Liability of CJH Devt. Corp. for Payment of 5% Preferential Tax Rate in Lieu of Local and National Internal Revenue Taxes

June 2, 1998 BIR RULING NO. 085-98 R.A. 7227-000-00-85-98 Bengzon Narciso Cudala Pecson BENGSON & JIMENEZ SOL Building, 112 Amorsolo Street Legaspi Village, Makati City Attention: Attys . Romeo H . Duran and Hubert E . Molina Gentlemen : This refers to your letter dated August 26, 1997 requesting on behalf of your client, CJH DEVELOPMENT CORPORATION (CJHDevCo) ,for confirmation of your opinion on the following issues: "1. CJHDevCo shall be liable for the payment of the preferential tax rate of 3%,plus the amounts equivalent to 1% for the Local Government Units and 1% for the Special Development Fund, respectively, based on its gross income earned, in lieu of local and national internal revenue taxes. Since Section 4(b) of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, is explicit in its provisions that the withholding tax therein prescribed shall not apply to "income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special",and since CJHDevCo enjoys exemption from income tax, income payments to CJHDevCo shall be exempt from the expanded/creditable withholding taxes under Rev. Regs. No. 6-85, as amended by Rev. Regs. No. 12-94, otherwise known as the Expanded Withholding Tax Regulations; "2. Accordingly, the importation by CJHDevCo of goods/articles, including raw materials and capital equipment, in connection with its business activities within the Zone shall be exempt from value-added tax ("VAT"); "3. Moreover, the sale of goods of services by a domestic seller/contractor in the Customs territory to CJHDevCo shall be considered export and effectively zero-rated on the part of the domestic seller/contractor. The domestic seller/contractor shall not impute or shift any VAT as part of cost to be paid by CJHDevCo on its purchases of goods or services from the domestic seller/contractor in the Customs territory. Provided, however, that the domestic seller/contractor, aside from being VAT-registered, shall apply for effective zero-rating of its sales of goods and services to CJHDevCo in accordance with Revenue Regulations No. 5-87 (now Rev. Regs. No. 7-95),as amended. Otherwise, the sales of goods or services by a domestic seller/contractor to CJHDevCo shall only be considered exempt from VAT. (BIR Ruling Nos. 046-95 dated March 3, 1995; 093-95 dated June 15, 1995; 156-95 dated October 12, 1995)" It is represented that CJHDevCo is a domestic corporation organized and existing under and by virtue of Philippine Laws; that it is registered with the Bases Conversion and Development Authority on May 21, 1997: that it won the right to lease, develop and operate a portion of the John Hay Special Economic Zone, consisting of 246.9967 hectares, in a public bidding conducted by the Bases Conversion and Development Authority; that a Lease Agreement was subsequently entered into by CJHDevCo and the Bases Conversion and Development Authority (BCDA): and that CJHDevCo has undertaken the full-scale development of the leased portion of the John Hay Special Economic Zone into a world-class, family-oriented and wholesome tourism complex, which is to be completed within a maximum period of three (3) years. In reply, please be informed as follows: 1. Section 3 of Executive Order No. 420 provides that the John Hay Special Economic Zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of R.A. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may be enacted. Corollary to this, Section 3 of Revenue Regulations No. 12-97 which provides that Section 12(c) of R.A. 7227, otherwise known as the Bases Conversion and Development Act of 1992, in relation to Section 3 of Presidential Proclamation No. 420 series of 1994, Section 5 of Executive Order No. 80 and Section 2, par 2.1.2 of Executive Order No. 62, registered enterprises within the Subic, Clark, John Hay and Poro Point Special Economic Zone, shall, in lieu of paying local and national taxes, pay five percent (5%) of their gross income earnings, which shall be distributed as follows: (a) To the National Government 3% (b) To the Local Government Units affected by the declaration of the ECOZONE, to be distributed in the manner set forth under Sec. 5.4.1.1 herein 1% (c) To the Special Development Fund of each concerned LGU of municipalities/cities contiguous to the base/ecozone areas and, for the SBMA, for such LGUs located outside and contiguous to the City of Olongapo and the Municipality of Subic, to be utilized for the development, and to be distributed in the manner set forth under Sec. 5.4.1.2 herein 1% Accordingly, CJHDevCo shall be liable for the payment of the preferential tax rate of 5% in lieu of local and national internal revenue taxes. Moreover, since CJHDevCo is enjoying exemption from income tax by virtue of the cited provisions, income payments to CJHDevCo shall be exempt from the creditable expanded withholding tax prescribed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, otherwise known as the Expanded Withholding Tax Regulations. (BIR Ruling No. 46-95 dated March 3, 1995) 2. Section 4(A)(a) of Revenue Regulations No. 1-95 implementing R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992 provides that: "SEC. 4. Exemptions and Incentives . "A. All SBMA registered enterprises doing business within the Secured Area in the Zone shall enjoy the following: "a. Exemption from customs and import duties and national internal revenue taxes on importations of raw materials for manufacture into finished products and capital goods and equipment needed for their business operation within the Secured Area. xxx xxx xxx" Such being the case, your opinion that the importation by CJHDevCo of goods/articles, including raw materials and capital equipment, in connection with its business activities within the Zone shall be exempt from value-added tax, is hereby confirmed. 3. We also confirm your opinion that the sale of goods by a domestic seller/contractor in the customs territory to CJHDevCo shall be considered export and effectively zero-rated on the part of the domestic seller/contractor. The domestic vendor shall not impute or shift any VAT as part of cost to be paid by the CJHDevCo on its purchases from the Customs territory. It should be understood however, that VAT registered domestic vendors in the Customs Territory shall apply for the effective zero-rating of their sales to CJHDevCo and to registered enterprises within the John Hay Special Economic Zone pursuant to Revenue Regulations No. 5-87. (BIR Ruling No. 93-95 dated June 15, 1995) 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. LLphil Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue