Tax Exemption of Corporation Established to Manufacture and Sell an Invention

October 8, 1999 BIR RULING NO. 158-99 158-99 Atty. Wencito F. Yap 3/F Gonzaga Building 414 Rizal Avenue Sta. Cruz, Manila S i r : This refers to your letter dated March 23, 1998, in relation to your letter dated September 10, 1999, requesting on behalf of your client, Engr. Jaime U. Gosiaco, for a ruling confirming the following: 1. The Corporation, where your said client and his wife hold a majority share, is exempt from income tax on the net income and value-added tax on gross receipts derived from the sale of the Bullet Magazine, as well as from excise taxes, if any, directly payable in connection with such sale, pursuant to Section 5 of R.A. No. 7459, in relation of Section 6 thereof, for a period of ten (10) years from the date of the sale. 2. The dividends received from the corporation by your client, together with other individual stockholders are subject to tax at the rate of 0% pursuant to then Section 21(c)(2) of the Tax Code, as amended. It is represented that your client, Engr. Jaime U. Gosiaco, is a bonafide member of the Filipino Inventors Society (FIS) and the inventor/registered patentee of a utility model "Bullet Magazine" and a Panday Pira Awardee for his subject invention; that he is also the President and Chairman of the Board of Aaron Group of Co., Inc., a domestic corporation doing business under the name and style "Alloy Engineering Works"; that in March, 1990, your said client entered into a Memorandum of Agreement with Aaron Group of Co., Inc. wherein the former shall give the latter the right to manufacture, sell and distribute the patented bullet magazine, in consideration of which, and in order to protect his rights to the invention, he and his wife shall continue to control at least eighty percent (80%) of the outstanding capital stock of the Aaron Group of Co., Inc.; and that the first sale on commercial scale was made on October 16, 1990, to the Armed Forces of the Philippines (PN) as per Sales Invoice No. 1607 in the amount of P991,600.00. In reply, please be informed that Section 3(c) of Revenue Regulations No. 19-93 implementing R.A. No. 7459 provides, viz. : "Sec. 3. Tax Incentives and Tax Exemption . "xxx xxx xxx "c) The inventor shall be exempt from the following taxes for which otherwise he shall have been directly liable; "(a) Income tax on the net income derived from the sale of invention products resulting from newly discovered developed technologies by local research or new technology adopted from foreign sources whether it be patented machine, product, process including implements or tools and other related gadgets of invention, utility model and industrial design patents; "(b) 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/machines, which may be shifted to him as part of cost of goods sold or for services rendered; "(c) Excise taxes directly payable in connection with the sale of invention products. The above tax exemption from the sale of an invention, which are directly payable in connection with such sale shall continue to be available to the inventor of the corporation established to manufacture and sell the said invention. Accordingly, your opinion that the corporation where your client and his wife hold the majority shares, is exempt from income tax on its net income and value-added tax on gross receipts derived from the sale of "Bullet Magazine", as well as from excise taxes, if any, for which he is directly payable in connection with such sale pursuant to Section 5 of R.A. No. 7459, in relation to Section 6 thereof, for a period of ten (10) years reckoned from the date of its (Bullet Magazine) first sale on a commercial scale (more than P200,000.00) is hereby confirmed. (BIR Ruling No. 139-99 dated September 7, 1999) Moreover, cash and/or property dividends actually or constructively received by an individual from a domestic corporation shall be subject to a final tax at the following rates: 6% beginning January 1, 1998; 8% beginning January 1, 1999 and 10% beginning January 1, 2000, provided, that the final tax on dividends shall apply only on income earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to the tax pursuant to Section 24(B)(2) of the Tax Code of 1997. cdlex Furthermore, your client as well as his legal heirs or assignee (whether natural or juridical person) shall be liable to the following: 1. 20% final withholding tax on interest income from any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, royalties, prizes and other winnings; 2. 7% final withholding tax on interest income from a depository bank under the expanded foreign currency deposit system; 3. Final withholding tax on the interest income from the pre-terminated long term deposit or investment certificate in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas based on the remaining maturity thereafter before the 5th year under Sec. 24(B)(1) of the Tax Code of 1997; 4. Final withholding tax upon cash and/or property dividend actually or constructively received from a domestic corporation, etc. pursuant to Section 24(B)(2) of the Tax Code of 1997; llcd 5. Capital gains tax on sales of shares of stock not traded in the stock exchange prescribed under Section 24(C) of the Tax Code of 1997; 6. Capital gains tax on sales of real property classified as capital assets prescribed under Section 24(D)(1) of the Tax Code of 1997; 7. Documentary stamp tax on documents, instruments and papers. This exemption/privilege pertaining to the invention shall be extended to the legal heir or assignee upon the death of the inventor. The inventor or his legal heirs or assignee shall register with the proper Revenue District Officer as a withholding agent and as such shall withhold taxes (1) on the wages of your employees; (2) income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57(B) of the Tax Code of 1997; and (3) on government money payments pursuant to R.A. No. 1051, as implemented by Revenue Regulations No. 4-88, as amended by Revenue Regulation No. 10-93; and shall prepare and file in triplicate on or before April 15 of each year for the preceding calendar year an Annual Information Return with the Revenue District Officer having jurisdiction over your place of business. It is, of course, understood that your book of accounts and other pertinent records shall be subject to periodic examination by our revenue enforcement officers for purposes of ascertaining whether you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your tax liability, if any, pursuant to Section 235 of the Tax Code of 1997. 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