BIR Ruling No. 291-12

April 25, 2012 BIR RULING NO. 291-12 RA 7916; Executive Order No. 226; Sec. 106 of the Tax Code of 1997; RR 2-98; 000-00 ACCRA Law Offices ACCRA Building 122 Gamboa St., Legaspi Village Makati City Attention: Atty. Ruby Rose J. Yusi & Atty. Jay Patrick R. Santiago Gentlemen : This refers to your letter dated September 8, 2009 and July 30, 2010 requesting, in behalf of your client, STMicroelectronics, Inc. (STMI), confirmation of your opinion that sale of certain assets to ST-Ericsson (Philippines), Inc. (ST-EPI) by STMI (1) is not subject to regular rate of income taxation, but it is subject only to either (a) the five percent (5%) special tax incentive pursuant to the Special Economic Act Zone of 1995 (Republic Act No. 7916); or (b) the ITH incentive pursuant to the Omnibus Investment Code of 1987, in relation to the Special Economic Zone Act of 1995; (2) that the transaction shall not be subject to value added tax and documentary stamp tax; and (3) that the transactions are exempt from the creditable withholding tax. It is represented that STMI is a corporation duly organized and existing under and by virtue of Philippine laws; that it is engaged in the business of development, manufacture, production, processing and/or assembly for export and sale of electronic equipment, accessories, parts or components, including semiconductors, integrated circuits, micro-processors, printed circuit board assemblies, computer systems and sub systems and sub-systems and accessories, parts and components thereof; that STMI is registered with the PEZA as an Ecozone Export Enterprise under Certificate of Registration No. 08-35 engaged in: (I) the manufacture of (a) integrated circuits (TV on mobile, portable poser solution, audio and video processor, wireless LAN, USB) and (b) micro leadframe package known as "HVQFN"; (II) the assembly of Bluetooth ("BT") system modules; (III) the manufacture of assembly of integrated circuits (small shrink outline package and near-field communication and quad flat packages); and (IV) the importation of raw materials, machinery, equipment, tools, goods, wares, articles or merchandise directly used in its registered operations at the Light Industry and Science Park of the Philippines II-Special Economic Zone (LISP II-SEZ); that it enjoys the incentives opposite each of the products described below: Activity Date of Registration Incentive Manufacture/Assembly of February 17, 1998 5% GIT Integrated circuits (TV on mobile, portable power solution, audio & video processor, wireless LAN, USB) Manufacture/assembly of December 21, 2005 ITH from Nov. 2005 micro leadframe package to October 2009 known as "HVQFN" Manufacture/assembly and July 12, 2007 5% GIT bluetooth (BT) systems modules Manufacture/assembly of ITH from Oct. 2005 micro leadframe package to September 2009 known as "HVQFN" that ST-EPI is also a domestic corporation engaged in the business of development, manufacture, production, processing and/or assembly for export or wholesale distribution of electronic equipment, accessories, parts or components, including but not limited to, semi conductors, integrated circuits, micro-processors, printed circuit board assembled, computer systems and sub-systems and accessories, parts and components thereof; that it is registered with PEZA as an Ecozone Export Enterprise under Certificate No. 09-02 engaged in: (I) the manufacture of (a) integrated circuits (TV on mobile, portable poser solution, audio and video processor, wireless LAN, USB) and (b) micro leadframe package known as "HVQFN"; (II) the assembly of Bluetooth ("BT") system modules; and (III) the importation of raw materials, machinery equipment, tools, goods, wares, articles or merchandise directly used in its registered operations at Light Industry and Science Park of the Philippines II-Special Economic Zone (LISP II-SEZ); that as part of a worldwide restructuring and transfer of business between the parent companies of STMI and ST-EPI, STMI sold all assets related to all its PEZA-registered activities to ST-EPI; that the sale included tangible fixed assets like buildings, machinery and installations and production and commercial inventories used in projects registered under the regime of five percent (5%) special tax incentive pursuant to the Republic Act No. 7916, as amended and income tax holiday incentive pursuant to the Omnibus Investment Code of 1987, in relation to the Special Economic Zone Act of 1995. In reply, please be informed that 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 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. IaHAcT Based on the foregoing, though STMI, a PEZA-registered company, is granted certain preferential tax treatment under Section 24 of RA No. 7916 on its registered activities i.e. (I) the manufacture of (a) integrated circuits (TV on mobile, portable poser solution, audio and video processor, wireless LAN, USB) and (b) micro leadframe package known as "HVQFN"; (II) the assembly of Bluetooth ("BT") system modules; (III) the manufacture of assembly of integrated circuits (small shrink outline package and near-field communication and quad flat packages); and (IV) the importation of raw materials, machinery, equipment, tools, goods, wares, articles or merchandise, nevertheless sale of fixed assets is not included in its registered activity. Thus, inasmuch as the preferential rate/s should only apply to STMI's registered activities and that sale of its fixed assets is not part of its registered activities, hence it is subject to normal income tax rate. It should be remembered that laws and statutes granting tax exemptions are strictly construed against the taxpayer. Exemptions are never presumed and the burden is upon the taxpayer to establish his right to exemption beyond reasonable doubt. 1 In the case of Mactan Cebu International Airport Authority v. Marcos , 2 the Supreme Court held: "Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting the exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception." In view of the foregoing, the request for confirmation of your opinion that sale of certain assets to ST-EPI by STMI (1) is not subject to regular rate of income taxation but it is subject only to either (a) the five percent (5%) special tax incentive pursuant to the Special Economic Act Zone of 1995 (Republic Act No. 7916); or (b) the ITH incentive pursuant to the Omnibus Investment Code of 1987, in relation to the Special Economic Zone Act of 1995; (2) that the transaction shall not be subject to value-added tax and documentary stamp tax; and (3) that the transactions are exempt from the creditable withholding tax is hereby denied for lack of legal basis. TCSEcI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Dimaampao, Japar B., Tax Principles and Remedies, Second Edition (2005). 2. G.R. No. 120082, 11 September 1996, 261 SCRA 667.