BIR Ruling No. 115-13

March 22, 2013 BIR RULING NO. 115-13 RA 7916; Secs. 27 (A); 106 & 196 NIRC; RR No. 2-98 Lepiten and Bojos Law Office 21/F Don Pedro Rodriguez St., Capitol Site Cebu City Attention: Atty. Magdalena Lepiten Counsel Gentlemen : This refers to your letter dated April 26, 2010 requesting on behalf of Fourlink Electronics Philippines, Inc. ("FEPI" for brevity), (now, Surface Technology International Philippines, Inc. ), for legal opinion that the sale of a factory and office building located at Mactan Economic Zone made by Asia Technologies Corporation ("ATC" for brevity) in favor of FEPI is income derived by ATC from its PEZA-registered activities subject to the preferential rate of five percent (5%) on the gross income, pursuant to Section 24 of Republic Act (RA) 7916, as amended. HEITAD Documents submitted show that ATC, with Tax Identification Number (TIN) 004-759-037-000, is a domestic corporation organized and existing under the laws of the Philippines, with principal office address at Mactan Economic Zone, Lapu-Lapu City, Philippines. It is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. C199700455 dated April 22, 1997. It was registered with the Philippine Economic Zone Authority (PEZA) with Registration Certificate No. 97-040 dated May 26, 1997 as an Ecozone Export Enterprise to engage in the sub-assembly of camera parts at the Mactan Economic Zone. On the other hand, FEPI, with TIN 007-250-246, is also a domestic corporation duly organized and existing under the laws of the Philippines with principal office at Mactan Economic Zone, Lapu-Lapu City. It is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. CS200902614 dated February 25, 2009. It was registered with the Philippine Economic Zone Authority (PEZA) with Registration Certificate No. 09-09 dated March 9, 2009 as an Ecozone Export Enterprise to engage in the assembly of motorbike cluster, car cluster, high power stabilizer, parking system and other electronics and related projects for the automotive industry at the Mactan Economic Zone. ATC was the owner of a factory and office building located at 3rd Avenue, Block C-5, Mactan Economic Zone 1, Lapu-Lapu City. On March 9, 2010, ATC executed a Deed of Sale for the sale of the aforesaid building to FEPI, for the sum of Fourteen Million Pesos (Php14,000,000.00). It is contended that the income of ATC from the said transaction is covered by its PEZA-registered activity, hence, subject to the preferential rate of five percent (5%) on the gross income, pursuant to Section 24 of Republic Act (RA) 7916, as amended. In reply, please be informed that Section 24 of RA 7916, as amended, provides in part: "SEC. 24. Exemption from National and Local Taxes . Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ecozone. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ecozone shall be paid and remitted as follows: (a) three percent (3%) to the national government; and (2) two percent (2%) to the municipality or city where the enterprise is located." In relation thereto, Section 4, Revenue Regulations (RR) No. 1-2000, implementing Section 24 of RA 7916, also provides that: "Section 4. Nature of the 5% Tax and Extent of Exemptions . The above 5% tax is imposed on "gross income", hence, income tax in nature and a national internal revenue law in character. Registered ECOZONE enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748." DTIACH The term "gross income" on which the 5% tax is imposed is defined in RR No. 11-05, thus: " Section 3. Gross Income Earned. For purposes of implementing the tax incentive of registered Special Economic Zone (ECOZONE) enterprises in Section 24 of Republic Act No. 7916, the term "gross income earned" shall refer 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, marketing, selling and/or operating expenses or incidental losses during a given taxable period. " (emphasis supplied) As a general rule, PEZA-registered enterprises are imposed a preferential tax rate of five percent (5%) based on gross income in lieu of all taxes except real property tax. It must be emphasized, however, that such tax incentives granted to PEZA-registered enterprises shall apply only in respect of the enterprise's registered activity within the Ecozone. Thus, the five percent (5%) gross income tax could only be availed of by the PEZA-registered entities in relation to its registered activity. Relative thereto, noteworthy is Article II of the Registration Agreement dated May 26, 1997 executed by and between PEZA and ATC which laid down the scope of ATC's registered activity as follows: " 2. The scope of the REGISTRANT's registered activity shall be limited to the sub-assembly of camera parts for export and the importation of raw materials, machinery, equipment, tolls, goods, wares, articles or merchandise directly used in its registered operations at the Mactan Economic Zone (MEZ). In the event the REGISTRANT decides to engage in a new or additional product line, directly or indirectly related to its registered activity, it shall apply anew to the PEZA for the latter's approval. " (underscoring supplied) It is clear from the foregoing that ATC's registered activity shall be limited to the sub-assembly of camera parts for export and the importation of raw materials, machinery, equipment, tolls, goods, wares, articles or merchandise directly used in its registered operations. Nothing in the said Registration Agreement allows ATC to engage in the sale of its factory and office building as part of its registered activity. In fact, Article IV of the Registration Agreement limits the right of ATC to assign, transfer, sell, mortgage or encumber its assets to its machinery and equipment, leasehold right, Registration Agreement and other rights arising therefrom and even requires the prior consent of the PEZA fifteen (15) days before the intended assignment, transfer, conveyance, sale, mortgage or encumbrance. In this case, ATC failed to adduce any competent proof to show that the sale of its factory and office building located at the Mactan Economic Zone was part of its PEZA-registered activity. Such being the case, the sale of ATC of its factory and office building in favor of FEPI shall be subject to the regular income tax rate of thirty (30%) percent, and consequently, to the creditable withholding tax pursuant to Revenue Regulations No. 2-98, as amended. Furthermore, considering that the aforesaid factory and office building was used in business, the sale of the same is considered as sale of ordinary asset subject to the value-added tax (VAT) pursuant to Section 106 of the 1997 Tax Code, as amended. Finally, the Deed of Sale executed by and between ATC and FEPI for the sale of the said building shall be subject to the documentary stamp tax (DST) in accordance with Section 196 of the 1997 Tax Code, as amended. Please be guided accordingly. EAICTS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue