BIR Ruling No. 140-12

February 27, 2012 BIR RULING NO. 140-12 00-000 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Alexander B. Cabrera Managing Partner Gentlemen : This refers to your letter dated August 4, 2008 stating that your client, Enomoto Philippine Manufacturing, Inc. (EMPI), is a company organized and existing under the laws of the Republic of the Philippines under Securities and Exchange Commission (SEC) Registration No. ASO95-09418 dated September 22, 1995; that it is established primarily to engage in manufacture and metal moulds, plastic mouldings and connector parts for use in semiconductor lead frames (Products); that it is also registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with a pioneer status; that its facilities are located at Gateway Business Park Special Economic Zone Jalavera, Gen. Trias, Cavite; that on the other hand, Enomoto Co., Ltd. (Enomoto), EPMI's parent company and domiciled in Japan, has developed and possesses certain know-how relating to the manufacture of the products; that on October 1, 2003, EPMI entered into a Know-How Licensing Agreement (Agreement) with Enomoto; that under the Agreement, Enomoto grants EMPI a license to use the know-how and to manufacture and sell the products; that the former shall furnish EMPI with its technical information relating to the know-how and shall provide technical support consisting of the following: 1. Training in and acquisition of production technology; 2. Launching new products and acquisition of mass production technology; and 3. Maintenance, improvement and revamp of existing products. that in consideration thereof, EMPI shall pay royalty fees to Enomoto equivalent to 6% of total net sales; that the term "sales" includes those sales made by the EMPI's subsidiaries or affiliated companies to a third party; that however, no royalties shall accrue under the following scenarios: If the sale is made by EMPI to its subsidiaries or affiliated companies or within or between the EMPI's subsidiaries and affiliated companies; The sale of products manufactured by Enomoto is made to a third party through EMPI; The sale is made by EMPI to Enomoto; or The sale is made of a metal mold and/or device manufactured by EMPI and that the Agreement shall continue in full force and effect until March 31, 2004 and shall be automatically renewed for successive periods of one year each, unless either party gives a written notice of non-renewal to the other party three (3) months prior to the expiration of the then effective period. Based on the foregoing representations, you now request for confirmation of your opinion that the royalties being paid by EMPI to Enomoto under their Know-How Licensing Agreement constitute direct costs of the payor which are deductible from gross sales for purposes of computing its gross income subject to the 5% preferential tax rate under Republic Act (RA) No. 7916. 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: "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 EMPI to Enomoto 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. 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