Extension of Benefits of Accredited Inventor's Tax Incentives to His Own Corporation

September 7, 1999 BIR RULING NO. 139-99 R.A. 7459-448-95; 181-95-139-99 Atty. Millard M. Manseguiao 5F Don Jacinto Building Dela Rosa corner Salcedo Sts. Legaspi Village Makati City 12000 S i r : This refers to your letter dated September 28, 1998 requesting confirmation that Engr. Benjamin Santos who is an accredited inventor granted tax incentives under R.A. No. 7459 can extend the benefits of his incentives to Bensan Industries, Inc., a domestic corporation owned and controlled by him. Records show that on December 22, 1995, the Bureau of Internal Revenue (BIR) issued BIR Ruling UN 448-95 to Mr. Benjamin Santos, President and General Manager of Bensan Industries, Inc., stating that as an inventor, he is entitled to the following incentives, to wit: a) Exemption from income tax on the net income derived from the sale of invention products resulting from newly discovered developed technologies by local researchers or new technology adapted from foreign sources whether it be patented machine, product, process including implements or tools and other related gadgets or invention, utility model and industrial design patents; b) Exemption from Value Added Tax (VAT) on the gross receipts/revenues derived from the sale of said invention products, provided, however, that an inventor shall not be exempt from taxes for which he is not directly liable, e.g. VAT on his purchases of raw materials, supplies and equipment which may be shifted to him as part of cost of goods sold or for services rendered. c) Exemption from excise taxes directly payable in connection with the sale of invention products. that on December 6, 1995, the BIR issued BIR Ruling No. 181-95 holding that the "exemption from income tax on the net income and value added tax on gross receipts derived from the sale of the foregoing invention products, as well as excise taxes, if any, directly payable in connection with such sale, shall continue to be available to the inventor and the corporation to be established by said inventor as the majority stockholder; that said ruling was issued based on the following statement of facts, thus "This refers to your letter dated September 18, 1996, stating that as a registered inventor, you were issued BIR Ruling Nos. 041-95 both dated March 31, 1995, confirming that your two (2) existing firms, namely the Vasquez Building Systems Corporation and Vasquez Commodities Corporation are entitled to the tax incentive under Republic Act No. 7459, as implemented by Revenue Regulations No. 19-93; that you have invented and patented a system of housing construction design now known as the VAZBUILT Technology; that your aforesaid firms manufacture the prefabricated reinforced concrete columns, wall panels, tie beams, steel framing concrete roof tiles and together with other house components, assemble into modular housing units; that with the tax-free benefits you are now enjoying, you are motivated to expand your operations and shares your developed technology to more Filipinos, but your companies could not do this alone due to limited resources; that you need to form new companies with other investors (like housing developers and foreign investors), wherein you will hold the majority share in each of the new corporations to protect your rights to the invention; xxx xxx xxx "Based on the foregoing, you posed the following queries: "a. Can these new companies extending the operations of my original firms also enjoy the same tax incentives? "b. If yes, what will be the tax consequence on the dividends to be received by the other stockholders? that on June 29, 1998, the BIR issued BIR Ruling No. 101-98 which, according to you, was perceived ambiguously as a ruling against the transfer of the tax incentives by the individual inventor to the corporation; that you posited that said ruling did not revoke BIR Ruling No. 181-95 rather, it stated a different rule which is the sale of an invention by a corporation to another; and that the subject paragraph of that ruling is quoted below: "It should be emphasized, however, that the corporation selling your invention shall not be entitled to that tax incentives previously granted to individual inventor like you under R.A. No. 7459. Thus sale by the Pre-Stressed Octagonal Pole Manufacturers, Inc. of your said invention shall not be entitled to any tax incentives ." In reply, please be informed that pursuant to Sec. 246 of the Tax Code of 1997, "any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation , modification or reversal will be prejudicial to the taxpayers , except . . . ." Applying the foregoing provision, the rule enunciated in BIR Ruling No. 101-98 which did not categorically preclude the transfer of the right to the invention by an individual inventor to the corporation which he owns and control shall not affect Engr. Santos. Such being the case, BIR Ruling No. 181-95 dated September 6, 1995 upholding the regularity of the transfer by the individual inventor to the corporation which bears his name (Benjamin Santos) remains valid. Hence, since Engr. Santos is the owner of Bensan Industries, Inc., the transfer of his privilege to the latter fall squarely under BIR Ruling No. 181-95. After all the subject of the right being transferred belongs to both the transferor and the transferee. The corporation is merely a practical means of commercializing his invention a logical consequence of his creativity that the government appreciates and the reason why the law granted him tax incentives. In other words, the tax incentives in R.A. 7459 stating "SEC. 5. Tax Incentives . Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is made on a commercial scale. "Inventors shall be exempt from paying any fees involved in their application for registration of their inventions. "SEC. 6. Tax Exemptions . To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adopted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance; Provided , That this tax exemption privilege pertaining to the invention shall be extended to the legal heir/assignee upon the death of the inventor." is not a limitation to the right of the inventor to transfer his invention to the corporation he owns or controls for commercial exploitation, but a statement of a stand-by grant to the heirs to step into and enjoy the statutory inventor's privilege after his death. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue