered effectively zero-rated for VAT purposes. However, the VAT-registered enterprises in the Customs territory shall apply for effective zero-rating of their sales of goods and services to SBMA and to SBF enterprises pursuant to Revenue Regulations No. 5-87, as amended." From the foregoing provision of RA. No. 7916, it is clear that the sale of services to PEZA-registered enterprises, for income and VAT purposes, should be rendered within the PEZA boundaries to be entitled to the benefits of Section 24 of R.A. No. 7916. Accordingly, and since your Liaison office space and Expats house are located outside the PEZA boundaries, the lease thereof is therefore subject to the 10% VAT imposed under then Section 102(a) [now Section 108(a)] of the Tax Code, as amended, and to the corporate income tax prescribed under then Section 24(a) [now Section 27(A)] of the Tax Code, as amended. Moreover, purchases of services by SBMA and SBF-accredited enterprises from enterprises in the customs territory should be rendered within the secured area in the zone to be considered effectively zero-rated for VAT purposes. LibLex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue