BIR ruling No. 014-12: Is the enumeration of allowable deductions exclusive?

Tax incentives are certainly among the reasons why an investor would want to do business in a country. Here in the Philippines, an enterprise registered with the Philippine Economic Zone Authority (PEZA) gets to enjoy certain tax incentives provided by law. One of the incentives, in lieu of paying taxes, for PEZA-registered enterprises is to pay only five-percent tax based on gross income earned to the national and local government.

The Revenue Regulations (RR) of the PEZA Law which was issued by the Department of Finance (DOF) on 2005 after the same was recommended for approval by the commissioner of Internal Revenue defines “gross income earned” as “gross sales or gross revenues derived from business activity within the Ecozone, net of sales discounts, sales return 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.”

For PEZA-registered export enterprises, free trade enterprises and domestic market enterprises, the regulations state that “(for) purposes of computing the total five-percent tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned:

(1) Direct salaries, wages or labor expenses

(2) Production supervision salaries

(3) Raw materials used in the manufacture of products

(4) Decrease in goods in process account (intermediate goods)

(5) Decrease in finished goods account

(6) Supplies and fuels used in production

(7) 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

(8) Rent and utility charges associated with building, equipment and warehouses used in production, and

(9) Financing charges associated with fixed assets used in production the amount of which were not previously capitalized.” (RR No. 11-05)

Just recently, the Bureau of Internal Revenue (BIR), relying on the familiar maxim “expressio unius est exclusio alterius,” which means the mention of one thing implies the exclusion of another thing not mentioned, issued BIR Ruling No. 014-12 dated Jan. 4, 2012 where it interpreted the enumeration of allowable deductions for PEZA-registered export enterprises under the Implementing Rules and Regulations of the PEZA Law (IRR) enacted on 1995, as an exclusive list. Certainly, this strict interpretation in BIR Ruling No. 014-12, will effectively limit the allowable deductions enjoyed by PEZA-registered entities enjoying the preferential five-percent tax.

It should be pointed out that the IRR relied upon by the BIR in BIR Ruling No. 014-12 was enacted far earlier than the RR. Well-settled is the rule that “the last one enacted, as the latest expression of the legislative will, supersedes and repeals the earlier act although it contains no repealing clause.” (Iloilo Palay and Corn Planters Association Inc. vs. Feliciano, G.R. No. L-24022, March 3, 1965). Based on this premise, it is believed that the RR should have been used as the basis for BIR Ruling No. 014-12 for being the later rule or, at the very least, should have been taken up in the said BIR ruling for being a very relevant issuance of the DOF and the BIR on the matter. Thus, it is quite interesting why the BIR limited itself to the IRR when it issued BIR Ruling No. 014-12.

It should be noted that the RR provides that the enumerated items are included in the allowable deductions for purposes of computing the five-percent tax. These wordings of the RR cannot be interpreted to mean that the items enumerated are the only deductible items. If the real intention was to confine the list of allowable deductions to those enumerated and nothing more, a restrictive language would have been made so as to leave no doubt in anyone’s mind on the exclusivity of items deductible for purposes of computing the five-percent tax. A cardinal rule in statutory construction is that when the law is clear and free from any doubt or ambiguity, there is no room for construction or interpretation. There is only room for application. As the RR is clear, plain, and free from ambiguity on this issue, it must be given its literal meaning and applied without attempted interpretation.

On another point, the “ipso facto clause” in the PEZA Law provides that all privileges, benefits, advantages or exemptions granted to special economic zones under the Bases Conversion and Development Act of 1992 (Republic Act No. 7227), shall “ipso facto” be accorded to special economic zones already created or to be created. Under the implementing regulations of the Bases Conversion and Development Act of 1992, it is provided that royalty is an allowable deduction for purposes of computing the gross income subject to five-percent final tax. Pursuant to the “ipso facto” clause, this benefit of deduction is deemed granted to PEZA-registered entities as well. It is believed that BIR Ruling No. 014-12 cannot deny PEZA-registered enterprises the said benefit of deduction without violating the “ipso facto” clause of the PEZA Law.

Likewise interesting and certainly worth contemplating is that BIR Ruling No. 014-12 revoked all other existing rulings inconsistent therewith. As understood, BIR Ruling No. 014-12 held that royalty is not among the allowable deductions for purposes of computing gross income of PEZA-registered enterprises subject to five-percent tax. Said ruling is anchored on the proposition that the enumeration of the allowable deductions in the RR is exclusive. Based on this line of reasoning, it is not improbable to assume that all other rulings already issued allowing the deduction of items (other than royalty) that are not specifically included in the enumeration as also revoked.

As of date, the present administration has lived up to its campaign primer not to push for the legislation of new taxes. However, apparently because of collection shortfall, tax authorities seem to have become very “resourceful” in interpreting tax laws. “Resourceful” to the extent that they now seem to interpret tax laws to create other sources of tax revenue for the government.

Mark Nette E. Concepcion is a supervisor of tax units Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]. Mark is also the author of the article ‘Do Taxpayers Really Need to Compromise’, published at the KPMG Corner on Nov. 19, 2011.”