MEP Solutions Corporation

May 15, 2017 BIR RULING NO. 228-17 R.A. No. 7916; E.O. No. 226; RR No. 2-98; RR No. 16-2005; RR No. 07-2007; BIR Ruling No. 372-2011; BIR Ruling No. 371-2011; BIR Ruling No. 142-2010 MEP Solutions Corporation Unit 10-1, 10th Floor of Net One Center, 3rd Avenue Cor., 26th St., Bonifacio Global City, Taguig, Metro Manila Attention: AAA _______________ Gentlemen : This refers to your letter dated September 18, 2015 requesting for a BIR Ruling in behalf of your client, MEP SOLUTIONS CORPORATION , pursuant to the provisions of Republic Act (RA) No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995." It is represented that MEP SOLUTIONS CORPORATION with Tax Identification Number 000-000-000-000 and Certificate of Registration No. OCN 9RC0000204675 dated September 17, 2015, is a stock corporation duly organized under the laws of the Republic of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CS201513825 dated July 13, 2015; and that it is also registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration Number 15-165 dated September 08, 2015. In reply, please be informed as follows: I. Income Tax Holiday and Expanded Withholding Tax 13.4 of Article XIII of the Registration Agreement entered into between PEZA and MEP SOLUTIONS CORPORATION provides that: "13.4 The REGISTRANT's project subject of this approval shall be entitled to four (4) years Income Tax Holiday (ITH) incentive, among other incentives under RA 7916, as amended, in accordance with the 2014 Investment Priorities Plan (IPP). The ITH incentive granted to this project is premised on the REGISTRANT's use of an entirely new set of equipment/software amounting to PhP______________ that will be used for the first time in the Philippines, i.e., the said equipment have not been used by any IT enterprise in the Philippines. . . . ." Accordingly, MEP SOLUTIONS CORPORATION is entitled to an Income Tax Holiday (ITH) incentive for a period of four (4) years from the start of its commercial operations which shall not be later than one (1) year from October 2015. Moreover, Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of Republic Act (RA) No. 7916 which 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. (BIR Ruling No. 142-2010 dated December 09, 2010) Thus, since MEP SOLUTIONS CORPORATION is a PEZA-registered enterprise enjoying a 4-year ITH, income payments made to it, with respect to its registered activity of business process outsourcing (BPO) services such as, but not limited to, the preparation of detailed drawings using computer-aided design (CAD) and new technologies, and the importation of machinery equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations, shall not be subject to 2% expanded creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended, for a period of four (4) years from the start of commercial operations which shall not be later than one (1) year from October 2015. However, it must be emphasized, that MEP SOLUTIONS CORPORATION is constituted as withholding agent for the government. As such, it is required to withhold the tax on compensation income of its employees or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the National Internal Revenue Code of 1997, as amended. In addition, under Section 235 of the National Internal Revenue Code of 1997, as amended, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. ( BIR Ruling No. 371-2011 dated October 07, 2011 ) Therefore, a copy of this letter of exemption shall be attached to the Income Tax Return (ITR) which MEP SOLUTIONS CORPORATION will file on or before the 15th day of the fourth month of each year. DETACa II. VAT Zero-Rating on Purchase of Goods, Properties, and Services Sec. 4.106-5 of Revenue Regulations (RR) No. 16-2005 as amended by Section 5 of RR No. 04-2007 provides, viz. : "Section 5. Zero Rated Sales. Sec. 4.106-5 of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. . . . (5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. 'Considered export sales under Executive Order No. 226' shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same . . .; Provided, further, that pursuant to E.O. 226 and other special laws, even without actual exportation, the following shall be considered constructively exported: . . .; (2) sales to export processing zones pursuant to Republic Act (R.A.) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones; . . ." Thus, sale of goods and services by a VAT-registered person to MEP SOLUTIONS CORPORATION , a PEZA-registered Export Enterprise shall be subject to VAT at zero percent (0%) rate pursuant to the aforementioned Sec. 4.106-5 of RR No. 16-2005, as amended by RR No. 4-2007. It shall be noted, however, that such entitlement to VAT at zero percent (0%) rate shall be limited only to sale of goods and services relating to its registered activity of business process outsourcing (BPO) services such as, but not limited to, the preparation of detailed drawings using computer-aided design (CAD) and new technologies, and the importation of machinery equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations. III. Customs Duties and its Related Internal Revenue Taxes This Office is without jurisdiction to grant exemption on customs duties, since the imposition of custom duties falls under the jurisdiction of the Bureau of Customs. 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.) CAESAR R. DULAY Commissioner of Internal Revenue