Exemption of EPZA-Registered Company from Payment of DST on Original Issue of Stock Certificates

September 14, 1999 BIR RULING NO. 146-99 000-00-146-99 Clarion Manufacturing Corporation of the Philippines 3/F Cacho Gonzales Building 101 Aguirre Street Legaspi Village Makati City Attention: Mr . Kuniaki Noya Acctg. Dept. Manager Gentlemen : This refers to your letter dated March 17, 1998 stating that Clarion Manufacturing Corporation of the Philippines (Clarion) is duly registered with the Export Processing Zone Authority (EPZA) with Certificate of Registration No. 89-047 dated October 13, 1989; that upon the expiration of Clarion's income tax holiday, it started paying the quarterly and annual income tax based on the preferential tax rate of 5% prescribed under Section 24 of R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995; that on April 28, 1997, a Certificate of Accreditation was duly issued by the Bureau of Export Trade Promotion of the Department of Trade and Industry in favor of Clarion; that Clarion has a plan to make additional investment for the expansion, modernization and rehabilitation of the company's increasing production capacity; that Clarion is 100% exporter and its export denominated in US Dollars are paid by its buyers to its Foreign Currency Deposit US Dollar Account via Telegraphic Transfer mode on an Open Account Basis; and that some of its banks subject its export proceeds to documentary stamp tax. Based on the foregoing, you now request for a ruling as to whether or not Clarion, an establishment operating within the ECOZONE is exempt from the payment of the documentary stamp tax on the original issuance of shares as well as on its certificates of deposits; and to the final tax of 7.5% on the interest income derived under the expanded foreign currency deposit system. In reply, please be informed that Section 24 of R.A. No. 7916 provides that any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. This five percent (5%) shall be shared and distributed as follows: (a) Three percent (3%) to the national government; (b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; and (c) One percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE; . . . cdlex Considering that Clarion is liable to the preferential tax rate of 5% on its gross income earned which shall be in lieu of local and national taxes pursuant to Section 24 of R.A. No. 7916, it is exempt from the payment of documentary stamp tax on the original issue of stocks certificates to its respective stockholders as well as on the certificates of deposits. However, Section 173 of the Tax Code of 1997, provides that "whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." Accordingly, since Clarion is exempt from the payment of documentary stamp tax, it is the respective stockholders and/or the banks, as the case may be, who are the ones liable for the tax. On the other hand, since Clarion is subject to the preferential tax treatment of 5% on its gross income in lieu of local and national taxes, this Office is of the opinion and so holds, that the interest income earned by Clarion from its bank deposits within the zone, whether in peso or foreign currency deposit, is subject to the preferential tax rate of 5%. cdlex 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue