BIR Ruling No. 400-15

December 10, 2015 BIR RULING NO. 400-15 E.O. 226; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-2011 Davao Bay Coconut Oil Mills, Inc. 358 Quezon Avenue Quezon City Attention: Mariano MC Arnold S. Lim President Gentlemen : This refers to your letter dated March 20, 2014 requesting, on behalf of Davao Bay Coconut Oil Mills, Inc. ("Davao Bay") , certificate of tax exemption from income and expanded withholding taxes on account of its registration with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". Documents submitted show that Davao Bay , with Tax Identification No. (TIN) 007-011-798-000, is a domestic corporation duly organized under the Philippine laws, with plant address at Km. 14, Panacan, Davao City; that the Corporation is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. CS200805532; that the company is engaged in coconut oil milling business and is a duly registered enterprise with the Board of Investments (BOI) per BOI Certificate of Registration No. 2008-122 dated June 10, 2008 as New Producer of Crude Coconut Oil and Copra Cake/Meal; that Davao Bay shall be entitled to income tax holiday (ITH) for the said activity for a period of four (4) years beginning from November 27, 2010; 1 and that on January 9, 2014, the BOI approved Davao Bay's application for an extension of one (1) year in its ITH, covering the period from November 27, 2014 to November 26, 2015. It is further shown that the ITH of Davao Bay shall be limited only to the revenue generated from its registered activities as follows: Table No. 1 Registered Activities BOI Authority Date Issued Incentive New Producer of crude BOI Certificate of June 10, 2008 4 years ITH from July coconut oil and copra Registration No. 2009 (amended to cake/meal 2008-122 November 27, 2010 per BOI Board Resolution No. 11-6 s. 2011 until November 26, 2015) Cochin ( Refined and BOI Board Resolution October 26, 2011 4 years ITH from July Bleached Coconut No. 11-6 s. 2011 (per BOI PAG 2009 (amended to Oil ) or Edible Oil amending BOI letter) November 27, 2010 per (Refined, Bleached Certificate of BOI Board Resolution and Deodorized Registration No. 2008- No. 11-6 s. 2011) and Coconut Oil), and 122 limited to the remaining By-Product ( Coconut period of the Firm's Fatty Acid Distillates ) entitlement to incentives Toll Crushing BOI Board Resolution October 26, 2011 ITH effective upon Services No. 11-6 s. 2011 (per BOI PAG approval on October 5, amending letter) 2011 and limited to the Certificate of remaining period of the Registration No. 2008- Firm's entitlement to 122 incentives. The revenue generated from the Toll Crushing Services should not exceed 2% of the total sales of the company as represented. and that only the sales generated from the registered activities conducted/located at Davao Bay's plant in Km. 14, Panacan, Davao City 2 shall be entitled to ITH incentives. SDHTEC Davao Bay , under the Specific Terms and Conditions of its BOI Registration for the above registered activities, is obligated to observe the following production schedule: Table No. 2 Product 3 Registered Capacity 4 Crude Coconut Oil 105.000 MTPY Copra Meal/Cake 57,960 MTPY Cochin (RBO-Refined 75,000 MTPY and Bleached Coconut Oil) OR Edible Oil (RBDO-Refined, 75,000 MTPY Bleached and Deodorized Coconut Oil) Coconut Fatty Acid 3,000 MTPY Distillates (CFAD) In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 implementing Section 57 (B) of the Tax Code of 1997, as amended, the withholding tax prescribed in the said Regulations shall not apply to income payments to persons enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investments Code of 1987. (BIR Ruling No. 334-2011 dated September 7, 2011) Accordingly, since Davao Bay's business activities as New Producer of Crude Coconut Oil, Copra Cake/Meal, Cochin (Refined and Bleached Coconut Oil) or Edible Oil (Refined, Bleached and Deodorized Coconut Oil), By-Product (Coconut Fatty Acid Distillates) , and Toll Crushing Services have been duly registered with the BOI, this Office is of the opinion as it hereby holds, that income payments received by Davao Bay in connection with the above registered activities, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for the period indicated in Table No. 1 above. It must be emphasized that the above exemption from the creditable withholding tax covers only the income directly attributable to the revenues generated by Davao Bay from the conduct of its above-registered activities located at Km. 14, Panacan, Davao City and shall be limited only to the respective registered capacity of each product as shown in Table No. 2 above. Moreover, Davao Bay's entitlement to ITH for its registered activities as New Producer of Crude Coconut Oil, Copra Cake/Meal, Cochin (Refined and Bleached Coconut Oil) or Edible Oil (Refined, Bleached and Deodorized Coconut Oil), By Product (Coconut Fatty Acid Distillates) , and Toll Crushing Services , is not automatic as it has still to comply with the provisions of the Specific Terms and Conditions of the BOI Registration, viz. : (1) The firm shall increase its Paid-Up Capital Stock to at least P90M and shall submit proof of compliance prior to the availment of Income Tax Holiday incentives; (2) The firm shall adhere to the following timetable and shall notify the Board of any changes thereat: Activity Schedule Related Expenses Cost (in Php) Obtain appropriate January- Pre-operating 5,000.000 licenses/agreement/ May 2008 expenses permits from relevant government agencies concerned, Training of manpower Site acquisition through April-June Land acquisition 10,000,000 execution of deed of 2008 sale of land Site preparation and June 2008- Warehouse/lease- 60,000,000 development March 2009 hold improvement *Hiring of /civil works/other contractors expenses *Completion of site preparation and development Acquisition of September Furniture & 165,000,000 equipment 2008-June Fixtures *Placing of purchase 2009 Machinery & orders or opening of Equipment letters of credit *Arrival of equipment *Installation of equipment Start of commercial November Working capital 118,410,000 Operation 27, 2010 5 Total Project Cost 358,410,000 ========== (3) Only the sales generated from the registered activities located at Km. 14, Panacan, Davao City shall be entitled to ITH incentives; AScHCD (4) Secure from BOI Supervision and Monitoring Department, a certificate of ITH Entitlement prior to filing of income tax return with BIR, otherwise, ITH for that particular taxable year without COE will be forfeited; (5) File an application with the BOI Incentives Department within one (1) month from the filing of the final Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR) in order to validate the claim for income tax exemption. The application shall be accompanied by a certification from the Social Security System (SSS) that the enterprise is in good standing in the remittance of SSS contributions of its employees; (6) The enterprise shall submit to the BOI Supervision and Monitoring Department a quarterly report on actual investments, employment and sales pertaining to the registered project; (7) The enterprise shall undertake Corporate Social Responsibility (CSR) activity duly identified by the Board. For this purpose, the enterprise shall submit proof of compliance thereof prior to the availment of the ITH; (8) The enterprise must abide by the principles of Good Corporate Governance. It must likewise accomplish the self-rating Governance Scorecard to be provided by the BOI every year as a requirement for ITH availment; (9) The incentives availment for the inclusion of Toll Crushing Services shall be effective on October 5, 2011 and limited to the remaining period of the firm's entitlement to incentives; (10) For Income Tax Holiday (ITH) purposes, revenue generated from the toll crushing services should not exceed 2% of the total sales of the company as represented; and (11) For its ITH bonus year, the Firm shall use the indigenous raw material criterion pursuant to Art. 39 (a) (1) (ii) of E.O. 226 subject to the following conditions: 1. At the time of actual availment of the ITH bonus year incentive the ratio of the cost of indigenous raw materials shall be at least 50% of the total raw material cost; and 2. The Firm shall undertake Corporate Social Responsibilities (CSR) activities which shall be completed on the actual availment of the bonus year. The CSR activity shall be aligned with the priority programs/projects of the National Anti-Poverty Commission and/or other special laws such as R.A. 7942 or the Mining Act and DOE Energy Regulation 1-94. The amount spent for the CSR activities shall be reflected in the Notes to the Firm's Audited Financial Statements. Failure to complete the CSR activity shall mean forfeiture of the approved ITH bonus year. It should be understood that Davao Bay shall be constituted as a withholding agent for the government if it acts as employer and any of its employees receive compensation income subject to compensation withholding tax, or if it makes payments to individuals or corporations subject to the withholding taxes at source as required under Chapter XIII and Section 57 of the Tax Code of 1997, as amended and implemented by Revenue Regulations (RR) No. 2-98 , as amended. Likewise, Davao Bay is required to file on or before the 15th day of the fourth month following the close of its accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the taxable year. Finally, the Davao Bay's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining whether it has been complying with the conditions under which it has been granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The start of commercial operation and ITH reckoning date was amended from July 2009 to November 27, 2010 per BOI Board Resolution No. 11-6 Series of 2011. 2. Change of Plant Location per IDG letter dated March 18, 2013. 3. Amended per BOI Resolution No. 11-6 S'2011. 4. Amended per BOI Resolution No. 11-6 S'2011. 5. Amended per BOI Board Resolution No. 11-06 S'2011.