BIR Ruling No. 338-12

May 15, 2012 BIR RULING NO. 338-12 Section 2 (o) (3) of Revenue Regulations 13-2005; Section 2 (t) of Revenue Bulletin 01-03; BIR Ruling No. DA-394-04; BIR Ruling No. 082-10 Nicera Philippines, Inc. Lot 46, Block F, Subic Techno Park Argonaut Highway, Boton Area Subic Bay Freeport Zone Attention: Erwin O. Cabatingan Finance Assistant Manager Gentlemen : This refers to your letter dated February 10, 2011 requesting for a confirmation of your opinion that certain components of the statement of income of Nicera Philippines, Inc.,(Nicera) are deductible expenses for the purposes of computing the gross income earned subject to the 5% preferential rate. TaDAIS It is represented that Nicera is a corporation duly organized and existing by virtue of Philippine laws with business address at Lot 46, Blk. F, Subic Techno Park, Argonaut Highway, Boton Area, Subic Bay Freeport Zone; that Nicera was registered with the Securities and Exchange Commission (SEC) on January 18, 2001; that as per Nicera's Articles of Incorporation, it is primarily engaged in the trade of developing, manufacturing, and selling for export on a wholesale basis, sensors, sensors applied products and ceramic related products; that Nicera is a duly registered Subic Bay Freeport Enterprise as per Subic Bay Metropolitan Authority (SBMA) Certificate of Registration and Tax Exemption No. 2001-0008, issued on March 26, 2010 and valid until March 25, 2011, in accordance with R.A. 7227. You now request confirmation of your opinions that the following items are valid deductions from your gross income: a) Hired Services Van Nicera's account title to describe a component of its direct labor expense attributable to reasonable and necessary expenditure to transport production related personnel from a fixed point within the vicinity of Subic Bay Freeport Zone to Nicera's facility; b) Repairs and Maintenance Parts and Repairs and Maintenance Labor: 1. Nicera's account title to describe reasonable and ordinary expenditures to keep and maintain production equipment and facility in good working condition; or 2. The capitalization and subsequent amortization of such reasonable and ordinary expenditure to keep and maintain production equipment and facility in good working condition. c) Insurance Building Nicera's account title that pertains to the reasonable and ordinary expenses to protect the business from certain risks such as fire, earthquake and flood; DISaEA d) Insurance Inventory Nicera's account title that describes the incidental cost to protect the business from certain risks inherent in the delivery of purchased goods. In reply, we regret to inform you that the list of allowable deductions enumerated in Section 2 (o) (3) of Revenue Regulations (RR) 13-2005 which defines "Gross Income Earned" to implement the tax incentive provision under paragraph (c) Section 12 of R.A. 7227, otherwise known as "The Bases Conversion and Development Act of 1992", is exclusive. Expenses for transport of production related personnel, repairs and maintenance, building insurance and insurance for the delivery of purchased goods are excluded from the list of allowable deductions as enumerated in Section 2 (o) (3) of RR 13-2005, hence such items are not valid deductions for the purposes of computing Nicera's gross income earned. Section 2 (o) (3) of RR 13-2005 provides, viz. : Section 2. Gross Income Earned. for the purpose of implementing the tax incentive provision under paragraph (c) Section 12 of R.A. 7227, otherwise known as "The Bases Conversion and Development Act of 1992," Section 3 (o) of Revenue Regulations No. 1-95 as amended by Revenue Regulations No. 16-99 shall read as follows: DICSaH (o) Gross income earned shall refer to the gross sales or gross revenues derived from business activity within the zone, net of sales discounts, sales returns and allowances and minus cost of sales or direct costs but before any deduction is made for administrative, marketing, selling and/or operating or incidental losses given a taxable period. For financial enterprises, gross income shall include interest income, gains from sales, and other income, net of costs of funds. For purposes of computing the total five percent (5%) tax imposed, the following deductions shall be allowable for the calculation of gross income earned for specific types of enterprises. "xxx xxx xxx" 3. Manufacturing Enterprises: Direct salaries, wages or labor expense Production supervision salaries Raw materials used in the manufacture of products Decrease in Goods in Process Account (Intermediate Goods) Decrease in Finished Goods Accounts Supplies and fuels used in production Depreciation of machinery and equipment used in production, and of that portion of the building owned and constructed by the registered enterprise that is used exclusively in the production of goods Rent and utility charges associated with building, equipment and warehouses used in production Financing charges associated with fixed assets used in production the amount of which were not previously capitalized aCHDAE "xxx xxx xxx" Finally, you are requesting for a clarification on whether or not the provision of Revenue Regulations No. 13-2005 allowing financing charges as allowable deductions from the gross income earned, or Sec. 34 (B) (2) of the Tax Code of 1997, as amended, which disallows deduction of interest on inter-affiliate loans for purposes of computing income tax, would apply to Nicera, should a loan be granted to Nicera by its parent company, for the purpose of acquiring production related equipment. Please be informed that this Office cannot as yet issue a determinative ruling on the above matter considering that the issue is based on hypothetical situation, which is considered as a "No-Ruling Area" pursuant to Section 2 (t) of Revenue Bulletin 01-03. (BIR Ruling No. DA-394-04, dated July 21, 2004; and BIR Ruling No. 082-10, dated October 5, 2010) Section 2 (t) of Revenue Bulletin 01-03 provides: "Section 2. List of No-Ruling Areas. The following shall hereby be construed and identified as "No-Ruling Areas": t) Request for rulings on issue/s or transactions based on hypothetical situations;" Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue