BIR Ruling No. 092-13

March 5, 2013 BIR RULING NO. 092-13 RR 11-2005; 00-000 Nonato & Nonato Room 406, Tulips Center, A.S. Fortuna Street Bakilid, Mandaue City Cebu Attention: Atty. Rolando P. Nonato Gentlemen : This refers to your letter dated March 22, 2010 stating that your client, Hyde Sails Cebu, Inc. (HSCI) with TIN 225-917-371-000, is a corporation organized and existing under the laws of the Philippines with business address at Unit F, SPPI Technology Center Building, Cebu Light Industrial Park-SEZ, Basak, Lapu-Lapu City, Cebu; that HSCI is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with PEZA Certificate of Registration No. 03-053 dated August 11, 2003; that HSCI is engaged in the business of export and manufacturing of sails for various types of boats including among others dinghies, one design keelboats and custom racing and cruising yachts; that HSCI is currently paying the 5% preferential tax on gross income earned, in lieu of all other local and national taxes, on its registered activities; that as part of its operations, HSCI has hired a General Manager who directly supervises the whole production operations of the Company; that the General Manager also partly supervises the administrative staff of HSCI which includes accountants and other staff; that it is estimate that the General Manager's work is composed of 90% involvement in production and 10% involvement in administration; and that the General Manager's work involving production are integral to the performance of and directly related to the registered activities of HSCI. IcTEAD Based on the foregoing representations, you now request confirmation of your opinion that the portion of the salary specifically those referring to production activities, fringe benefits, and other welfare expenses of HSCI's General Manager are direct costs deductible in the computation of the gross income for purposes of the 5% preferential tax rate. In reply thereto, please be informed that the term "gross income" refers to gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus cost of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. The allowance deductions from "gross income" are specifically enumerated under Section 2, Rule XX of these Rules. (Sec. 2, Rule 1 of the Rules and Regulations to Implement Republic Act (R.A.) No. 7916). The above paragraph may be reduced to the following formula: Gross sales/revenue xxx Less: Sales Discounts xxx Sales Returns/Allowances xxx Direct Costs (Costs of Sales) xxx Other Manufacturing Costs (Factory Overhead) xxx xxx Gross taxable income xxx === With respect to the allowable deductions for PEZA-registered export enterprises, Section 2, Rule XX of the Implementing Rules and Regulations of R.A. No. 7916, provides as follows: "SEC. 2. Gross Income Earned; Allowable Deductions . For purposes of these Rules, Gross Income earned shall be as defined in Section 2(nn), Rules I of these Rules subject to the following allowable deductions for specific types of enterprises: 1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises SEIacA Direct salaries, wages or labor expenses Production supervision salaries Raw materials used in the manufacture of products Goods in process (intermediate goods) Finished goods Supplies and fuels used in production Depreciation of machinery and equipment used in production, and buildings owned or constructed by an ECOZONE Enterprise Rent and utility charges associated with building, equipment and warehouses, or handling of goods Financing charges associated with fixed assets." Corollarily, Revenue Regulations No. 11-2005 further clarified Section 2, Rule XX of the Rules and Regulations Implementing R.A. No. 7916, as amended, by enumerating certain production/direct costs deductible from gross income for purposes of determining the taxable base of ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises, to wit: a. Direct salaries, wages or labor expenses b. Production supervision salaries c. Raw materials used in the manufacture of products d. Decrease in Goods in Process Account (Intermediate Goods) e. Decrease in Finished Goods Account f. Supplies and fuels used in production g. Depreciation of machinery and equipment used in production, and of that portion of the buildings owned or constructed that is used exclusively in the production of goods h. Rent and utility charges associated with building, equipment and warehouses used in production i. Financing charges associated with fixed assets used in production the amount of which were not previously capitalized The above-mentioned enumerations are exclusive. Thus, under the maxim exppressio unius est exclusio alterius , the mention of one thing implies the exclusion of another thing not mentioned. If a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect ( Tolentino v. Paqueo , 523 SCRA 377). In the same vein, where the terms are expressly limited to certain matters, it may not by interpretation or construction be extended to other matters ( Sarmiento III v. Mison , 156 SCRA 549). The rule proceeds from the premise that the legislature would not have made specified enumerations in a statute had the intention been not to restrict its meaning and to confine its terms to those expressly mentioned ( Romualdez v. Marcelo , 497 SCRA 89). DAEICc Accordingly, this Office regrets to inform you that portion of the salary specifically those referring to production activities, fringe benefits, and other welfare expenses of HSCI's General Manager are NOT direct costs deductible in the computation of the gross income for purposes of the 5% preferential tax rate. 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. This REVOKES all other existing rulings inconsistent herewith. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue