BIR Ruling [DA-059-01]

April 2, 2001 BIR RULING [DA-059-01] Honda Cars Alabang (A Branch of Honda Cars Makati, Inc.) Alabang Zapote Road cor. Investment Drive Ayala Alabang, Muntinlupa City Attention: Ms . Marie Kristine I . Calpo Accounting Manager Gentlemen : This refers to your letter dated May 3, 1999 requesting for a ruling as to whether or not your sale of locally assembled motor vehicles to the following: 1) Daeduck Philippines, Inc. PEZA registered enterprise with Certificate of Registration No. 96-038; 2) FCC (Philippines) Corporation PEZA registered enterprise with Certificate of Registration No. 93-55; 3) AMKOR ANAM Advanced Packaging, Inc. PEZA registered enterprise with Certificate of Registration No. 95-132; 4) ASTEC Power, Inc. (Philippine Branch) PEZA registered enterprise with Certificate of Registration No. 94-82; 5) Kawashima Textile Mfg. Philippines, Inc. PEZA registered enterprise with Certificate of Registration No. 94-95; 6) SANWA Electric Phils., Inc. PEZA registered enterprise with Certificate of Registration No. 95-67; 7) Philips Semiconductor Phils., Inc. PEZA registered enterprise with Certificate of Registration No. 94-77 are effectively zero-rated pursuant to Section 106(A)(2)(c) of the Tax Code of 1997; and that said sale is exempt from ad valorem tax. In reply, please be informed that Section 106(A)(2)(c) of the Tax Code of 1997 provides that sales of goods and services to persons or entities whose exemption under special laws (e.g. R.A. 7227 and R.A. 7916) or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. However, in interpreting and applying the above-cited section, this Office in RMC No. 25-99 declared that the sales of ordinary automobiles to PEZA, or SBMA and other ECOZONE registered enterprises are not entitled to VAT zero-rating. This is so because under Section 2(ii) of R.A. No. 7916 the term "Merchandise or Goods" shall collectively refer to raw materials, supplies, equipment, machineries, spare parts, packaging materials or wares of every description to be used in connection with the registered activity of an ECOZONE enterprise . (Emphasis supplied) The phrase "to be used in connection with the registered activity of an ECOZONE enterprise" in describing what comprises merchandise or goods imparts the presumption that the same are somehow utilized in the production activity of an ECOZONE enterprise. CIAHDT Such being the case, since the sale of locally assembled motor vehicles to the above-mentioned PEZA registered enterprises are not directly related to its registered activities as such, the same could not be covered within the classification of goods or merchandise entitled to the benefit of tax exemption. Moreover, since value-added tax is an indirect tax, the amount of tax may be shifted or passed on to the buyer of the goods, properties or services. Accordingly, the sale of locally assembled motor vehicles to the above-mentioned PEZA registered enterprises are subject to 10% value-added tax. (BIR Ruling No. 74-99 dated June 4, 1999) However, the said PEZA registered enterprises are not liable to the corresponding ad valorem tax for their purchases of locally assembled motor vehicles, since it is the manufacturer or assembler who shall pay for the said ad valorem tax. Nonetheless, considering that the ad valorem tax is an indirect tax, the same may be passed-on by the manufacturer as part of the selling price. 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group