BIR Ruling [UN-232-A-94]

August 1, 1994 BIR RULING [UN-232-A-94] MEMORANDUM FOR : The Commissioner This refers to the internal revenue tax case of Zilog Philippines, Inc. (ZPI), Sucat Road, West Service Road, SSH, Paraaque, Metro Manila, involving the amount of P2,717,073.60 representing deficiency income tax for the year 1989 under Assessment Notice No. FAS-1-89-92-003951 dated September 23, 1992. cdtech Records of this case disclosed that ZPI is registered with the Board of Investments under Executive Order No. 226 otherwise known as the Omnibus Investments Code of 1987 as a pioneer producer (expanding) for the production, manufacture and export of semi-conductor devices on October 7, 1988 under Certificate of Registration No. EP 88-681; that under the specific terms and conditions of its registration, ZPI is entitled to an income tax holiday for three (3) years from commercial operations of the expansion and increased production capacity of its current product line of integrated circuits and the manufacture of its new product line, i.e., Quad Flat Pack (QFP); that on May 21, 1990 ZPI filed its application with the BOI to avail of the income tax holiday for January to December 1989; that in letter dated January 11, 1991, the BOI approved ZPI's application for income tax exemption amounting to P2,855,524.00 for taxable year ended December 31, 1989 under Section 39(a) of Executive Order No. 226 otherwise known as he Omnibus Investment Code of 1987; that the BOI in letter dated January 11, 1991 addressed to the Industry Audit Division, BIR, states that ". . . it has been determined that said company is entitled to income tax exemption having complied with the conditions for its entitlement to such incentive. The approximate amount of its tax exemption is P2,855,524.00 which represents 22.03% of the income tax due on its registered activity had it not been entitled to income tax exemption . . ."; that however, in a memo-report dated August 4, 1992 Revenue Officer Antonio C. Navarro states that "upon post audit, it was found out that commercial operation of the Expansion Project started only in July 1989 as indicated under paragraph II-2 of the memo for the Management Committee from the Electronics and Telecom Department of the BOI dated December 14, 1990, the income of the registered activity from January June 1989 is not yet entitled to income tax holiday inasmuch as commercial operation started only in July 1989. Sales from January to June 1989 was still the production of the original facilities installed as pioneer export producer and not from the expansion project."; that the allowable income tax holiday of P2,855,524.00 as determined by the BOI was reduced to P1,414,162 resulting in a deficiency income tax assessment of P2,717,073.00 for the year 1989; and that in letter dated November 3, 1992, counsel for ZPI protested the aforesaid assessment on the ground that the same has no legal and factual bases. The specific terms and conditions of the registration of ZPI as a pioneer producer (expanding) are as follows: "1. The enterprise shall adhere to the following project timetable: "Phase 1 September 1988 Expansion of the current product lines Sub-contracting of the preliminary operations of the Quad Flat Pack ("QFP") in Swire, Hongkong; June 1990 Final testing of the QFP in ZPI Start of construction of the new building for the QFP "Phase II May 1989 Ordering of the assembly equipment to be consigned to ZPI by Zilog, USA June 1989 Installation of the in-house assembly equipment for the QFP and trial run July 1989 start of production of the QFP "3. . . . "4. . . . "5. . . . "6. The enterprise shall be entitled to the following incentives: a) Income tax holiday for three (3) years from commercial operation; commercial operation shall be as stated herein or actual date of commercial operation, whichever is earlier, but in no case earlier than the date of its registration. Availment of incentive on income tax holiday shall be for three (3) years from the date of commercial operation but in no case earlier than the date of registration. For the new product, i.e., Quad Flat Pack (QFP) commercial operation shall mean the actual date of in-house assembly operation. xxx xxx xxx Thus, under Phase 1 of the aforesaid terms and conditions, the project timetable for ZPI's current product line which is the integrated circuits should start September 1988 but since the date of registration of ZPI as a pioneer producer (expanding) is October 7, 1988, commercial operation for the expansion of its current product line starts October 7, 1988. However, under Phase II which relates to ZPI's new product, i.e. the Quad Flat Pack (QFP) it is specifically provided that the project timetable or the start of operation is July 1989. The registered expansion products of ZPI consists of its current product line which is the integrated circuits and its new product line, the QFP. Its current product line recorded an increased volume production as of January 1989 as shown by the production report submitted by ZPI to the BOI when it filed its application for income tax holiday for January to December 1989. However, the start-up date for its new expansion product i.e. QFP is still July 1989. Such being the case, the reduction by this Office of the allowable income tax holiday from P2,855,524.00 which represents 22.03% of the income tax due on ZPI's registered activity as determined by the BOI which is the sole agency tasked to determine ZPI's eligibility to avail of the income tax holiday incentive to P1,414,162.00 resulting in a deficiency income tax of P2,717,073.60 for the year 1989 is without legal and factual bases . In view thereof, it is respectfully recommended that the 1989 deficiency income tax assessment issued against Zilog Philippines, Inc., Sucat Road, West Service Road, SSH, Paraaque, Metro Manila, involving the amount of P2,717,073.60 be withdrawn and cancelled and this case considered closed. aisadc Respectfully submitted: ALICIA L. TOMACRUZ Chief, Law Division I CONCUR: ALICIA P. CLEMENO Acting Assistant Commissioner Legal Service APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue