Sale of Industrial Lots by a Duly Registered Ecozone Developer Not Subject to VAT

June 9, 1997 BIR RULING NO. 070-97 R.A. 7916 000-00 070-97 Angeles Industrial Park, Inc. Nepo Mart Bldg.,Plaridel St. Angeles City Attention: Mr . Peter G . Nepomuceno President & General Manager Gentlemen : This refers to your letter dated May 19, 1997 stating that your company is duly registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Developer having as its primary business activity the development and selling of industrial lots; that KEC Resource Incorporated, a domestic corporation, bought industrial lots within the Economic Zone from your firm and leased the land to another company, KEC Philippines, Inc. which constructed a factory to be utilized in manufacturing ceramic condensers for export. cdt In connection therewith, you are requesting a ruling on the following: (1) That since you are registered with the PEZA, you are exempt from VAT on your transactions; (2) That your suppliers are either subject to 0% VAT or exempt from VAT; and (3) That KEC Resource Incorporated can be classified as an "Ecozone Facilities Enterprise" subject to the 5% preferential tax rate under R.A. 7916. In reply thereto, please be informed as follows: (1) That under Section 24 of Republic Act No. 7916, otherwise known as "The Special Economic Zone Act of 1995", businesses and enterprises within the ECOZONE shall, in lieu of paying local and national taxes, be liable to the payment of the five percent (5%) preferential tax rate based on gross income earned distributed as follows: (1) three percent (3%) to the national government; (2) one percent (1%) to the local government units affected by the declaration of the ECOZONE; and (3) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE. Accordingly, as a duly registered Ecozone developer, your sale of industrial lots shall not be subject to VAT. Your tax exemption privilege, however, exempts you only from your direct tax liability, or taxes for which you would otherwise be liable, if it were not for your tax exemption privilege. It does not include exemption from indirect tax, i.e.,VAT on your purchases of goods or services, which is a direct liability of the seller. (2) Sections 100 (a)(2)(C) and 102 (b)(3) both of the Tax Code, as amended and as implemented by Revenue Regulations No. 7-95 as amended by Revenue Regulations No. 6-97 provide that sales of goods (or properties) and services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales or supply of such services to zero-rate. Such being the case, and since R.A. 7916 is a special law which grants exemptions from the payment of national taxes to PEZA-registered business establishments operating within the ECOZONE, except the payment of the preferential tax rate of 5% on gross income earned, the sales of goods (or properties) and services to you shall be effectively zero-rated. It shall be understood that your VAT-registered suppliers shall apply with the Revenue District Officer concerned having jurisdiction over their principal place of business for the effective zero-rating of their sales of goods and services to PEZA-registered enterprises within the ECOZONE pursuant to Revenue Regulations No. 7-95 as amended by Revenue Regulations No. 6-97. Without an approved application for zero-rating, the transactions otherwise entitled to zero-rating shall be considered exempt. (3) Sec. 1 (n), Rule 1, and Part 1 of the Rules and Regulations implementing R.A. 7916 otherwise known as "The Special Economic Zone Act of 1995" defines "Ecozone Facilities Enterprise" as referring to a business entity or concern within the Ecozone duly registered with and/or franchised/licensed by the PEZA with or without incentives provided under R.A. 6957, as amended (The Build-Operate-Transfer Law) and/or with or without financial exposure on the part of the PEZA such as contractors/operators of buildings, structures, warehouses, site development and road network, ports, sewerage and drainage system and other facilities for the development, operation and maintenance of the Ecozone and other similar or anxillary activities as may be determined by the Board. Such being the case, and since KEC Resource Incorporated merely bought industrial lots within the Ecozone and have it rented by KEC Philippines, Inc., it does not fall within the purview of an "Ecozone Facilities Enterprise". Accordingly, it is not entitled to the 5% preferential tax rate under R.A. 7916. Income derived by KEC Resource Incorporated shall be subject to taxes under the Tax Code, as amended pursuant to Sec. 25 of R.A. 7916 otherwise known as "The Special Economic Zone of 1995." Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue