Base Figure to Determine Income Tax Due After Expiration of Income Tax Holiday

December 28, 1999 BIR RULING NO. 207-99 R.A. 7916 RMC 74-99-207-99 Dae Kyung Phils . Co . Inc . Philippine Economic Zone Authority Lot 2-11, Block 19, Phase III Rosario, Cavite Attention: Mr . Hoo Won Hwang General Manager Gentlemen : This refers to your letter dated October 21, 1999 requesting for a ruling on the following issues: 1. What is the base figure to determine the income tax due on the taxable months following the expiration of Dae Kyung Phils. Co., Inc.'s (DKP) income tax holiday? 2. For purposes of income tax computation, are the interest and bank charges on loan availed to acquire fixed assets deductible from cost of sales? 3. Is the lease of DKP's building B to some companies (all PEZA registered company and also paying 5% preferential tax) subject to 10% VAT? It is represented that DKP is a corporation organized and existing under Philippine laws and is a Philippine Economic Zone Authority registered company with Certificate of Registration No. 93-26 dated June 3, 1993; that DKP is engaged in the manufacture of satellite video receiver and other components of and sub-components of electronic products; and that as of May 31, 1998, DKP's income tax holiday expired and it is now paying 5% preferential tax on gross income earned for its registered activity. In reply, please be informed that Section 2(nn) of the Rules and Regulations To Implement Republic Act No. 7916, Otherwise Known as "The Special Economic Zone Act of 1995 provides that "Gross Income" refers to gross sales or 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. Thus, upon the expiration of the income tax holiday and for the proper determination of the income tax due, DKP's gross income must refer to gross sales or 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 following the month of the expiration of the income tax holiday. For example: Gross sales or revenues derived from business activity January to May, 1999 Exempt Gross sales or revenues derived from business activity June to December, 1999 . . . Less: allowable deductions - June - December, 1999 . . . ________ Gross Income . . . The interest and bank charges on loan availed to acquire fixed assets are deductible from the cost of sales considering that Section 2(1), Rule XX of the same Rules and Regulations provides, viz: "Section 2. Gross Income Earned; Allowable Deductions . for purposes of these Rules, Gross Income earned shall be defined in Section 2(nn) Rule I of these Rules subject to the following allowable deductions for specific types of enterprises: 1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises LexLib xxx xxx xxx - Financing charges associated with fixed assets xxx xxx xxx As regards the lease of DKP's building B to some companies (all PEZA registered company and also paying 5% preferential tax) Section 5(4)(a) of Revenue Memorandum Circular No. 74-99 provides, viz: "Section 5. Tax Treatment of Sales Made by a PEZA Registered Enterpris e. xxx xxx xxx (4) Sale of Service by ECOZONE Enterprise to Another ECOZONE Enterprise (Intra ECOZONE Enterprise Sale of Service): (a) If PEZA-Registered Seller is Subject To The 5% Special Tax Regime. Exempt from VAT or any percentage tax, pursuant to Sec. 24 of R.A. 7916. xxx xxx xxx hence, exempt from VAT or any other percentage tax. 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