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December 22, 2009

BIR RULING [DA-(IL-046) 797-09]R.A. 7916; DA-649-2004; DA-698-06Tekno Logika Pilipinas, Inc.Unit 4 TBI Bldg., UP TechnoPark,C.P. Garcia cor. Katipunan Ave.,

Diliman, Quezon City Attention: Mr. Robert S. dela CruzPresident/CEOGentlemen :This refers to your letter August 11, 2009 requesting confirmation that as aPEZA-registered company, Tekno Logika Pilipinas, Inc., it is entitled to incentivesgranted under R.A. 7916 (Special Economic Zone Act of 1995).It is represented that Tekno Logika Pilipinas, Inc. with Taxpayer IdentificationNo. 007-206-995-000, is a domestic corporation registered with the Securities andExchange Commission (SEC) under SEC Registration No. CS200900274 datedJanuary 29, 2009; that Tekno Logika Pilipinas, Inc. is registered as an Ecozone ITEnterprise at the UP Science and Technology Park (South) with the Philippine

Economic Zone Authority (PEZA) under Certificate of Registration No. 09-35-ITdated May 13, 2009; that the scope of Tekno Logika Pilipinas, Inc.'s registeredactivity is:". . . limited to the provision of IT software development andknowledge-based application to global companies and the importation ofmachinery, equipment, tools, goods, wares, articles, or merchandise directlyused in its registered operations at the UP Science and Technology Park(South). In the event the registrant decides to engage in a new or additionalactivity, directly or indirectly related to its registered activity, it shall applyanew with PEZA for the latter's approval."

and that Tekno Logika Pilipinas, Inc. now seeks confirmation of the followingincentives 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 originalprojects effective on the committed date of start of commercial operations, orthe actual date of start of commercial operations, whichever is earlier; ITHentitlement for the original project can also be extended for another three (3)years provided specific criteria are met for each additional year and priorPEZA 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 includesraw materials, capital equipment, machinery and spare parts;3. Exemption from wharfage dues and export tax, impost and fees;DTAHSI

4. VAT zero-rating of local purchases subject to compliance withBIR and PEZA requirements; and5. Exemption from the payment of any and all local government

imposts, fees, licenses or taxes except real estate tax; however, machineryinstalled and operated in the ecozone for manufacturing, processing or forindustrial purposes shall not be subject to payment of real estate taxes for thefirst three (3) years of operation of such machinery, production equipment notattached to real estate shall be exempt from such real property taxes."

In reply, please be informed that Section 2.57.5 (B) of Revenue RegulationsNo. 2-98 is explicit in its provisions that the expanded withholding tax does not applyto income payments to persons enjoying exemption from payment of income taxespursuant to the provisions of any law, general or applied. PEZA registered enterprises

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enjoy exemption from payment of income taxes pursuant to the provisions of Section39 (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 bySection 4 of Revenue Regulations No. 14-02, provides as follows:"SECTION 4. E xemption from Withholding.— The withholdingof 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 taxespursuant to the provisions of any law, general or special, such as but notlimited to the following:xxx xxx xxx(2) C orporations duly registered with the Board of Investments,Philippine Export Processing Zones and Subic Bay Metropolitan Authorityenjoying 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,respectively;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 incentiveunder a special law and the 5% preferential tax incentive from the PEZA, all paymentsreceived by it from its customers, whether ECOZONE registered or customs territoryenterprises are exempt from the withholding tax. (BIR Ruling No. DA-381-2000 datedNovember 7, 2000) Further, Section 2 (nn), Rule I of the implementing Rules of RANo. 7916 defines the term "gross income" as follows:"(nn) "Gross Income" for purposes of computing the special tax dueunder Section 24 of the Act refers to gross sales and gross revenues derivedfrom business activity within the ECOZONE, net of sales discounts, salesreturns and allowances and minus costs of sales or direct costs but before anydeduction is made for administrative expenses or incidental losses during agiven 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 taxrate 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 registeredactivity is not entitled to the preferential tax rate of 5%. Instead, such income derivedfrom an unregistered activity shall be subject to regular internal revenue tax asprovided 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 MemorandumCircular 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 VATRuling No. 032-98 dated November 5, 1998."

 Accordingly, we hereby confirm that any sale of goods or services to TeknoLogika 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. DSAEIT

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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, thenthis ruling shall be considered null and void.Very truly yours,Commissioner of Internal RevenueBy:

(SGD.) JAMES H. ROLDAN Assistant CommissionerLegal Service