BIR Ruling No. 661-12

December 27, 2012 BIR RULING NO. 661-12 RA 7916; BIR Ruling No. 014-2012 Laguna Dai-Ichi, Inc. 103 North Science Avenue, Laguna Technopark Special Export Processing Zone, Bian, Laguna Attention: Ms. Melelia Cadorniga Accounting Manager Gentlemen : This refers to your letter dated September 10, 2009 requesting confirmation of your opinion that royalty payments made by Laguna Dai-ichi, Inc. to Dai-ichi Seiko Co., Ltd. constitute direct costs on the part of the former which are deductible from its gross income for purposes of computing the 5% gross income tax (GIT) under Republic Act No. 7916, otherwise known as "The Special Economic Zone Act of 1995." DcAaSI It is represented that Laguna Dai-ichi, Inc. is an export enterprise registered with the Philippine Economic Zone (PEZA) under Certificate of Registration No. 94-10 dated February 18, 1994; that Laguna Dai-ichi, Inc. is located at 103 North Science Ave., Laguna Technopark, Bian, Laguna; that its registered activity includes the manufacture of molding dies, plastic parts and stamping metal pressed parts for export; that on November 1, 2004, Laguna Dai-ichi, Inc. entered into a Royalty Agreement with Dai-ichi Seiko Co., Ltd. , a corporation duly organized and existing under the laws of Japan, with office address at No. 12-4 Negoro, Momoyamacho, Fushimi-ku, Kyoto 612-8024 Japan; that Dai-ichi Seiko Co., Ltd. is the owner of the patent/method used for the manufacture of molding dies, plastic parts and stamping metal pressed parts and has the exclusive right to use and license others to use such patent/method; and that under the Royalty Agreement, Dai-ichi Seiko Co., Ltd. shall grant Laguna Dai-ichi, Inc. a license to use the know-how, and the provision of technical information and technical services and assistance for the manufacture and marketing of molding dies, plastic parts and stamping metal pressed parts and various industrial plastic products; and that in consideration for the rights, licenses and assistance granted by Dai-ichi Seiko Co., Ltd., Laguna Dai-ichi, Inc. shall pay the former remuneration/royalty fee equivalent to 5% of the gross sales of the products. In reply, please be informed that Sec. 3 of Revenue Regulations (RR) No. 11-2005 dated April 25, 2005, implementing R.A. 7916, defines "gross income earned" as follows: "SEC. 3. Gross Income Earned. For purposes of implementing the tax incentive of registered Special Economic Zone (ECOZONE) enterprises in Section 24 of Republic Act No. 7916, the term 'gross income earned' shall refer to gross sales or gross 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, marketing, selling and/or operating expenses or incidental losses during a given taxable period." The above definition is reduced to the following formula: Gross sales/revenues xxxx Less: Sales Discounts xxxxx Sales Returns/Allowances xxxxx Direct costs (cost of sales) xxxxx Other Manufacturing Costs xxxxx xxxx Gross taxable income xxxx The same Section also provides for a list of direct costs deductible from gross income for purposes of determining the taxable base, to wit: CcTHaD "For purposes of computing the total five percent (5%) tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned for specific types of enterprises: 1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises: Direct salaries, wages or labor expenses Production supervision salaries Raw materials used in the manufacture of products Decrease in Goods in Process Account (Intermediate goods) Decrease in finished Goods Account Supplies and fuels used in production Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed 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 was not previously capitalized." xxx xxx xxx The above-mentioned enumerations are exclusive. Thus, under the maxim expression unius est exclusio alterius , the mention of one thing implies the exclusion of another thing not mentioned. If a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect ( Tolentino vs. Paqueo , 523 SCRA 377). In the same vein, where the terms are expressly limited to certain matters, it may not, by interpretation or construction, be extended to other matters ( Sarmiento III vs. Mison , 156 SCRA 549). The rule proceeds from the premise that the legislature would not have made specified enumerations in a statute had the intention been not to restrict its meaning and to confine its terms to those expressly mentioned ( Romualdez vs. Marcelo , 497 SCRA 89). (BIR Ruling No. 014-2012 dated January 4, 2012) aHTEIA It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed ( CIR vs. Isabela Cultural Corporation, G.R. No. 172231 dated February 12, 2007). In view of the foregoing, royalty payments made by Laguna Dai-ichi, Inc. to Dai-ichi Seiko Co., Ltd. , not being one of the allowable deductions provided under the law and rules and regulations, cannot be deducted from the former's gross income for purposes of computing its 5% gross income tax. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue