Tax-Exempt Status of Foreign Suppliers under Just-in-Time Supply Program for Acer's Subic Manufacturing Plants

November 5, 1999 BIR RULING NO. 172-99 SBDMC, Inc . Administration Building Subic Bay Industrial Park Argonaut Cor. Rizal Highways Subic Bay Freeport Zone Attention: Mr . Larry Kao Advisor Gentlemen : Your letter dated October 3, 1999, addressed to Mr. Pepito Baynosa, Revenue District Officer, Subic Bay Freeport Zone, requesting for confirmation of the tax-exempt status of foreign suppliers participating in the so-called Just-In-Time supply program for ACER's Subic manufacturing plants, was referred to this Office for action. prcd It is represented that SBDMC, is the developer and administrator of the Subic Bay Industrial Park; that it has sponsored a third party warehouse for the Just-In-Time program which is a buffer stock program requested by Acer Information Products (Phils) Inc.,(Acer) a locator in the Subic Freeport Zone, from its various foreign suppliers; that the warehouse to be used for this program is operated by Circle Freight International, Phils.,Inc.,another SBF registered enterprise; that under the Just-In-Time (JIT) program, Acer suppliers from other countries will ship products that Acer ordered to SBF; that the materials will remain the property of the foreign suppliers but designated for the account and use of Acer; that the said JIT program is intended to serve the following purposes: 1) To ensure that Acer's Subic production lines will not shut down due to interruption of required parts or components on account of failed deliveries from suppliers; 2) To reduce Acer's inventory carrying cost and make its products more competitive in the market; that the products shipped will be kept in the third-party warehouse operated by Circle Freight and will be invoiced and paid for only upon call-off by Acer and delivery by Circle Freight to Acer Subic Plants; that the Subic Bay Metropolitan Authority (SBMA) is supportive of this program and has in fact agreed that, for the purpose of the said JIT program, the foreign shippers can also be the consignees for the cargo shipped to the third party warehouse in the SBF until actual delivery to Acer; that among the suppliers who are willing to participate in this buffer stock program is the internationally renowned IBM; that to avoid potential tax concern, IBM and the foreign suppliers participating in the JIT program, would like to know whether or not they will be liable for taxes in the Philippines. In reply, please be advised that under R.A. 7227, otherwise known as the Bases Conversion Development Act, the operations of the Subic Bay Freeport (SBF), for tax purposes, is distinct and separate from the Customs Territory and is governed by special law and regulations. Among the incentives and policies governing in the SBF are the following: (a) " ... (b) "The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital and equipment .However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) "The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to be base areas. " In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter ." (Section 12, RA 7227) (Emphasis supplied) Being a separate customs territory, the provisions of the Tax Code imposing and prescribing regular taxes upon persons and entities in the Customs Territory would not be applicable to the SBF and SBMA administered zones insofar as the same will conflict with the provisions of R.A. 7227. Such being the case, the so-called Just-In-Time buffer stock program being sponsored by SBDMC is entirely within the jurisdiction and administration of the Subic Bay Metropolitan Authority. However, in proper cases, this Office remains with jurisdiction to look into the books of accounts of SBF companies, such as ACER and Circle Freight, for the purpose of determining the veracity of declared income upon which the special tax rate is based. With respect to foreign suppliers participating under the JIT program, such as IBM, we hold that they are still subject to the jurisdiction of SBMA since, as represented, their transaction would be restricted to the introduction of materials or merchandise within the confines of the Subic Bay Freeport, there to be disposed of in the manner outlined under the JIT program, i.e.,for subsequent consumption by Acer, an SBF-registered enterprise. It bears stressing that the SBMA exercises authority and jurisdiction over all economic activity within the SBF (Section 11, Rules Implementing R.A. 7227). Thus, the rules, policies and regulations imposed by SBMA shall govern in this regard, provided, however, that the activities of the said foreign suppliers do not extend outside of the freeport zone and into the customs territory, for which the SBF incentives and SBMA regulations do not apply. Consequently, IBM and other foreign suppliers concerned exporting their materials under the said JIT program of Acer, as approved by the SBMA, do not come within the meaning of non-resident foreign corporations deriving taxable income within the Philippines. Therefore, its subsequent deliveries of products from the third-party warehouse and/or its receipts of payment therefor remain not subject to tax imposed under the Tax Code of 1997. prcd This ruling is being issued on the basis of the foregoing represented facts. If upon investigation, it will be discovered that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue