BIR Ruling No. 050-11

February 16, 2011 BIR RULING NO. 050-11 RA No. 7916; RR 01-00; BIR Ruling No. DA-279-05; BIR Ruling No. DA-373-05 Nonato & Nonato Law Offices Room 406, Tulips Center AS Fortuna Street, Bakilid Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Counsel for Primary Properties Corporation Gentlemen : This refers to your letter dated February 23, 2010 requesting on behalf of your client, Primary Properties Corporation ("PPC" for brevity), formerly Primary Industrial Properties Corporation with TIN 080-004-260-721, for confirmation of your opinion that: 1) PPC is not liable to the Documentary Stamp Tax ("DST") on Lease Agreements as it is registered with the Philippine Economic Zone Authority ("PEZA") as an Ecozone Facilities Enterprise, is paying the 5% tax imposed in Republic Act ("RA") No. 7916, and its leasing activities are part of its registered activities with PEZA; and 2) PPC's tenants some of whom are currently paying the 5% tax imposed in RA No. 7916, will be liable to the DST on the Lease Agreements as leasing is not part of their registered activities. It is represented that PPC is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that it operates PEZA-accredited Information Technology ("IT") Buildings in both the Mactan Export Processing Zone and the Asiatown I.T. Park, Cebu; that it is registered with the PEZA as an Ecozone Facilities Enterprise pursuant to Amended PEZA Certification of Registration No. 94-A10-F; that it is currently under the preferential 5% tax regime; that under the Registration Agreement, the company's registered activity includes leasing activities. It is further represented that PPC's tenants are Ecozone IT Enterprises which include, among others, Trax Technologies Asia, Inc. with PEZA Certificate of Registration No. 06-64-IT, Dash Engineering Philippines, Inc. with PEZA Certificate of Registration No. 04-24-IT, Etelecare Global Solutions, Inc. with Amended PEZA Certificate of Registration No. 00-020-IT, Western Wats Philippines, Inc. with PEZA Certificate of Registration No. 03-13-IT. Some of PPC's tenants are currently already paying the 5% tax imposed on gross income consistent with RA No. 7916 while others are under the ITH and will pay the 5% tax upon expiration of their ITH. ITaCEc In reply thereto, please be informed that Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, as amended by Section 4 of Republic Act No. 8748, provides that business establishments operating within the Ecozone shall be exempt from all national and local taxes, and shall in lieu thereof be subject to the 5% preferential tax rate of the gross income earned. Section 4 of Revenue Regulations ("RR") No. 1-2000, dated November 12, 1999, implementing the afore-quoted provision states that: "Section 4. Nature of the 5% Tax and Extent of Tax Exemption. The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character. Registered Ecozone enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by the developers, pursuant to Section 24 of RA No. 79 16, as amended by RA No. 8 748." In BIR Ruling No. DA-279-05 dated June 23, 2005 amending BIR Ruling No. DA-236-04 dated December 15, 2004 , this office laid down the rule on DST exemptions of PEZA-registered companies. PEZA-registered firms no longer enjoying the ITH at the time of the transaction but subject to the 5% preferential tax, can claim exemption from the DST since the 5% income tax on gross income applicable to PEZA-registered enterprises is in lieu of all national and local taxes including DST. This Office in BIR Ruling No. DA-373-05 dated August 30, 2005 also has had occasion to rule on the DST implications of a PEZA-registered enterprise's lease transactions in relation to its registered activities, to wit: "Furthermore, since IPI is engaged in real estate business, leasing of real properties is among its registered activities, IPI, therefore, is exempt from payment of the document stamp tax (DST) due on the Contract of Lease it executed with the other PEZA-registered company. However, applying Section 173 of the T ax Code of 19 97, as amended, the other party to the Contract of Lease, therefore shall bear the burden of paying the DST, except, however, if the other PEZA-registered enterprise is also engaged in realty (leasing) business, in which case, it shall likewise be exempt from payment of the DST. xxx xxx xxx Further, since leasing of realty is not among the registered activities of EMS, the Contract of Lease between EMS as lessor and IPI as lessee is subject to the documentary stamp tax imposed under Sec. 194 of the T ax Code of 1 997, as amended." WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that: TAaCED 1) PPC is not liable to the DST on Lease Agreement as it is registered with the PEZA as an Ecozone Facilities Enterprise, paying the 5% tax imposed in RA No. 7916, and its leasing activities are part of its registered activities with PEZA; and 2) PPC's tenants some of whom are currently paying the 5% tax imposed in RA No. 7916, will be liable to the DST on the Lease Agreements as leasing is not part of their registered activities. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue