Exemption from Income Tax Due to the Income Tax Holiday Granted to BOI-registered Pioneer Industry pursuant to the Omnibus Investments Code of 1987 is Exclusive to Industry Listed under the Investment Priorities Plan

December 29, 1997 BIR RULING NO. 141-97 E.O. 226-000-00-141-97 Extensive Wood Processing Corporation 106 Aguirre Street, Legaspi Village Makati City Attention: Mr . Max L . Alcantara VP-Corporate Affairs Gentlemen : This refers to your letter dated November 7, 1997 requesting for exemption from the payment of all internal revenue taxes on the interest payment on loan from bank/financial institutions. It is represented that Extensive Wood Processing Corporation (EWPC) is registered with the Board of Investments (BOI) as a Registered Enterprise with Pioneer Status; that it secures loans from bank/financial institutions to fund its Laminated Veneer Lumber (LVL) Project which shall produce raw materials in the manufacture of wooden doors and other finished goods for export; that LVL is a lumber substitute product which will be of help in solving the dwindling timber resources and which will allow conversion of wood waste into valuable raw materials, the utilization of which is advantageous in terms of cost as it makes the production of finished products cheaper and faster; that records of the Philippine Wood Products Association allegedly showed that there is no LVL enterprise operating in the Philippines; and that to insure the feasibility of the project, the financial package should be secured at the lowest possible cost, which necessarily includes the tax on interest income from loan as a vital component. Hence, this request. In reply, please be informed that the exemption from income tax due to the Income Tax Holiday (ITH) being granted to BOI-registered pioneer industry pursuant to the provisions of the Omnibus Investments Code of 1987 is exclusive to the industry listed under the Investment Priorities Plan, like EWPC in this case. ITH is an exemption from income tax on income payments received by the company for the duration of the period specified in the Terms and Conditions of the Certificate of Registration. In the case of EWPC, the ITH shall be for the period of four (4) years commencing from January 1997 or date of actual operation, whichever comes first. Since the tax incentive pertains to the income payment received by EWPC, it categorically excludes "interest income payment on loan" from bank/financial institutions, which is not income properly attributable to the former. On the contrary, interest payment on loans with the tax thereon included is an expense of EWPC forming part of the operating cost necessary to earn income. Furthermore, the ITH being enjoyed by EWPC is non-extendible to another entity doing business with it. If, in the course of its operation, EWPC shall transact business with a company enjoying similar ITH, or if in this case, the bank/financial institution is also enjoying an income tax holiday, the same shall benefit only the said entity to the exclusion of the other, including EWPC. Thus, in the absence of any statutory provision treating tax on interest on loan from bank/financial institution contracted by a BOI-registered pioneer industry enjoying ITH, as tax credit, the same, if it is being charged to the borrower, EWPC in this case, shall be treated as part of interest expense which is a business expense duly deductible from the gross income. In view of the foregoing, your request for exemption from tax on the interest on loan being paid by EWPC to the bank/financial institutions is hereby denied for lack of legal basis. LLphil Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue