April 12, 2004

BIR RULING [DA-200-04]

R.A. 7916; 08-99; DA-227-02; DA-333-

98

Romulo Mabanta Buenaventura

Sayoc & De Los Angeles
30th Floor, CITIBank Tower
CITIBank Plaza
8741 Paseo de Roxas
Makati City

Attention: Atty. Wilma M. Valdemoro-Cua

Atty. Priscilla B. Valer
Atty. Jayson L. Fernandez

Gentlemen :

This refers to your letter dated February 27, 2004 stating that your
client, Read Rite Philippines, Inc. (RRPI) [formerly known as Sunward
Technologies (Phils.), Inc.] is a domestic corporation registered with the
Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise
under Certificate of Registration No. 94-60 dated March 5, 1997; that RRPI's
production facility is located at the Carmelray Industrial Park, an export
processing zone approved by and registered with the PEZA; that on June 18,
2003, RRPI ceased its production operations due to continued business
losses and bankruptcy proceedings was commenced by its parent
corporation in the United States Bankruptcy Court for the Northern District of
California, Oakland Division pursuant to Chapter 7 of the U.S. Code; that on
July 28, 2003, the PEZA provisionally approved the cancellation of RRPI's
PEZA registration subject to fulfillment of certain conditions which included,
among others, the receipt of RRPI's notice that it has completed its winding-
up operations; that the PEZA also authorized RRPI to sell its facility located
at the Carmelray Industrial Park; that pursuant to its Registration and
Supplemental Agreements with PEZA dated June 2, 1994, June 29, 1995 and
October 5, 1999, RRPI enjoyed a four-year income tax holiday incentive on
the manufacture of tapeheads from April 1, 1995 to March 31, 1999 and on
the manufacture of multi-channel tapeheads from October 1, 1999 to
September 30, 2003; and that immediately upon expiration of RRPI's income
tax holiday on September 30, 2003, RRPI became subject to the 5% tax on
gross income which shall be in lieu of all national and local taxes pursuant to
Section 24 of R.A. No. 7916, as amended by R.A. No. 8748.
Based on the foregoing representations, you now request confirmation
of your opinion that —
"1. The sale by RRPI of its facilities at the Carmelray Industrial
Park, including the buildings, machinery, equipment and other
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 improvements thereon, in the course of winding up its registered
activity will fall under R.A. 7916, hence, subject to 5% preferential tax
rate on the gross selling price less the depreciated cost of the
buildings, machinery and equipment as of the date of the cessation of
RRPI's commercial operations;
"2. Consequently, the sale of RRPI's buildings, machinery and
equipment will be exempt from the 6% creditable withholding tax
pursuant to Section 2.57.5 of Revenue Regulations No. 2-98, as
amended by Revenue Regulations No. 14-02."
In reply thereto, please be informed that your opinion is hereby
confirmed as follows: TCaAHI

1. Based on the PEZA certification dated February 26, 2004 submitted

to this office, it is noted that RRPI enjoyed a four-year income tax holiday
incentive on the manufacture of tapeheads from April 1, 1995 to March 31,
1999 and on the manufacture of multi-channel tapeheads from October 1,
1999 to September 30, 2003. Accordingly, upon the expiration of its four-
year income tax holiday on September 30, 2003, RRPI became subject to the
5% final tax effective October 1, 2003. (BIR Ruling No. DA-227-02 dated
November 29, 2002; VAT Ruling No. 037-98)
Under Section 24 of R.A. No. 7916, as amended, otherwise known as
"The Special Economic Zone Act of 1995", no taxes, local and national, shall
be imposed on business establishments operating within the Ecozone and
that in lieu of paying taxes, five percent (5%) of the gross income earned by
all business enterprises within the Ecozone shall be remitted as follows:
three percent (3%) to the national government and two percent (2%) to the
municipality or city where the enterprise is located. Additionally, under
Section 2 (nn), Rule I of the Rules and Regulations implementing R.A. No.
7916, "gross income" refers to gross sales or gross revenues derived from
business activity within the Ecozone, net of sales discounts, sales returns
and allowances minus cost of sales or direct costs but before deduction is
made for administrative expenses or incidental losses during a given taxable
period.
Such being the case, and since R.A. 7916 is a special law which grants
exemptions from payment of all national taxes to PEZA-registered business
establishments operating within the Ecozone, except payment of the
preferential tax rate of 5% on the gross income earned, the gross income
earned on the sale by RRPI of its facilities consisting of building,
machineries, equipment and other improvements thereon located within the
Ecozone in the course of winding up its registered business within the
Ecozone is subject to the 5% preferential tax rate based on the gross selling
price minus the depreciated cost of the building as of the date of cessation
of commercial operations. (BIR Ruling Nos. 008-99 dated January 19, 1999;
DA-090-01 dated May 16, 2001; VAT Ruling No. 89-02 dated December 17,
2002)
2. Under Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98
implementing Section 57 (B) of the Tax Code of 1997, the withholding tax
prescribed in the said Regulations shall not apply to income payments made
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 to corporations enjoying exemption from the payment of income taxes
pursuant to the provisions of R.A. No. 7916.
Since RRPI is subject to the final tax of 5%, which shall be in lieu of all
national and local taxes pursuant to Sec. 24 of R.A. No. 7916, as amended,
this Office is of the opinion as it hereby holds that the sale of RRPI's facilities
located at the Carmelray Industrial Park, including the buildings, machinery,
equipment and other improvements constructed or installed therein, in the
course of winding up its PEZA-registered business is exempt from the 6%
creditable withholding tax imposed under Sec. 2.57.2 (J) of Revenue
Regulations No. 2-98, as amended. (BIR Ruling Nos. DA 333-98 dated July 21,
1998; DA 362-98 dated August 12, 1998; DA 151-02 dated September 10,
2002; DA 227-02 dated November 29, 2002) DTIACH

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 as represented are different, then this ruling shall be considered null
and void.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner
Legal & Inspection Group

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