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CIR v. J.P. MORGAN CHASE BANK

FACTS:

This case involves a dispute between J.P. Morgan-Philippines and the Commissioner of Internal Revenue regarding the taxability of J.P. Morgan-Philippines' lease of physical plant space, infrastructure, and other transmission facilities from PeopleSupport, a company registered with PEZA (Philippine Economic Zone Authority).

J.P. Morgan-Philippines argued that the lease of the facilities is exempt from withholding tax because it is related to PeopleSupport's registered activities with PEZA, specifically providing outsourced customer care and business process outsourcing services. On the other hand, the Commissioner of Internal Revenue contended that the lease is not related to PeopleSupport's registered activities and is subject to regular income tax.

The Court of Tax Appeals Second Division initially granted J.P. Morgan-Philippines' claim for refund, ruling that the rental income from the lease was exempt from withholding tax. However, the Commissioner of Internal Revenue filed a motion for reconsideration, which was denied.

The Commissioner of Internal Revenue then appealed to the Court of Tax Appeals En Banc, which upheld the initial ruling that the lease of facilities falls within PeopleSupport's registered activities and is thus exempt from withholding taxes.

Not satisfied with the decision, the Commissioner of Internal Revenue filed a petition for review on certiorari before the Supreme Court, raising the issue of whether the lease of facilities is related to PeopleSupport's registered activities and exempt from withholding taxes.

The Supreme Court clarified that this is a question of law, which requires the interpretation of the agreement between J.P. Morgan-Philippines and PeopleSupport. The Commissioner of Internal Revenue argued that the lease of facilities is not covered by PeopleSupport's PEZA registration, while J.P. Morgan-Philippines maintained that it is related to PeopleSupport's registered activities.

Tax refunds can only be granted by a clear provision of law, according to the Commissioner of Internal Revenue. Thus, the Commissioner argued that the rental income from the lease should be subject to regular income tax since it is not a PEZA-registered activity.

The Supreme Court acknowledged that the interpretation of the agreement is a legal issue and does not require an evaluation of the evidence presented. Therefore, the Court proceeded to resolve the issue on the taxability of the lease transaction between J.P. Morgan-Philippines and PeopleSupport.

This case involves the interpretation and application of the fiscal incentives granted to business enterprises operating within economic zones under Republic Act No. 7916, or the Special Economic Zone Act of 1995, as amended. The petitioner, PeopleSupport, is a registered enterprise under the Philippine Economic Zone Authority (PEZA) and availed the fiscal incentives provided by law. The dispute focuses on the scope of the fiscal incentives and whether certain income received by PeopleSupport is covered by the incentives.

Section 23 of Republic Act No. 7916 provides that business establishments operating within economic zones shall be entitled to fiscal incentives 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, also known as the Omnibus Investment Code of 1987. Article 39(a)(1) of Book VI of Executive Order No. 226 states that registered enterprises shall enjoy an income tax holiday for a certain number of years, depending on whether the enterprise is a pioneer or non-pioneer firm.

However, the Implementing Rules and Regulations of Republic Act No. 7916 specify that PEZA-granted incentives apply only to registered operations of the Ecozone Enterprise and only during its registration with PEZA. Moreover, Executive Order No. 226 provides that the incentives shall only apply "to the extent engaged in a preferred area of investment."

Revenue Regulations No. 20-2002 of the Bureau of Internal Revenue further clarifies the tax treatment of income earned from unregistered activities by enterprises under the Bases Conversion and Development Act of 1992 and the Philippine Economic Zone Act of 1995. It provides that income realized by a registered enterprise that is not related to its registered activity shall be subject to regular internal revenue taxes.

In this case, the Bureau of Internal Revenue issued several rulings determining the tax treatment of certain income derived by PEZA-registered enterprises. These rulings held that income derived from activities that are not within the registered activity of the enterprise is subject to regular income tax.

The issue in this case is whether certain income received by PeopleSupport, which is not related to its registered activity as a call center, is subject to regular income tax or covered by the fiscal incentives granted to registered enterprises operating within economic zones.

ISSUES:

  1. Whether income derived by a PEZA-registered enterprise from activities not related to its registered activities shall be subject to regular internal revenue taxes.

  2. Whether forex gains derived by an Ecozone Export Enterprise shall be covered by income tax incentives if attributed to an activity with income tax incentive, and subject to normal corporate income tax if attributed to an activity without income tax incentive.

  3. Whether sales of production "rejects," scrap, raw materials, packaging materials, and other production supplies by a PEZA-registered enterprise shall be covered by income tax incentives.

  4. Whether the transaction between respondent and PeopleSupport is a registered activity or embraced within the latter's registered activities with the PEZA.

  5. Whether respondent is entitled to fiscal incentives.

  6. Whether the services provided by PeopleSupport fall within the definition of information technology services eligible for registration with PEZA.

  7. Whether the Agreement between respondent and PeopleSupport is exempt from income tax.

  8. Whether PeopleSupport's leasing services to respondent falls within the scope of the activity of a facilities provider/enterprise.

RULING:

  1. Yes, income derived by a PEZA-registered enterprise that is not related to its registered activities shall be subject to regular internal revenue taxes.

  2. Forex gains derived by an Ecozone Export Enterprise shall be covered by income tax incentives if attributed to an activity with income tax incentive, and subject to normal corporate income tax if attributed to an activity without income tax incentive.

  3. Sales of production "rejects," scrap, raw materials, packaging materials, and other production supplies by a PEZA-registered enterprise shall be subject to income tax incentives if derived from its registered activity, otherwise, it shall be subject to normal corporate income tax.

  4. The Court ruled that respondent failed to satisfactorily show that its transaction with PeopleSupport is a registered activity or embraced within the latter's registered activities with the PEZA. Therefore, it is not entitled to the fiscal incentives.

  5. In light of the ruling on the first issue, the Court did not rule on whether respondent is entitled to fiscal incentives.

  6. The services provided by PeopleSupport do not fall within the definition of information technology services eligible for registration with PEZA. The tax incentives granted to PeopleSupport under its Registration Agreement with PEZA are therefore not applicable.

  7. The Agreement between respondent and PeopleSupport is not exempt from income tax. The Agreement is essentially a lease of facilities outside the latter's registered activities, and thus, is not exempt from income tax.

  8. PeopleSupport's leasing services to respondent falls within the scope of the activity of a facilities provider/enterprise. Tax incentives that may be granted to an information technology service enterprise are different from tax incentives granted to an information technology facilities provider/enterprise.

PRINCIPLES:

  • Income derived by a PEZA-registered enterprise from activities not related to its registered activities shall be subject to regular internal revenue taxes.

  • Forex gains derived by an Ecozone Export Enterprise shall be covered by income tax incentives if attributed to an activity with income tax incentive, and subject to normal corporate income tax if attributed to an activity without income tax incentive.

  • Sales of production "rejects," scrap, raw materials, packaging materials, and other production supplies by a PEZA-registered enterprise shall be subject to income tax incentives if derived from its registered activity, otherwise, it shall be subject to normal corporate income tax.

  • In order for a party to be entitled to fiscal incentives, it must show that its transaction is a registered activity or embraced within the registered activities of the other party.

  • PEZA lists various activities that are eligible for registration and fiscal incentives, including export manufacturing, IT service export, tourism, medical tourism, agro-industrial export manufacturing, agro-industrial bio-fuel manufacturing, logistics and warehousing services, economic zone development and operation, facilities providers, and utilities.

  • PEZA Board Resolution No. 00-411 provides definitions for terms related to IT registration and availment of incentives, including "information technology," "IT enterprises," "IT parks and buildings," and "facilities-providers."

  • Tax incentives under the Philippine Economic Zone Act of 1995 are granted to information technology service activities that involve the use of any information technology software and/or system for value addition.

  • Business process outsourcing refers to the delegation of service-type business processes to a third-party service provider, and is generally divided into sectors such as contact centers, back office services, and software development.

  • Providing information technology-enabled services is different from providing information technology facilities, infrastructure, or equipment.

  • Tax incentives partake of the nature of tax exemptions, and they are a privilege that must be strictly construed against the taxpayer.

  • A taxpayer seeking an exemption must justify it by words that are "too plain to be mistaken and too categorical to be misinterpreted."