THIRD DIVISION
G.R. No. 210528, November 28, 2018
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. J.P. MORGAN CHASE BANK, N.A. – PHILIPPINE CUSTOMER CARE CENTER, Respondent.
D E C I S I O N
LEONEN, J.:
Respondent's lease of the physical plant space, infrastructure, and other transmission facilities of PeopleSupport (Philippines), Inc., a Philippine Economic Zone Authority (PEZA)-registered Export Enterprise, is not covered within its registered activities. Thus, income derived from it is subject to the regular corporate income tax.
This Petition for Review on Certiorari1 seeks to reverse and set aside the Court of Tax Appeals En Banc Decision2 dated July 15, 2013 and Resolution3 dated December 18, 2013 in CTA EB No. 876. The Court of Tax Appeals En Banc denied the Commissioner of Internal Revenue's appeal and affirmed the December 21, 20114 and February 17, 20125 Resolutions of the Court of Tax Appeals Second Division, which ruled that the income from the lease of PeopleSupport (Philippines) Inc.'s transmission facilities is exempt from withholding tax, and granted J.P. Morgan Chase Bank N.A.–Philippine Customer Care Center's claim for refund.6
JP Morgan Chase Bank, N.A. – Philippine Customer Care Center (J.P. Morgan–Philippines) is the Philippine branch of American corporation J.P. Morgan Chase Bank, N.A. It is registered with the Securities and Exchange Commission to engage in call center and business process services, information technology, information technology-enabled services, and customer care services.7
On May 1, 2007,8 J.P. Morgan–Philippines entered into Task Order #2 to the Master Service Provider Agreement (Agreement) with PeopleSupport (Philippines), Inc. (PeopleSupport), a Philippine Economic Zone Authority (PEZA)-registered Economic Zone IT (Export) Enterprise, which enjoys an income tax holiday period from May to July 2007. Under the Agreement, PeopleSupport would provide and lease transmission facilities to J.P. Morgan-Philippines for a fee.9
The Agreement stated:
III. DESCRIPTION AND SCOPE OF SERVICESSupplier shall provide the following services to [JP Morgan]:
A. Scope of Services.
Supplier will provide physical plant space in its facility located at 6780 Ayala Avenue, Makati City 1227 Philippines (the "Facility") that will allow JPMC personnel to perform certain services for the benefit of JPMC. Supplier will provide all voice and data infrastructure needed for JPMC personnel to perform their intended function(s). Supplier will further provide all workstation infrastructure (as further detailed below) that is compatible with JPMC specifications to support JPMC work types to be performed at Supplier's location. Supplier will provide workstation voice and data bandwidth as set forth below. Supplier will also provide all infrastructure necessary to conduct telephone call recording, workstation screen data capture, and data storage per the requirements of JPMC. Additionally, Supplier will provide the platform and support for inbound telemarketing activities that will be performed by JPMC employees located in the Facility. This platform and support will be consistent with all service requirements as set forth in Task Order #1 currently executed between PeopleSupport, Inc. and JPMorgan Chase Bank, National Association.
V[.] SUPPLIER/JPMC INTERACTIONSupplier and JPMC agree to the following:
- Supplier will assign an account manager mutually agreeable to JPMC and Supplier.
- The account manager must be proactive, responsive[,] and solution oriented.
- The account manager should have expertise in, or direct linkage to, Supplier's facilities, security and information technology.
- The account manager must have the ability to effectively manage or address the Services to ensure optimum results for JPMC.
- The account manager will be responsible for facilitating communication between JPMC and Supplier.
- Supplier will notify JPMC of any staff reassignments involving the account manager or other designated [k]ey personnel.
- JPMC will provide a point of contact(s) ("POC") that will serve as a liaison between the Supplier and JPMC.
- JPMC will provide POC(s) during Supplier's hours of operations.
- JPMC POC(s) will provide feedback or updates regarding escalations or concerns made by the Supplier."10 (Emphasis in the original)
There is a question of law "when there is doubt or controversy as to what the law is on a certain [set] of facts." The test is "whether the appellate court can determine the issue raised without reviewing or evaluating the evidence." Meanwhile, there is a question of fact when there is "doubt ... as to the truth or falsehood of facts." The question must involve the examination of probative value of the evidence presented.52 (Citation omitted)
Section 23. Fiscal Incentives. — Business establishments operating within the ECOZONES shall be entitled to the fiscal incentive:s as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits provided for in the Export Development Act of 1994.
Art. 39. Incentives to Registered Enterprises. — All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment;
(a) Income Tax Holiday. —
(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: . . . (Emphasis supplied)
An income tax holiday is bestowed on a new project to encourage investors to set up businesses and to contribute to the country's economic growth. The fiscal incentive is also meant to help registered enterprises recoup their substantial initial investments by giving them a reprieve from paying income tax for a few years. However, like any privilege, the income tax holiday comes with conditions and requirements which must be fulfilled for its continued enjoyment.55 (Emphasis supplied)
SECTION 1. TAX TREATMENT — Income derived by an enterprise registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority (CDA), or the Philippine Economic Zone Authority (PEZA) from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration (i.e., the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be). Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activity/ies, income realized by such registered enterprise that is not related to its registered activity/ies shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and the 5%/10% capital gains tax or ½% stock transaction tax, as the case may be, on the sale of shares of stock.57 (Emphasis supplied)
On Gains on Foreign Exchange Transactions:
Foreign currency is normally used by Ecozone Export Enterprises for their registered activities, either as the functional currency or as a supplemental currency. On the other hand, it is also used by some Ecozone Export Enterprises for other activities which can be considered as "additional business opportunities" which PEZA has no control of.
The tax treatment of foreign exchange (forex) gains shall depend on the activities from which these arise. Thus, if the forex gain is attributed to an activity with income tax incentive (Income Tax Holiday or 5% Gross Income Tax), said forex gain shall be covered by the same income tax incentive. On the other hand, if the forex gain is attributed to an activity without income tax incentive, said forex gain shall likewise be without income tax incentive, i.e., therefore, subject to normal corporate income tax.
The tax treatment of forex gains is illustrated as follows:
Activity Income Tax Incentive Tax Treatment of Forex Gain Registered 1st Project 5% Gross Income Tax 5% Gross Income Tax Registered 2nd Project Income Tax Holiday Income Tax Holiday Other Activities None Normal Corporate Income Tax
On Sales of Production "Rejects" and "Seconds[,"] Scrap, Raw Materials, Packaging Materials and Other Production Supplies:
1. All local sales shall be subject to applicable duties and taxes (including VAT) prior to withdrawal thereof from the Ecozone.
2. For purposes of entitlement to income tax incentives (Income Tax Holiday or 5% Gross Income Tax), the following shall apply:
a. Sale of production "rejects" and "seconds" from the registered activity of the Export Enterprise shall be considered covered by the registered activity of said Enterprise. Thus, any income derived therefrom shall be covered by the applicable income tax incentive, i.e., Income Tax Holiday or 5% Gross Income Tax.
b. Sale of recovered waste/scrap generated from processing of raw materials, including used packaging materials and other direct/indirect materials/supplies that have undergone processing/which have been used in production/processing activity registered with PEZA shall likewise be considered covered by the registered activity of an Export Enterprise. Any income derived therefrom shall likewise be covered by the applicable income tax incentive.
c. Sale of unprocessed, unused, obsolete or "off-specs" production inputs (direct/indirect materials/supplies) shall not be covered by the registered activity of an Ecozone Enterprise. Thus, any income derived therefrom shall be subject to normal corporate income tax, provided that the related cost shall be deducted only once for purposes of computing income.
For purposes of proper reckoning of incentives, Ecozone Export Enterprises with multiple activities are required to maintain separate books of accounts for each activity.63
- Export Manufacturing — manufacturing, assembly or processing activity resulting in the exportation of at least 70% of production ... Eligible firms shall qualify for registration as "Economic Zone Export Manufacturing Enterprise."
- IT (Information Technology) Service Export — IT service activities, of which 70% of total revenues is derived from clients abroad. ("IT Service Activities" are activities which involve the use of any IT software and/or system for value addition) ... Eligible firms shall qualify for registration as "IT Enterprise."
- Tourism — establishment and operation within PEZA Tourism Special Economic Zones of sports and recreation centers, accommodation, convention, and cultural facilities and their special interest attraction activities/establishments, with foreign tourists as primary clientele. Eligible firms shall qualify for registration as "Tourism Economic Zone Locator Enterprise."
....- Medical Tourism — medical health services, endorsed by the Department of Health, with foreign patients as primary clientele. Eligible firms shall qualify for registration as "Medical Tourism Enterprise" in a Medical Tourism Special Economic Zone Park or Center.
....- Agro-industrial Export Manufacturing — processing and or manufacturing of agricultural products resulting in the exportation of its production ... Eligible firms shall qualify for registration as "Agro-Industrial Economic Zone Export Enterprise."
....- Agro-industrial Bio-Fuel Manufacturing — specialized manufacturing of agricultural crops and eventual commercial processing which shall result in the production of clean energy such as bio-fuels and the like. Eligible firms shall qualify for registration as "Agro-Industrial Economic Zone Enterprise."
....- Logistics and Warehousing Services — (a) operation of a warehouse facility for the storage, deposit, safekeeping of goods for PEZA-registered Economic Zone Export Manufacturing Enterprises, and or (b) importation or local sourcing of raw materials, semi-finished goods for resale to - or for packing/covering (including marking / labeling) cutting or altering to customers' specification, mounting and/or packaging into kits or marketable lots for subsequent sale to - PEZA-registered Export Manufacturing Enterprises for use in their export manufacturing activities, or for direct export, or for consignment to PEZA-registered Export Manufacturing Enterprises and eventual export. Eligible firms shall qualify for registration as "Economic Zone Logistics Services Enterprise."
....- Economic Zone Development and Operation:
8.a. Manufacturing Economic Zone Development / Operation —
....
8.b. IT Park Development / Operation — development, operation and maintenance of an area as a complex capable of providing infrastructures and other support facilities required by IT Enterprises, as well as amenities required by professionals and workers involved in IT Enterprise, or easy access to such amenities. Eligible firms shall qualify for registration as "IT Park Developer / Operator."
....
8.c. Tourism Economic Zone Development / Operation —
....
8.d. Medical Tourism Economic Zone Development / Operation —
....
8.e. Agro-Industrial Economic Zone Development / Operation —
....
8.f. Retirement Economic Zone Development / Operation — ...- Facilities Providers:
9.a. Facilities for Manufacturing Enterprises — ...
9.b. Facilities for IT Enterprises — construction as owner/operator of buildings and other facilities inside IT Parks which are leased to PEZA-registered IT Enterprises. Eligible firms shall qualify for registration as "IT Park Facilities Enterprise."
....
9.c. Retirement Facilities —- Utilities — establishment, operation and maintenance of light and power systems, water supply and distribution systems inside Special Economic Zones. Eligible firms shall qualify for registration as "Economic Zone Utilities Enterprise."65
I. Definition of Terms
....
"Information Technology" or "IT" is the collective term for the various technologies involved in processing and transmitting information, which include computing, multimedia, telecommunications, microelectronics[,] and their interdependencies. Also called "informatics" or "telematics," the term "IT" is now also often used to refer to the convergence of various information-based, broadcast[,] and mass media communication technologies (NITC 1997);
"IT Service Activities" are activities which involve the use of any IT software and/or system for value addition;
"IT Enterprises" are companies operating/offering IT services;
"IT Park" is an area which has been developed into a complex capable of providing infrastructures and other support facilities required by IT Enterprises, as well as amenities required by professionals and workers involved in IT Enterprises, or easy access to such amenities.
"IT Building" is a building, the whole or part of which has been developed to provide infrastructures and other support facilities required by IT Enterprises, and which may also provide amenities required by professionals and workers involved in IT Enterprises, or easy access to such amenities.
"Facilities-Providers" are owners/operators of buildings and other facilities inside economic zones/IT Parks which are leased to PEZA-registered locator enterprises.67
- Software development and application, including programming and adaptation of system softwares (sic) and middlewares (sic), for business, media, e-commerce, education, entertainment, etc.;
- IT-enabled services, encompassing call centers, data encoding, transcribing and processing; directories; etc.;
- Content development for multi-media or internet purposes;
- Knowledge-based and computer-enabled support services, including engineering and architectural design services, consultancies, etc.;
- Business process out-sourcing using e-commerce;
- IT research and development; and
- Other IT[-]related service activities, as may be identified and approved by the PEZA Board.
An IT Enterprise operating any of the above-listed IT service activities may register with PEZA for availment of incentives provided under R. A. No. 7916, as amended by Republic Act No. 8748, provided it physically locates inside a PEZA-registered IT Park, Building or special economic zone, which is covered by the required Presidential Proclamation.68
- Incentives under Book VI of EO 226 which includes the following:
- Corporate income tax holiday (ITH) for six (6) years for pioneer project and four (4) years for non-pioneer project effective on the committed date of start of commercial operations or the actual date of start of commercial operations, whichever is earlier; ITH entitlement can also be extended but in no case to exceed a total period of eight (8) years for pioneer project and seven (7) years for non-pioneer project 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;
- Tax and duty free importation of merchandise which include raw materials, capital equipment, machineries and spare parts;
- Exemption from wharfage dues and export tax, impost or fees;
- VAT zero-rating of local purchases subject to compliance with BIR and PEZA requirements; and
- Exemption from payment of any and all local government imposts, fees, licenses or taxes except real estate tax; however, machineries 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 machineries; production equipment not attached to real estate shall be exempt from real property taxes.72
Article II
Scope of Registrant's Registered Activity
- The scope of the REGISTRANT's registered activity shall be limited to the establishment of a contact center which will provide outsourced customer care services and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at Asiatown IT Park. In the event the REGISTRANT decides to engage in a new or additional product line, directly or indirectly related to its registered activity, it shall apply anew with PEZA for the latter's approval.87 (Emphasis supplied)
While Certification No. 2007-067 dated June 27, 2013 states that [PeopleSupport] has a site in 6780 Ayala, there is nothing therein that shows that the leasing activity conducted by [PeopleSupport] in the 6780 Ayala site is registered with PEZA and entitled to incentives. In my mind, respondent has the burden of proving by preponderant evidence that [PeopleSupport] is registered with PEZA as a facility-provider and that [PeopleSupport]'s income from the lease of its physical plant space, infrastructure[,] and other transmission facilities to respondent is entitled to the ITH incentive.
Considering that respondent failed to establish that [PeopleSupport] is registered with PEZA as a facility-provider and that [PeopleSupport]'s income from the lease of physical plant space, infrastructure[,] and other transmission facilities to respondent is entitled to ITH incentive, it is my humble view that the income received by PPI from respondent is subject to regular corporate income tax imposed under Section 27(A) of the 1997 [National Internal Revenue Code], as amended.88
Endnotes:
1Rollo, pp. 36-55.
2 Id. at 56-70. The Decision was penned by Associate Justice Esperanza R. Fabon-Victorino and concurred in by Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Cielito N. Mindaro-Grulla, and Amelia R. Cotangco-Manalastas of the Court of Tax Appeals En Banc, Quezon City. It was dissented by Presiding Justice Roman G. Del Rosario (pp. 71-76). Associate Justice Ma. Belen M. Ringpis-Liban inhibited.
3 Id. at 77-79. The Resolution was penned by Associate Justice Esperanza R. Fabon-Victorino and concurred in by Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Cielito N. Mindaro-Grulla, and Amelia R. Cotangco-Manalastas of the Court of Tax Appeals En Banc, Quezon City. It was dissented by Presiding Justice Roman G. Del Rosario. Associate Justice Ma. Belen M. Ringpis-Liban inhibited.
4 Id. at 96-102. The Resolution, in the case docketed as CTA Case No. 7962, was penned by Associate Justice Caesar A. Casanova and concurred in by Associate Justices Juanito C. Castañeda, Jr. and Cielito N. Mindaro-Grulla of the Second Division of the Court of Tax Appeals, Quezon City.
5 Id. at 110-113. The Resolution, in the case docketed as CTA Case No. 7962, was penned by Associate Justice Caesar A. Casanova and concurred in by Associate Justices Juanito C. Castañeda, Jr. and Cielito N. Mindaro-Grulla of the Second Division of the Court of Tax Appeals, Quezon City.
6 Id. at 101-102.
7 Id. at 57.
8 Id. at 139, Comment.
9 Id. at 57.
10 Id. at 19-20.
11 Id. at 57.
12 Id. at 57-58.
13 Id. at 58.
14 Id.
15 Id.
16 Id. at 82-83, Court of Tax Appeals September 23, 2011 Decision.
17 Id. at 58.
18 Id. at 80-95. The Decision, docketed as CTA Case No. 7962, was penned by Associate Justice Caesar A. Casanova and concurred in by Associate Justices Juanito C. Castañeda, Jr. and Cielito N. Mindaro-Grulla of the Second Division of the Court of Tax Appeals, Quezon City.
19 Id. at 87.
20 Id. at 93.
21 Id. at 94.
22 Id. at 96-102.
23 Id. at 101-102.
24 Id. at 110-113.
25 Id. at 56-70.
26 Id. at 67.
27 Id. 77-79.
28 Id. at 128.
29 Id. at 138-153.
30 Id. at 171-186.
31 Id. at 42.
32 Id. at 44.
33 Id. at 45-46.
34 Id. at 47.
35 Id. at 49.
36 Id. at 143.
37 Id. at 146.
38 Id.
39 Id.
40 Id.
41 Id. at 149.
42 Id. at 150.
43 Id. at 171-187.
44 Id. at 173.
45 Id. at 175.
46 Id. at 178.
47 Id. at 179.
48 Id.
49 Id. at 180.
50 Id. at 182.
51 744 Phil. 31 (2014) [Per J. Leonen, Second Division].
52 Id. at 44.
53 Republic Act No. 7918 (1995), sec. 1.
54 Executive Order No. 226 (1987), sec. 39. The Omnibus Investments Code of 1987.
55 J. Leonen, Dissenting Opinion in Board of Investments v. SR Metals, Inc., G.R. No. 219927, October 3, 2018, < http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2018/october2018/219927.pdf> 7 [Per J. Del Castillo, First Division].
56 Revenue Regulations No. 20-2002 (2002). Clarifying the Tax Treatment of Income Earned from Unregistered Activities by Enterprises Registered under the Bases Conversion and Development Act of 1992 and the Philippine Economic Zone Act of 1995.
57 Revenue Regulations No. 20-2002 (2002), sec. 1.
58 The Ruling was signed by Deputy Commissioner Jose Mario C. Buñag on January 28, 2003.
59 The Ruling was signed by Deputy Commissioner Jose Mario C. Buñag on April 5, 2004.
60 Bureau of Internal Revenue Ruling No. DA-209-06 was signed by Officer-in-Charge Pablo M. Bastes, Jr. on April 5, 2006. In it, the grant by Hitachi Cable Philippines, Inc. of a foreign currency denominated loan to its affiliate was considered not related to its registered activities.
61 Bureau of Internal Revenue Ruling No. 320-11 was signed by Commissioner of Internal Revenue Kim S. Jacinto-Henares on August 22, 2011. In it, the investment of Our Lady of Mt. Carmel Medical Center in a time deposit account was held an unregistered business activity.
62 Philippine Economic Zone Authority, Memorandum Circular No. 2005-032 (2005). Clarification of the Tax Treatment of (a) Gains on Foreign Exchange Transactions; and, (b) Sales of Production "Rejects" and "Seconds[,"] Scrap, Raw Materials, Packaging Materials and Other Production Supplies.
63 Philippine Economic Zone Authority, Memorandum Circular No. 2005-032 (2005).
64 Activities Eligible for PEZA Registration and Incentives, Philippine Economic Zone Authority < http://www.peza.gov.ph/index.php/eligible-activities-incentives> (last accessed on November 28, 2018).
65Activities Eligible for PEZA Registration and Incentives, Philippine Economic Zone Authority (last accessed on November 28, 2018).
66PEZA Board Resolution No. 00-411, Philippine Economic Zone Authority, December 29, 2000 < http://www.peza.gov.ph/issuances/guidelines/Guidelines_IT.pdf> (last accessed on November 28, 2018).
67 Id.
68 Id.
69Rollo, p. 42.
70 Id.
71 Id. at 16.
72 Id. at l6-17.
73 Revenue Regulations No. 20-2002 (2002) sec. 1.
74 Revenue Regulations No. 2-98 (1998), sec. 2.57.2.
75Rollo, p. 146.
76 Id.
77 Id.
78BPO Industry at a Glance, Senate, January 2010 < https://senate.gov.ph/publications/AG%202010-01%20-%20BPO%20Industry.pdf> (last accessed on November 19, 2018).
79 Id.
80 Id.
81Commissioner of Internal Revenue v. American Express International, Inc., 500 Phil. 586, 598 (2005) [J. Panganiban, Third Division].
82Rollo, pp. 19-20.
83 Id. at 25-30.
84 Id. at 29.
85Fiscal Incentives to PEZA-Registered Economic Zone Enterprises, http://www.peza.gov.ph/index.php/eligible-activities-incentives/fiscal-incentives (last accessed on November 20, 2018).
86 Id.
87Rollo, pp. 42-43.
88 Id. at 30.
89PLDT v. City of Davao, 447 Phil. 571 (2003) [Per J. Mendoza, En Banc]; Luzon Stevedoring Corp. v. Court of Tax Appeals, 246 Phil. 666 (1988) [Per J. Paras, Second Division].
90Sea-Land Service, Inc. v. Court of Appeals, 409 Phil. 508, 513 (2001) [Per J. Pardo, First Division] citing Commissioner of Internal Revenue v. P. J. Kiener Co., Ltd., 160 Phil. 149 (1975) [Per J. Martin, First Division].