BIR Ruling No. 125-13

March 25, 2013 BIR RULING NO. 125-13 RA 7916; RA 7227; RR No. 13-05 & RR No. 11-05; BIR Ruling No. 014-2012 Sutherland Global Services Philippines, Inc. 12th Fl., Total Corporate Center, Triangle Drive, Bonifacio Triangle Bonifacio Global City, Taguig Attention: Alteza A. Dy Tax Manager Gentlemen : This refers to your letter dated January 25, 2010 on behalf of Sutherland Global Services Philippines, Inc. (hereinafter called "SGSPI") requesting for confirmation that the Foreign Exchange Loss realized by SGSPI from foreign currency transaction derived from its registered activities as PEZA registered entity can be allowed as deduction from the gross income subject to PEZA incentive, i.e. , Income Tax Holiday or to 5% Gross Income Tax (GIT) whichever is applicable. It is represented that SGSPI, with Tax Identification (TIN) No. 238-416-758, is a corporation duly organized and existing under the laws of Cayman Island and has a branch office in the Philippines registered with the Securities and Exchange Commission (SEC) under Reg. No. FS200509037. SGSPI-Branch is likewise registered with Philippine Economic Zone Authority (PEZA) as an Ecozone IT Enterprise bearing Certificate of Registration No. 05-10-IT dated October 16, 2008 and is currently enjoying income tax holiday on its PEZA registered activities. SGSPI-Branch is also registered with Clark Development Corporation (CDC) as a Clark Special Economic Zone Enterprise with Certificate No. 2006-177 valid until June 30, 2011 and is subject to 5% Gross Income Tax (GIT) on its income derived from its registered operations. It is further represented that the scope of business of SGSPI is Process Consulting, Technology Support Services, Account Management Services, Technical Support/Help Desk Services, Customer Care Services and Back Office Processing for Operating Call Center and the importation of raw materials, machinery, equipment, tools, goods, wares, articles of merchandise directly used in its operations. SGSPI's clients and programs are US-based companies and that all of its clients pay in US Dollars. However, SGSPI incurs and pays substantial amount of operating expenses in Philippine currency such as payroll, rental, utilities and other direct overhead costs. CaHAcT Further, while SGSPI's functional currency is in Philippine Peso, however, it has to pay connectivity charges, transactions in foreign currency as well. Thus, in order to reduce foreign currency exposures and to avoid adverse effect on the US dollars earnings as against the local currency spending, SGSPI executes hedges on forecasted cash flows and expected revenues. Consequently, SGSPI recognizes Forex Gain and Forex Loss from the above transaction in accordance with Philippine Accounting Standards (PAS) 21 on the effects of changes in Foreign Exchange. It is further represented that for Fiscal Years 2007 & 2008, SGSPI recorded Realized Forex Loss which significantly reduced the amount of revenues from its Clark Operation. While Realized Forex Gain was treated as additional revenue in the computation and payment of 5% Gross Income Tax for its Clark operation for fiscal years 2007 & 2008 respectively, however, Realized Forex Loss was not considered in the computation of 5% GIT. In reply, please be informed that Section 2, Rule 1 of the Rules and Regulations to implement Republic Act No. 7916, otherwise known as "The Special Economic Zone Act of 1995," (the PEZA Law) defines gross income as follows: "Gross Income" for purposes of computing the special tax under Section 24 of PEZA law 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 4 Rule XX of these Rules. No. 2 Section 4 of PEZA IRR enumerates the Direct Cost as allowable deduction from gross income, such as: Direct Salaries, wages or labor expenses Service Supervision salaries Direct Materials, supplies used or resold to another ECOZONE enterprise Depreciation of machinery, equipment and buildings owned and/or constructed SHacCD Financing charges associated with fixed assets Rent and utility charges for buildings and capital equipment On the other hand, Revenue Regulations (RR) No. 11-2005 dated April 25, 2005, implementing R.A. 7916, provides for a list of direct costs deductible from gross income for purposes of determining the taxable base, to wit: "For purposes of computing the total five percent (5%) tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned for specific types of enterprises: 1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises: Direct salaries, wages or labor expenses Production supervision salaries Raw materials used in the manufacture of products Decrease in Goods in Process Account (Intermediate goods) Decrease in finished Goods Account Supplies and fuels used in production Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed that is used exclusively in the production of goods Rent and utility charges associated with building equipment and warehouses used in production Financing charges associated with fixed assets used in production the amount of which was not previously capitalized. 2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises: DaScAI Direct salaries, wages or labor expense Service supervision salaries Direct materials, supplies used Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the building owned or constructed that is used exclusively in the rendition of registered service Rent and utility charges for buildings and capital equipment used in the rendition of registered services Financing charges associated with fixed assets used in the registered service business the amount of which was not previously capitalized." xxx xxx xxx Furthermore, Revenue Regulations No. 13-05 dated April 25, 2005, implementing the tax provision of Section 12 (c) of RA No. 7227, otherwise known as "The Bases Conversion Development Act of 1992," provides that for purposes of computing the total five percent (5%) tax rate imposed, the deductions which may be allowed for the calculation of gross income earned for service enterprises are the following, namely: "3. Service Enterprises Direct salaries, wages or labor expense Service supervision salaries Direct materials, supplies used Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the building owned or constructed that is used exclusively in the rendition of the registered service cEaCTS Rent and utility charges for buildings and capital equipment used in the rendition of registered services Financing charges associated with fixed assets used in the registered service business the amount of which was not previously capitalized." It is worthy to note that nothing in the above-cited provisions indicates that a foreign exchange loss is one of allowable deductions for purposes of computing the applicable five percent (5%) gross income tax. It must be emphasized that the above-mentioned enumerations are exclusive pursuant to the maxim " 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 vs. 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 vs. 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 vs. Marcelo , 497 SCRA 89). (BIR Ruling No. 014-2012 dated January 4, 2012) It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed ( CIR vs. Isabela Cultural Corporation , G.R. No. 172231 dated February 12, 2007) In sum, this Office hereby rules that the foreign exchange losses incurred by SGSPI may not be deducted from its gross income for purposes of computing its gross income subject to 5% Gross Income Tax. EcASIC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue