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REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City
Bureau of Internal Revenue Ruling

012-2003

Person to Contact: Chief, Law Division


Tel. Nos. 926-55-36 / 927-09-63
October 13, 2003

Date: ___________________
UPS INTERNATIONAL, INC.
UPS Inter-Asia Hub
Civil Aviation Complex
Diosdado Macapagal International Airport
Clark Special Economic Zone
Pampanga
Attention: MR. NICK KYRZAKOS
Director
Gentlemen:
This refers to your letter dated May 2, 2002 stating that UPS International, Inc.
Company (UIIC) is a wholly owned subsidiary of a US Incorporated entity, UPS
International Inc.; that the ultimate parent company of UIIC is United Parcel Service, Inc.
(UPS); that UPS is a leading global package distribution group with subsidiaries, joint
ventures or agents operating throughout most countries in Asia Pacific; that UIIC has
been incorporated to operate as the intra-Asia air hub for the UPS package and cargo
business within the Clark Special Economic Zone (CSEZ); that the air hub activities to be
performed by UIIC in respect of packages and cargo include loading and unloading,
transferring between aircraft, temporary holding, and facilitating the ground
transportation of air cargo and on-board-courier materials; ground handling services;
customs brokerage; warehousing services; sorting of air cargo and on-board-courier
materials; package pickup and delivery; and performance of related administrative and
operational services; that for outbound packages from the CSEZ, UIIC will derive
revenue from shippers within the CSEZ; that UIIC will pay UPS Worldwide Forwarding
Inc. (WWF), a company organized and existing under U.S. laws, for the supply of
international transportation services outside of the Philippines; that for inbound packages
to the CSEZ, WWF will pay delivery compensation to UIIC for the provision of
brokerage, sorting and delivery services; that for packages transiting through the air hub,
WWF will pay a service fee to UIIC; that WWF is responsible for coordinating the
international transportation network of UPS; that in respect of the package business, the
contractual arrangements will be as follows: (1) in respect of outbound packages, UIIC
will contract with Philippine shippers inside and outside the Clark zone to ship their
packages or documents out of the Philippines; (2) where the Philippine shipper is inside

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the Customs territory, UIIC will subcontract the pick up activities to a local transportation
service provider; (3) UIIC will perform the sorting and handling activities within the
CSEZ. Alternatively, UIIC will subcontract certain ramp activities to other Clark entities;
(4) UIIC will contract with WWF for the supply of international transportation services.
That is, WWF will be responsible for transportation of packages from the Philippines to
the destination country; (5) UIIC will invoice the Philippine shipper for the total
transportation charge from pick up to delivery, including all service components relating
to activities in the customs territory, CSEZ and outside the Philippines; and (6) in respect
of inbound packages, UIIC will be contracted by WWF for the delivery of packages.
Where the delivery destination is inside the customs territory then UIIC will subcontract
the activity to a local transporter.
In connection therewith, you now request for confirmation of your opinion that
1. For purposes of Section 4(A)(f.1)(3) of Revenue Regulations No. 1699, amending Revenue Regulations No. 1-95, the revenue of UIIC
sourced from within the Customs Territory will be determined by
reference to the services actually rendered inside the Customs Territory;
2. The pick-up and delivery services provided by the transportation
subcontractors between the CSEZ and locations within the Customs
Territory would be considered to be rendered within the Customs
Territory; and
3. The services performed by UIIC within the CSEZ and provided by
WWF outside of the Philippines are considered to be rendered outside
of the Customs Territory.
In reply thereto, please be informed as follows:
1. Executive Order No. 62 dated February 27, 1993 was promulgated prescribing
the policies and guidelines to implement Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Authority (BCDA). Section 2.1.2 of the said
Executive Order provides that the Clark Air Base shall be developed as a special
economic zone with such incentives and privileges granted to Special Economic and
Freeport Zone and Export Processing Zones. Executive Order No. 80 dated 03 April
1993 was subsequently issued authorizing the establishment of the Clark Development
Corporation (CDC) as the implementing arm of the BCDA for the Clark Special
Economic Zone (CSEZ). Section 5 of the said Executive Order provides that:
xxx the CSEZ shall have all the applicable incentives in the Subic
Special Economic and Freeport Zone under RA 7227 and those
applicable incentives granted in the Export Processing Zones, the
Omnibus Investments Code of 1987, the Foreign Investments Act of
1991 and the new investment laws which may hereinafter be
enacted.

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October 13, 2003

On 24 January 1995, Revenue Regulations No. 1-95 implemented the incentive


provisions of Section 12(b) and (c) of RA 7227 as they are applicable to the Subic
Special Economic Zone. On 27 September 1999, Revenue Regulations No. 16-99
amended Revenue Regulations No. 1-95 which created the Subic Bay Regional
Enterprise (SBRE) and entitled to certain incentives, among which is the 5% preferential
tax rate on gross income. Section 4(A)(f.1)(3) of Revenue Regulations No. 1-95 as
amended by Revenue Regulations No. 16-99, provides in part as follows:
Section 4(A)(f.1)(3) of the Revenue Regulations No. 16-99, amending Revenue
Regulations No. 1-95, provides that Subic Bay Regional Enterprise may generate
revenues from sources within the Customs Territory up to 50% of its total revenues.
The income generated from the customs territory will be subject to the tax of 5% on
gross income earned as defined under Section 3(o)(4) of these Regulations; Provided,
that, if the revenues derived from the customs territory exceed 50% of its total
revenues, the excess of the income generated by the Regional Enterprise will be
subject to the regular income tax rates in the customs territory.

Considering that the incentives and privileges granted to Subic Special Economic
and Freeport Zone (SSEFZ) are made applicable to CSEZ, then the incentives and
privileges applicable to SBRE shall likewise apply to a Clark Regional Enterprise duly
registered with the CDC. The Subic Bay Regional Enterprise may generate revenues
from sources within the Customs Territory up to 50% of its total revenues. The income
generated from the customs territory will be subject to the tax of 5% on gross income
earned as defined under Sec. 3(o)(4) of these Regulations; Provided, That, if the revenues
derived from the customs territory exceed 50% of its total revenues, the excess of the
income generated by the Regional Enterprise will be subject to the regular income tax
rates in the customs territory.
It is submitted that the phrase revenues from sources within the customs
territory refers to the portion of revenue relating to the transportation services physically
performed inside the Customs Territory (i.e., pick-up and delivery) through local
subcontractors. Thus, the portion of the revenue derived by UIIC from services
performed inside the CSEZ or outside the Philippines is not revenue from sources inside
the customs territory for purposes of measuring the 50% threshold. Section 42(A)(3) of
the Tax Code of 1997 provides that compensation for labor or personal services
performed in the Philippines shall be treated as gross income from sources within the
Philippines. In interpreting the said section, this Office in BIR Ruling No. 138-84 dated
August 10, 1984 ruled that the important factor which determines the source of income, if
from services, for purposes of income taxation, is the place where services are actually
rendered. (Mertens, Law of Federal Taxation, Vol. 8, Chap. 45 p. 141; cited in CTA Case
No. 2373 and 2561, British Overseas Airways Corp. vs. Commissioner, January 26,
1983).
2. The pick-up and delivery services provided by the transportation subcontractors
between the CSEZ and locations within the customs territory would be considered as
rendered within the customs territory. The revenue of UIIC relating to services rendered
in the customs territory can be determined based on the charges billed by the
transportation subcontractors. Thus, if UIIC performs transportation activities within the
customs territory, then the revenue derived by UIIC should equal the charges of the

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independent contractors. However, regulatory restrictions necessitate that UIIC


subcontracts these transportation activities to local contractors.
3. The services performed by UIIC within the CSEZ and those provided by
WWF outside the Philippines are considered as rendered outside of the Customs
Territory. Accordingly, the portion of revenue for services rendered within the CSEZ
shall be treated as derived within the CSEZ and the revenue derived for services
performed outside the Philippines by WWF as revenue derived from sources outside the
Philippines.
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 are different, then this
ruling shall be considered null and void.
Very truly yours,

(Original Signed)
GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue

K-1-DJL
(gre4en)(uiic2)