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December 22, 2009

BIR RULING [DA-(IL-046) 797-09]

R.A. 7916; DA-649-2004; DA-698-06
Tekno Logika Pilipinas, Inc.
Unit 4 TBI Bldg., UP TechnoPark,
C.P. Garcia cor. Katipunan Ave.,
Diliman, Quezon City
Attention: Mr. Robert S. dela Cruz
Gentlemen :
This refers to your letter August 11, 2009 requesting confirmation that as a
PEZA-registered company, Tekno Logika Pilipinas, Inc., it is entitled to incentives
granted under R.A. 7916 (Special Economic Zone Act of 1995).
It is represented that Tekno Logika Pilipinas, Inc. with Taxpayer Identification
No. 007-206-995-000, is a domestic corporation registered with the Securities and
Exchange Commission (SEC) under SEC Registration No. CS200900274 dated
January 29, 2009; that Tekno Logika Pilipinas, Inc. is registered as an Ecozone IT
Enterprise at the UP Science and Technology Park (South) with the Philippine
Economic Zone Authority (PEZA) under Certificate of Registration No. 09-35-IT
dated May 13, 2009; that the scope of Tekno Logika Pilipinas, Inc.'s registered
activity is:
". . . limited to the provision of IT software development and
knowledge-based application to global companies and the importation of
machinery, equipment, tools, goods, wares, articles, or merchandise directly
used in its registered operations at the UP Science and Technology Park
(South). In the event the registrant decides to engage in a new or additional
activity, directly or indirectly related to its registered activity, it shall apply
anew with PEZA for the latter's approval."

and that Tekno Logika Pilipinas, Inc. now seeks confirmation of the following
incentives granted to PEZA registered enterprises as stated in its Certification No.
2009-956 dated August 19, 2009:
"1. C orporate income tax holiday for four (4) years for original
projects effective on the committed date of start of commercial operations, or
the actual date of start of commercial operations, whichever is earlier; ITH
entitlement for the original project can also be extended for another three (3)
years provided specific criteria are met for each additional year and prior
PEZA approval is obtained; duly approved and registered "Expansion" and
"New" projects are entitled to a three-year, and four-year ITH, respectively;
2. Tax and duty free importation of merchandise which includes
raw materials, capital equipment, machinery and spare parts;
3. Exemption from wharfage dues and export tax, impost and fees;
4. VAT zero-rating of local purchases subject to compliance with
BIR and PEZA requirements; and
5. Exemption from the payment of any and all local government
imposts, fees, licenses or taxes except real estate tax; however, machinery
installed and operated in the ecozone for manufacturing, processing or for
industrial purposes shall not be subject to payment of real estate taxes for the
first three (3) years of operation of such machinery, production equipment not
attached to real estate shall be exempt from such real property taxes."

In reply, please be informed that Section 2.57.5 (B) of Revenue Regulations

No. 2-98 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 applied. PEZA registered enterprises

enjoy exemption from payment of income taxes pursuant to the provisions of Section
39 (a) (1) of the Omnibus Investments Code of 1987, such as the income tax holiday.
In particular, Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended by
Section 4 of Revenue Regulations No. 14-02, provides as follows:
"SECTION 4. E xemption from Withholding. The withholding
of creditable withholding tax prescribed in these Regulations shall not apply
to income payments made to the following:
xxx xxx xxx
(B) Persons enjoying exemption from payment of income taxes
pursuant to the provisions of any law, general or special, such as but not
limited to the following:
xxx xxx xxx
(2) C orporations duly registered with the Board of Investments,
Philippine Export Processing Zones and Subic Bay Metropolitan Authority
enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A.
7916, the Omnibus Investment Code of 1997, and R.A. 7227, as amended,
xxx xxx xxx"

Such being the case, Tekno Logika Pilipinas, Inc. is exempt from the 1%
withholding tax on income payments made by the top 10,000 corporations.
Accordingly, since it is a PEZA registered enterprise still enjoying ITH incentive
under a special law and the 5% preferential tax incentive from the PEZA, all payments
received by it from its customers, whether ECOZONE registered or customs territory
enterprises are exempt from the withholding tax. (BIR Ruling No. DA-381-2000 dated
November 7, 2000) Further, Section 2 (nn), Rule I of the implementing Rules of RA
No. 7916 defines the term "gross income" as follows:
"(nn) "Gross Income" for purposes of computing the special tax due
under Section 24 of the Act refers to gross sales and 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 expenses or incidental losses during a
given taxable period. The allowable deductions from "gross income" are
specifically enumerated under Section 2, Rule XX of these Rules."

The definition of "gross income" limits the application of the preferential tax
rate of 5% to income derived from the registered activity by an ECOZONE enterprise.
Thus, any income derived by a registered enterprise that is not related to its registered
activity is not entitled to the preferential tax rate of 5%. Instead, such income derived
from an unregistered activity shall be subject to regular internal revenue tax as
provided under Section 1 (1st par.) of Revenue Regulations No. 20-02.
Further still, this Office has already ruled that Republic Act No. 7916 or the
PEZA Law is one of the special laws falling under the coverage of Section 108 (B) (3)
of the Tax Code of 1997. This is more clearly reiterated in Revenue Memorandum
Circular No. 74-99, particularly Section 3, which states that:
"(1) If the Buyer is a PEZA registered enterprise which is subject to
the 5% special tax regime, in lieu of all taxes, except real property tax,
pursuant to R.A. No. 7916, as amended: . . ."
"Sale of service This shall be treated subject to zero percent (0%)
VAT under the "cross border doctrine" of the VAT System, pursuant to VAT
Ruling No. 032-98 dated November 5, 1998."

Accordingly, we hereby confirm that any sale of goods or services to Tekno

Logika Pilipinas, Inc., a PEZA registered enterprise, is legally entitled to zero percent
(0%) VAT. And lastly, this Office will not rule on item no. 5 as it is within the
jurisdiction of the local government where the registered enterprise is located.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then
this ruling shall be considered null and void.
Very truly yours,
Commissioner of Internal Revenue
Assistant Commissioner
Legal Service