Incentives and Tax Exemptions Granted Under R.A. 7459 to Inventors Duly Certified by the Filipino Inventor's Society

November 14, 2002 BIR RULING NO. 040-02 R.A. Nos. 7459, 7227; Sec. 129 Lan-Gas Manufacturing 315 Manuel L. Quezon St.,Lower Bicutan Taguig, Metro Manila Attention: Mr. Rudy N. Lantano Inventor Gentlemen : This refers to your letter dated August 31, 2002 which was filed with us on September 30, 2002 requesting for a confirmatory ruling to the effect that Mr. Rudy N. Lantano, an inventor duly certified by the Filipino Inventor's Society, is entitled to the incentives and tax exemptions granted under R.A. 7459, otherwise known as "The Inventors and Invention Incentives Act of the Philippines", wherever he may be located and doing business in the Philippines. BACKGROUND OF THE CASE The following are the facts of the case as represented by the taxpayer. Mr. Rudy N. Lantano is an inventor duly certified by the Filipino Inventor's Society Screening Committee and a patent holder of various environment-friendly petroleum-based fuels, particularly, ALCO-DIESEL covered by Patent No. 28424; LAN-GAS covered by Patent No. 13594; and SUPERBUNKER FORMULA L covered by Patent No. 29089, all issued by the Philippine Patents Office. He has been issued various confirmatory rulings on the tax exemptions of the aforementioned invention products by the Bureau of Internal Revenue, to wit: 1. Ruling No. DA-37-02-04-98; 2. DA-280-07-01-98; 3. DA-281-07-01-98; 4. DA-145-99; and 5. BIR Ruling No. 155-98. Thereafter, Mr. Lantano started his operations as manufacturer-seller of the abovementioned invention products. During his first two (2) years of operation, he was located inside the Incubation Site of the DOST Compound, Taguig. In year 2001, he left the Site and temporarily relocated his plant at a nearby place, also in Taguig. He was, however, forced to slow down his operation after his Supply, Process and Lease Agreement ("Agreement") with Pilipinas Shell Petroleum Corporation (PSPC) expired last June 2002. Since Mr. Lantano does not own a refinery plant where he can process the crude oil into other petroleum products and yields which are actually the main components of his invention products, he can no longer manufacture the invention products at the same cost as before, and the tax saving/exemption portion is eaten up by the manufacturing costs of the products, practically, yielding the tax incentives granted under R.A. 7459 to nothing. Likewise, since the Taguig plant is located in a very densely populated and limited area and taking into consideration the lack of refinery and storage facilities, as well as the manufacturing costs of the invention products and the location of his plant, Mr. Lantano relocated his plant at Subic Bay Economic and Freeport Zone (SBFZ), mainly, for purposes of producing the invention products at a lower cost, and thereby sustaining the production of the same. The raw materials will be sourced within SBFZ from one of the petroleum companies located inside the Free-port Zone. Mr. Lantano will manufacture the invention products inside SBFZ, and thereafter, transfer the same to his storage tanks in Taguig where they will be stored until withdrawn for sale. In all cases, Mr. Lantano will either sell the finished invention products through wholesale or retail. In case of wholesale, the invention finished products will be available to petroleum new players or commercial buyers, and in case of retail selling, he will sell the invention products through his pumping outlets located in various places in Metro Manila and nearby provinces. Mr. Lantano has been granted a Locational Clearance and Permit to Operate a Blending Facility by SBMA through Investment Processing Department. However, as a sole proprietor, Mr. Lantano is not qualified to register as a SBFZ enterprise. POSITION OF MR. LANTANO In connection with the foregoing, Mr. Lantano is now requesting confirmation of the following: "1. The tax incentives availing under R.A. 7459 ("The Inventors and Invention Incentives Act of the Philippines") apply to a Filipino inventor wherever located in the Philippines e.g., Subic Bay Economic and Freeport Zone and other Ecozones. "The applicability of the law is within the Philippine jurisdiction. While ecozones are deemed covered by special laws, specifically delineating the areas from customs territory, they are nonetheless within the Philippine territory. It is therefore, my humblest opinion that R.A. 7459 cannot be limited by the provisions of special laws creating these ecozones. "2. The transfer of [inventor's] invention products manufactured inside the Special Economic Freeport Zone (in the Philippines) to [his] storage tanks located within the Customs Territory is exempt from taxes and duties on importation there being no consumption or sale between [the inventor] as consignor and consignee. While excise taxes is imposed on imported goods, in [inventor's] case, however, the invention products cannot be categorized as imported goods considering that [he] produced the products pursuant to the "Inventors and Inventions Incentives Act of the Philippines" which Act is applicable to all Filipino inventors wherever located in the Philippines. There is no sanction under the Act prohibiting Filipino inventors to relocate inside the economic zone. The purpose of the Act is to encourage commercialization of the inventions in the Philippines. "Furthermore, the sale of said invention products either through wholesale or retail is also exempt from all taxes availing under R.A. 7459. As implemented by Section 3 of Revenue Regulations No. 19-93 dated July 27, 1993 implementing R.A. No. 7459, the inventor is exempt from the payment of the following taxes for which he shall be directly liable to pay, to wit: "a) Income tax on the net income derived from the sale of invention products resulting from newly discovered/developed technologies by local researchers or new technology adopted from foreign sources whether it be patented machine, product, process including implements or tools and other related gadgets of invention, utility model and industrial design patents; "b) Value-added tax (VAT) on the gross receipts/revenues derived from the sale of said invention products, provided, however, that you shall not be exempt from taxes for which he is not directly liable, e.g. VAT on the purchases of raw materials, supplies and equipment/machineries, which may be shifted as part of the cost of goods sold or for services rendered; and "c) Excise taxes directly payable in connection with the sale of invention products. Further, in support of the above representation, the following documents were submitted: 1. Photocopy of Patent No. 28424 issued by the Philippine Patents Office on August 31, 1994 for ALCO-DIESEL invention; 2. Photocopy of Patent No. 13594 issued by Philippine Patents Office for LAN-GAS invention; 3. Photocopy of Patent No. 29089 issued by the Philippine Patents office for SUPERBUNKER FORMULA L invention; 4. Copy of BIR Ruling No. DA-37-02-04-98; 5. Copy of BIR Ruling No. DA-280-07-01-98; 6. Copy of BIR Ruling No. DA-281-07-01-98; 7. Copy of BIR Ruling No. 155-98; 8. Copy of Locational Clearance, Permit to Operate and Certification to that effect duly issued by the SBMA; 9. BIR Registration; 10. Copies of Minutes of Meetings Bicameral Committee Conference, Deliberations of both Houses of Representatives and Senate REQUESTED RULING I. Section 2 of Republic Act No. 7459 (RA 7459), otherwise known as the "Inventors and Invention Incentives Act of the Philippines", to wit: "SEC. 2. Declaration of National Policy and Program. It is hereby declared to be the national policy to give priority to invention and its utilization on the country's productive system and national life; and to this end provide incentives to inventors and protect their exclusive right to their invention, particularly when the invention is beneficial to the people and contributes to national development and progress. "Pursuant to the national policy, the Government shall provide a program to set up a climate conducive to invention and innovation, give encouragement and support to inventors who are creative and resourceful, as well as imbued with a deep sense of nationalism, and maximize the capability and productivity of inventors though incentives and other forms of assistance and support ." (Italics supplied.) Apparently the intention of the law is to promote invention and extend assistance and support to the Filipino inventors in the hope of maximizing their capability and productivity. 1 With respect to eligibility to the benefit and application of RA 7459, the Minutes of Proceedings on HB No. 240801 2 disclose that Filipino inventors residing in the Philippines can avail of the Bill's benefits. The Bill excludes Filipino inventors based abroad since it is assumed that they had already changed their citizenship and thus, their inventions are most probably presented to the foreign governments where they are now residing. 3 Thus, benefits and incentives granted under RA 7459 is availing to a Filipino inventor for as long as he resides in the Philippines. The fact that the blending facility is relocated at Subic Bay Special Economic and Free-Port Zone (SBFZ) which is a delineated area from Customs Territory pursuant to the provisions of Republic Act No. 7227 (RA 7227), otherwise known as "Bases Conversion and Development Act of 1992", does not disqualify Mr. Lantano from availing of the tax exemption and incentive benefits under RA 7459. II. The ultimate objective of RA 7227 is the conversion of military bases into alternative productive uses and the subsequent creation of Special Ecozones, among which, is the SBFZ, and to develop such Ecozones into a self sustaining industrial, commercial, financial and investment centers to generate employment opportunities in and around the zone and to attract and promote productive foreign investment. Under Section 12 of Republic Act No. 7227 (RA 7227), the area covering the SBFZ is within the territorial jurisdiction of the Province of Bataan. The delineation of the area covering SBFZ as a separate customs territory is to ensure the free flow or movement of goods and capital within, into and exported out of Special Economic Zone. In the process, incentives such as tax and duty free importations of raw materials, capital and equipment are made part of the package. But in all respect, however, SBFZ-registered enterprises are subject to five percent (5%) of the gross income earned in lieu of paying taxes which shall be distributed as follows: 3% to the National Government; 1% each to the local government units affected by the declaration of the zone; and, 1% to Special Development Fund. It can therefore, be readily ascertained that the five percent (5%) is actually a tax commuted into a single rate, and which amount is ultimately remitted to the National Government and local government units concerned in accordance with the above sharing ratio. Further, as provided for in RA 7227, the exportation or removal of goods from the SBFZ to the customs territory is subject to customs duties and taxes under the Tariff and Customs Code and other relevant tax laws of the Philippines. 4 Such exportation by an SBF locator is deemed to be an importation by the buyer from customs territory. In this connection, there are national internal revenue taxes that may be directly levied on imported petroleum goods, e.g.,the VAT and the excise tax on imported petroleum goods or articles. Importation of petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax are exempt from VAT. 5 In the instant case, since the invention products, i.e.,Lan-Gas, Alco-Diesel and Superbunker Formula L, are petroleum products, they are exempt from VAT. As to whether the said invention petroleum products are exempt from excise taxes, Section 6 of RA 7459 provides as follows: "SEC. 6. Tax Exemption. To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of first sale, subject to the rules and regulations of the Department of Finance. Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon death of the inventor. "The technologies, their manufacture and sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports. " (Italics supplied) The term 'technology' means the application of knowledge or science which shall include all other, such as inventions, innovations and results of researches. 6 What is exempt under the above-mentioned provision is the income of the inventor. The excise tax on the movement of the inventions from SBFZ to the customs territory is an importation, for which the law subjects the importation/importer to the corresponding excise tax. The importer does not enjoy the exemption granted to the inventor under the abovementioned provision of R.A. No. 7459. If, on the other hand, the inventor himself is the importer, he is likewise not exempt from the excise tax, because as stated, what the law exempts is the income derived from the sale of the invention, and not the importation thereof. Accordingly, the request for exemption from payment of excise taxes on the movement of the aforementioned invention products from the inventor's blending facility in SBFZ to his storage facility in Taguig which is located within the customs territory is hereby denied for lack of legal basis. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. Sponsorship Remarks of Senator Mercado during the Bicameral Committee Conference dated February 7, 1992; Sponsorship Speech of Sen. Lina during the Senate Committee Meeting dated January 30, 1992; Remarks of Atty. Vicente Alvarez as Presiding Officer during the Committee Hearing of Joint Senate Committee on Science and Technology and Committee on Trade and Commerce held on February 11, 1999. 2. House Bill entitled "An Act Providing Incentives to Filipino Inventors in the Country and Appropriating Funds Therefore" later consolidated with Senate Bill No. 1758 (Incentives for Inventions) to come up with RA 7459. 3. Interpellation of Mr. Escudero on HB No. 24801 dated August 2, 1990 . 4. Section 12(b), RA 7227. 5. Section 109(c) of the Tax Code of 1997. 6. Sec. 3(c), R.A. No. 7459.