BIR Ruling No. 112-12

February 22, 2012 BIR RULING NO. 112-12 00-000 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated May 5, 2006 stating that your client, Automotive Interiors Corporation (AIC), is a corporation organized and existing under the laws of the Philippines with principal place of business located at Lot 7-A Greenfield Automotive Park, Don Jose, Sta. Rosa, Laguna; that it is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise and as a non-pioneer manufacturer of automotive seats and interior components, under PEZA Certificate of Registration No. 99-08 dated February 10, 1999; that upon its registration with PEZA, AIC was granted income tax holiday incentive starting from June 1, 1999 to May 31, 2005, including the two-year extension; that it is now subject to the 5% final tax on gross income, in lieu of the payment of all national and local taxes; that the AIC entered into separate Technical License Agreements (Agreements) with Toyo Seat Co., Ltd. of Hiroshima, Japan; Nanjo Sobi Kogyo Ltd. of Hiroshima, Japan; Delta Kogyo Ltd. of Hiroshima, Japan; and GSK Corporation of Taiwan (collectively referred to as Licensors); that under the Agreements, the Licensors agreed to grant AIC access to technical information and know-how on the design and manufacture of certain licensed products (automotive/car seats and door trims); that the Licensors agreed to grant AIC non-exclusive right to use technical information and industrial property rights for the manufacture and sale of licensed products; and that in consideration for the technical information and intellectual property rights granted by the Licensors, AIC shall pay royalties to the Licensors at the agreed royalty rates. In connection therewith, you now request for an opinion as to whether or not the royalties arising from the Technical License Agreements relating to the technical information and know-how on the design and manufacture of licensed products should rightfully form part of the costs of finished goods and should be deductible in computing the 5% preferential tax rate based on the gross income earned as defined under Section 2, Rule 1 of the PEZA Rules. In reply thereto, please be informed that Section 2, Rule 1 of the Implementing Rules and Regulations of Republic Act (RA) No. 7916 defines gross income as follows: THSaEC "Gross Income for purposes of computing the special tax due under Section 24 of the Act refers to gross sales or gross revenues derived from business activity within the Ecozone, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. The allowable deductions from 'gross income' are specifically enumerated under Section 2 Rule XX of these Rules." Corollarily, Section 2, Rule XX of the PEZA IRR, on the other hand, provides for the following allowable deductions of ecozone export enterprises: 1. Direct salaries, wages or labor expenses; 2. Production supervision salaries; 3. Raw materials used in the manufacture of products; 4. Goods in process (intermediate goods); 5. Finished goods; 6. Supplies and fuels used in production; 7. Depreciation of machinery and equipment used in production and buildings owned or constructed by an ecozone enterprise; 8. Rent and utility charges associated with building, equipment and warehouses, or handling of goods; 9. Financing charges associated with fixed assets. xxx xxx xxx The above-mentioned enumerations are exclusive. Thus, under the maxim expressio 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). Accordingly, this Office regrets to inform you that the royalty payments made by AIC to the above-mentioned Licensors under their Technical License Agreements are NOT DEDUCTIBLE from gross revenues for purposes of computing its taxable income under the 5% preferential tax rate based on the gross income earned. aCcEHS 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