Propriety of Extending Income Tax Holiday Incentives to BOI-registered Industrial Estates

November 27, 2000 BIR RULING NO. 064-00 Sec. 2 & 4 E.O. 226 000-00 Anti-Graft League of the Philippines Suite 301, Manila Midtown Hotel Pedro Gil, Ermita Manila Attention: Mr . Cornelio D . de Guzman VP-Chief of Investigation Gentlemen : This refers to your letter dated October 28, 1998 requesting for a categorical and definitive determination whether the Board of Investments (BOI), at the time the income tax holidays were granted to BOI-registered industrial estates, has any legal basis in extending income tax holiday incentives to such industrial estates, insofar as the implementing provisions of the Omnibus Investment Code are concerned, particularly Articles 16, 17 and 18 thereof in relation to Articles 26 and 28 of the Omnibus Investment Code. Antecedent facts of the case are as follows. In BIR Ruling No. 048-93 dated January 22, 1993 issued to Laguna Technopark, Inc. (LTI), the text of which is hereby republished, thus "Laguna Technopark, Inc. Makati Stock Exchange Building 6767 Ayala Avenue, Makati Attn: Atty. Renato O. Marzan Gentlemen : This refers to BIR Ruling No. 50(b)-000-00-206-91 dated October 4, 1991, to the effect that your sale or industrial lots within the industrial estate in Bian and Sta. Rosa, Laguna is not subject to the creditable withholding tax of 2.5%. Please be informed that after a re-study of the pertinent facts, this Office believes that you are neither a producer nor a manufacturer of specific products and commodities under Arts. 16 and 18, in relation to Art. 28 of the Omnibus Investments Code (Executive Order No. 226); and that the listing of your activity of selling industrial lots in the Investment Priorities Plan is doubtful because it is not related to the production of specific products and commodities, as indicated under Articles 26 and 28 of the same Code. In view thereof, and considering the fact that the Department of Justice has rendered an opinion (Opinion No. 122, s. 1992) dated September 21, 1992) declining to rule on the issue of your eligibility to be registered with the Board of Investments as preferred non-pioneer enterprise, BIR Ruling No. 50(h)-000-00-206-91 dated October 4, 1991 is hereby revoked. It is understood, however, that the revocation is prospective; hence, it will not affect your transaction between October 4, 1991 and the issuance of this ruling. (Sgd. CIR Jose U. Ong)" this Office revoked the tax incentive previously granted to it; that on March 8, 1993, the BIR issued BIR Ruling No. 85-93 to the Philippine Industrial Estate Association, revoking the above-quoted BIR Ruling No. 47-93, thus effectively restoring the grant of income tax holiday (ITH) to industrial estates subject to the following conditions imposed by the BOI for the enjoyment of said ITH, viz: "a) that industrial estates must register with the BOI for more than three (3) years; "b) that such estates must be registered under pioneer status or must be located in less developed areas; and HDAaIS "c) that the industrial estates will be set up only in areas that need them with the eventual removal of these estates in the listing (of the IPP) once it is seen that sufficient infrastructure is already in place." that on May 12, 1997, you wrote the Commissioner of Internal Revenue asserting your stand on the alleged illegality of the grant of ITH to BOI-registered industrial estates by the Board of Investments (BOI) invoking BIR Ruling No. 048-93 which initially revoked the ITH granted by the BOI to Laguna Technopark, Inc. (LTI); that you further believed that it is within the BIR's power to effectively render an opinion on such legality of ITH by further revoking BIR Ruling No. 085-93 and thereby reinstating BIR Ruling No. 048-93; that, likewise, on May 15, 1997, in your faxed transmitted letter dated April 22, 1997 wherein you questioned the validity of the Board's grant of ITH incentive to industrial estates developer, namely, the LTI, by citing that it is neither a manufacturer or producer, hence, ineligible to said incentives, the BOI asserted the following, viz: " BOI is mandated by law (EO 226) to grant fiscal incentives to industrial estates as a preferred area of investment . "The grant of fiscal incentives to BOI-registered enterprise as defined in Art. 11 of EO 226 is an exercise of the Board's power to process and approve applications for registration, under such terms and conditions as it may deem necessary to promote the objectives of the Omnibus Investments Code. The objectives of EO 226 as clearly states in Art. 2 thereof entitled "Declaration of Investment Policies" consist of the acceleration of the sound development of the national economy consistent with principles of economic nationalism, feasible and practical dispersal of industries, and the promotion of small and medium scale industries (Art. 2, EO 226 supra). "One of the investment policies declared in E.O. 226 is the extension of fiscal incentives to projects which will significantly contribute to the attainment of the aforementioned objectives without which said projects may not be established in the locales required in such number and pace for optimum national economic development (Art. 2, (3), E.O. 226). In pursuance of said investment policy, E.O. 226 further provides that fiscal incentives systems shall be devised to compensate for market imperfections, reward performance contributing to economic development, be cost efficient, and be simple to administer (Art. 2, (3), E.O. 226). Thus, BOI as the Government Agency empowered to implement EO 226 has evolved and continues to do a fiscal incentives scheme for specific activities listed in the IPP (Art. 2(3), EO 226 supra)" " BOI listed industrial estate in the IPP as an activity wherein investments are to be encouraged with pioneer/non-pioneer incentives . "In 1990, the year when Technopark was registered by BOI, the latter listed industrial estates including science and technoparks, technology incubation centers with pioneer non-pioneer incentive . What this mean was that as preferred area of investment, the ITH incentive could cover a period of six (6) or four (4) years equivalent to those of pioneer and non-pioneer enterprises as defined in Art. 17 and Art. 18 of the Code (Emphasis supplied.) . . ." that on February 25, 1999, the Office of the Commissioner of Internal Revenue (OCIR) rendered the following averments, among others, "1) That "the BIR has no jurisdiction to issue a ruling regarding the above matter"; "2) The grant of income tax holidays "is clearly within the administrative powers of the BOI; and cEDaTS "3) "as co-equal body of the BOI, we cannot question nor reverse their decision and vice-versa;" that in your letter reply dated February 25, 1999, which was received by this Office on April 13, 1999, you posed the following observations/comments: "1) The BIR being the premiere and exclusive agency of the government responsible/accountable in the collection of income and other residual taxes must, in its interest, stand up and repel/nullify any move by the government agency that interlopes in its turf, ILLEGALLY, that would stunt BIR's collection efforts. It cannot allow BOI, for it to exercise its "administrative powers" peremptorily, without legal basis with impunity to the prejudice of its collection target. BIR cannot just fold its arms and abdicate its power and authority in its mandated role to impose the substantive law. "2) If the grant is indeed found illegal, it is null and void ab initio and therefore any subsequent revocation/modification of the same by BIR Ruling No. 048-93 and its prospective effect as invoked therein, is null and void with the alleged prejudicial effect, on the taxpayer LTI, in accordance with Sec. 245 of the Tax Code, no longer relevant vis-a-vis, the exemptions enumerated in Sec. 246 of the same Code. Since no ruling of the Commissioner can modify, charge or reverse the substantive law, perforce, the latter must prevail, for its enforcement by the BIR. 3) From the application alone, a perusal of its conditions imposed by EO 226, would show that LTI and other industrial estate enterprises similarly given income tax holidays, have "knowingly" violated them as well as the other implementing provisions, evidently through the apparent acquiescence/connivance of the BOI." In reply, please be informed of the following: A. The BIR, in the discharge of its functions, has the following powers and duties : 1) assessment and collection of all national internal revenue taxes, fees, and charges; 2) enforcement of all forfeitures, penalties, and fines connected therewith, as well as court judgments; and 3) giving effect to and administering the supervisory and police powers conferred to the Bureau. [Section 2 of the Tax Code of 1997 (then Sec. 3 of the Tax Code, as amended)] Consistent with the above, the BIR has been continuously performing its mandate, i.e., the assessment and collection of taxes. In relation to the foregoing, the Commissioner is empowered, among others, to interpret tax laws and decide tax cases, subject to review by the Secretary of Finance. (Section 4 of the Tax Code). Thus, in accordance with its power and function, the CIR has been issuing BIR Rulings interpreting various provisions of the Tax Code and other tax laws. In the interpretation of the Tax Code provisions and various tax laws, the Office of the Commissioner through the Law Division, does not single out one provision from among the interrelated provisions. The CIR, to give meaning to a tax law which is beset with controversies and vague provisions, considers the interpretation and regulations which were promulgated by the implementing agencies that were called to some degree to exercise their discretionary powers under a set of sufficient standards expressed by law (Cervantes vs. Auditor General, 91 Phil. 359) or implied from the policy and purpose of the Act . (Maceda vs. Macaraig, 197 SCRA 771). In this premise the above-mentioned BIR rulings had been issued, initially granting tax exemption to the industrial estates developer but which was revoked later. However, after a thorough study on the matter and consultation with the BOI, the BIR has to change its stand mainly, because the Omnibus Investments Code, as amended by RA No. 7918, under Section 2 thereof re: "Declaration of Investment Policies", mandates the BOI as the implementing agency to identify the preferred areas of investments in order to pursue the very objectives of the Investments Program. In furtherance of the said objectives, the BOI classifies the preferred areas of investments into two: the preferred pioneer and the preferred non-pioneer. It is in the yearly Investments Priorities Plan (IPP) that the BOI lists down which economic activities are considered preferred pioneer and which are preferred non-pioneer. Starting 1990, the IPP listed industrial estates enterprises and industrial communities as support activities, included in the areas of preferred investments. To encourage their participation in sustaining the objectives of the Investments Program, the BOI has been authorized under the Omnibus Investments Code to extend fiscal incentives to the investors of these preferred areas of investments. For this purpose, it uses the incentives package extended to the pioneer or non pioneer enterprises under Section 17 and 18 of EO 226. It is only within this limits that the Board can grant, which is in accordance with Section 28 in relation to Section 26, both of the Omnibus Investments Code (EO 226, as amended). Thus, when the Board grants the incentives to these investors in other preferred areas of investments, it did not categorically consider the industrial estates, in this case, as a pioneer or non-pioneer producer enterprise, as Anti-Grants wants to pursue. The BOI merely extends an equivalent incentives to industrial estates for making available their large tract of land for the use of a community of manufacturing industries and services catering to these industries, which activity is initially determined by the Board to be economically viable and in accordance with Section 28 of EO 226, as amended. ISDHcT 2. Thus, the BOI is mandated under Art. 11 of EO 226 to promote the objectives of Omnibus Investments Code . The objectives of EO 226 as clearly states in Art. 2 of the Code, "Declaration of Investment Policies" consist of the acceleration of the sound development of the national economy consistent with principles of economic nationalism, feasible and practical dispersal of industries, and the promotion of small and medium scale industries. And one of the investment policies declared in E.O. 226 is the extension of fiscal incentives to projects which will significantly contribute to the attainment of the aforementioned objectives without which said projects may not be established in the locales required in such number and pace for optimum national economic development . (Art. 2, (3), E.O. 226) Furthermore, in pursuance of said investment policy, EO No. 226 further provides that fiscal incentives systems shall be devised to compensate for market imperfections, reward performance contributing to economic development, be cost efficient, and be simple to administer (Art. 2(3), EO 226). It should be noted that it was then within the legislative power of Corazon C. Aquino to enact law which will objectively pursue her governmental policy in achieving economic growth. EO No. 226, otherwise known as the "Omnibus Investments Code of 1987", was specifically enacted for the purpose and further creating the body which will implement the same. Thus, BOI as the specialized government agency empowered to implement EO No. 226 has, in furtherance of said economic policy, evolved and continues to do a fiscal incentives scheme for specific activities listed in the IPP (Art 2(3), Art 3, EO 226 supra) 3. The application and subsequent registration by these industrial estate in the preferred area of investments is within the framework of the BOI Investments Priorities Plan sanctioned by EO 226, as amended by RA 7918 . As aptly pointed out by the CIR's Technical Staff, the extension of fiscal incentives to the BOI-registered enterprise in the preferred area of investment is within the administrative powers of the Board. As earlier identified, industrial estate enterprises are classified as falling under the preferred area of investment. Logically, the government cannot attract them to invest without granting them incentives during their initial years of operations, thus, the grant of ITH. Having been listed in the preferred areas of investments pursuant to the Investments Priorities Plan (IPP), the application by the industrial estate enterprises in this activity is a matter of course. HcTIDC In this light, granting without conceding that the grant of ITH by the Board to these industrial estate enterprises is doubtful, this Office is of the opinion as it hereby holds that BIR cannot declare the same as void and illegal. The BIR is not authorized to reverse or invalidate the action of a co-equal body. Finally, considering that the issue posed is equally necessary for judicial determination, this Office believes that the BIR is not the proper forum that can render Decision on the matter with legal and judicial effect. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue