Diamond Star Agro Products, Inc.

February 1, 2008 BIR RULING [DA-066-08] RR 16-2005; RR4-2007; VAT Ruling No. 010-2005 Diamond Star Agro Products, Inc. Multi-Purpose Building, DBP Avenue FTI Complex, Western Bicutan, Taguig City Attention: Larry E. Fernandez Comptroller Gentlemen : This refers to your letter dated January 25, 2008 requesting for confirmation of your opinion that the sale of goods, properties or services by VAT-registered suppliers to DIAMOND STAR AGRO PRODUCTS, INC. ("DIAMOND", for brevity) being considered export sales shall be subject to zero percent (0%) VAT rate without need of prior approved application with the appropriate BIR office for effective zero-rating. It is represented that DIAMOND is a domestic corporation organized and existing under the laws of the Republic of the Philippines; that it is engaged in the processing of agricultural products and as such, is a duly registered Value-Added Tax (VAT) taxpayer; that it is likewise a BOI-registered producer whose products are 100% exported; that pursuant to Revenue Regulations No. 16-2005, sale of goods, properties or services made by VAT-registered suppliers to a BOI-registered manufacturer/producer whose products are 100% exported are considered export sales, which is subject to zero percent (0%) VAT rate; that, hence, your local purchases of goods, materials, properties and services used exclusively for the production of agricultural food products, which are 100% exported, are subject to VAT at zero percent (0%) rate; that, however, your VAT-registered suppliers were denied by some BIR personnel the status of VAT zero-rate because they failed to secure an approved application for VAT zero-rating; and that in view of the issuance of Revenue Regulations No. 4-2007, wherein the requirements of securing approved applications for VAT zero-rating under Revenue Regulations No. 16-2005 and Revenue Memorandum Order No. 7-2006 was removed, you are of the opinion that the approval for VAT zero-rating of your VAT-registered suppliers is no longer required. In reply, please be informed that in VAT Ruling No. 028-00 dated August 21, 2000 , wherein a company registered with the BOI as an export trader engaged 100% in export sought clarification of the automatic VAT zero-rating characterization of its purchases of products for export, this Office had the occasion to rule that: "[P]ursuant to Revenue Memorandum Order (RMO) No. 9-2000, sales of goods, properties or services by VAT-registered suppliers to BOI-registered exporters shall be treated as automatically zero-rated sales, without need of prior approval from this Office, provided that supplier and the BOI-registered buyer are both VAT-registered taxpayers and provided further that the buyer is classified as 100% exporter by the Board of Investments (BOI)." That sales to BOI-registered enterprises whose manufactured products are 100% exported to foreign countries shall be accorded automatic zero-rating without the necessity of applying for and securing prior approval for zero-rating has been consistently ruled by this Office in VAT Ruling Nos. 054-00 dated November 20, 2000, 059-01 dated September 12, 2001, 003-02 dated February 6, 2002, 062-02 dated September 16, 2002 and 010-05 dated July 28, 2005. Corollary thereto, Section 106 (A) (2) (a) (5) of the Tax Code of 1997 provides that: "Section 106. Value-Added Tax on Sale of Goods or Properties . EISCaD (A) Rate and Base of Tax xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales . The term " export sales " means xxx xxx xxx (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987 , and other special laws." (Emphasis supplied) Implementing the above provision is Section 4.106-5 (a) (5) of Revenue Regulations (RR) No. 16-2005, wherein the sales of goods, properties or services made by VAT-registered supplier to a BOI-registered manufacturer/producer whose products are 100% exported (such as DIAMOND) are considered export sales subject to VAT at zero percent (0%) rate, to wit: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . xxx xxx xxx The following sales by VAT-registered persons shall be subject to zero-percent (0%) rate: (a) Export Sales . "Export Sales" means: xxx xxx xxx (5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws . ACHEaI ' Considered export sales under Executive Order No. 226 shall mean the Philippine F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer or the net selling price of export product sold by a registered export producer to another export producer or export trader that subsequently exports the same. Provided, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents. . . . . . Provided, finally, that sales of goods, properties or services made by VAT-registered supplier to a BOI-registered manufacturer/producer whose products are 100% exported are considered export sales ." . . . (Emphasis supplied) Hence, since the sales of goods, materials, properties and services by VAT-registered suppliers to DIAMOND (a registered 100% export producer), which are for the exclusive use of the latter's production of agricultural food products, fall within the definition of export sale under E.O. No. 226 such sale is the export sale contemplated by Section 106 (A) (2) (a) (5) of the Tax Code of 1997 as implemented by Section 4.106-5 (a) (5) of Revenue Regulations No. 16-2005, which is subject to VAT zero-rating. (VAT Ruling Nos. 003-2002 dated February 6, 2002 and 010-2005 dated July 28, 2005) . IDAaCc Furthermore, under Section 4.106-6 of RR 16-2005, sales to a BOI-registered enterprise [Sec. 4.106-5 (a) above] whose products are 100% exported which are subject to VAT at zero percent (0%) rate do not require prior approved application with the appropriate BIR office for VAT zero-rating, viz .: "SEC. 4.106-6. Meaning of the Term 'Effectively Zero-rated Sale of Goods and Properties '. The term ' effectively zero-rated sale of goods and properties ' shall refer to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. Under these Regulations, transactions which, although not involving actual export, are considered as 'constructive export' shall be entitled to the benefit of zero-rating, such as local sales of goods and properties to person or entities covered under pars. (a) no. (3) (sale to export-oriented enterprises), (a) no. (6) (sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations), (b) (Foreign Currency Denominated Sale) and (c) (Sales to Tax-Exempt Persons or Entities) of the preceding section. Except for Export Sale under Sec. 4.106-5(a) and Foreign Currency Denominated Sale under Sec. 4.106-5(b), other cases of zero-rated sales shall require prior application with the appropriate BIR office for effective zero-rating . Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-ratting." (Emphasis Supplied) However, with the issuance of Revenue Memorandum Order (RMO) No. 7-2006 [Section II (7)] which requires approval for VAT zero-rating for transaction falling under the provisions of Sections 106 (A) (2) (a) (5) of the Tax Code of 1997, as implemented by Section 4.106-5 (a) (5) of RR 16-2005, the treatment previously accorded to VAT-registered suppliers of DIAMOND as automatically zero-rated sellers was changed, thus: "II. GUIDELINES AND POLICIES xxx xxx xxx 7. Approval for VAT zero-rating shall be required only for transactions which fall under the provisions of Sections 106(A)(2)(a)(3), (5) and 6; 106(A)(2)(c); and 108(B)(3), (4) and 5 of the National Internal Revenue C od e (NIRC) of 1997, as last amended by Republic Act No. 9 33 7. . . ." With the issuance, however, of Revenue Regulations (RR) No. 4-2007, specifically Section 6 thereof which amends Section 4.106-6 of RR No. 16-2005, it dispensed with the requirement for prior BIR approval for effectively zero-rated sales of goods and properties, to wit: "Section 6. Effectively Zero-Rated. Sec. 4.106-6 of RR No. 16-2 00 5 is hereby amended to read as follows: 'SEC. 4.106-6. Meaning of the term 'Effectively Zero-Rated Sale of Goods and Properties '. The term 'effectively zero-rated sale of goods and properties' shall refer to the local sale of goods and properties by a VAT registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement.' cIECaS Accordingly, this Office is of the opinion and hereby holds that the sales of goods, materials, properties and services by VAT-registered suppliers to DIAMOND being considered export sales shall be subject to zero percent (0%) VAT rate without the necessity of applying for and securing prior approval for VAT zero-rating. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service