Malayan Towage & Salvage Corporation

February 8, 2007 BIR RULING [DA-077-07] R.R. No. 16-2005; VAT Ruling No. 029-2002 Malayan Towage & Salvage Corporation 18th Floor, Equitable Bank Tower, 8751 Paseo de Roxas Salcedo Village, Makati City Attention: Mr. Generoso L. Alava Comptroller Gentlemen : This refers to your letter dated May 18, 2006 requesting that the submission of the bank certification of inward remittances of your principals be waived in view of the bank secrecy law, that the requirement for yearly application for VAT zero-rating be withdrawn and that your request for Tax Credit be given due course. AHacIS It is represented that Malayan Towage & Salvage Corporation (Malayan) is a VAT registered domestic corporation with principal address at 18th Floor, Equitable Bank Tower, 8751 Paseo de Roxas, Salcedo Village, Makati City; that Malayan failed to file an application for VAT Zero Rating for the years 2002, 2003, 2004 and 2005; that Malayan's revenues are derived from: (a) Towing, Lighterage and Salvage Services, (b) Oil Spill Projects, (c) Agency Fees for Manning of Vessels of Foreign Principals; that it has been issued a certificate of VAT zero-rate for the year 2001 and prior years for the sale of various services enumerated above; that Malayan could not comply with the requirement for securing a renewal of its application for VAT zero-rating for the successive years because the shipping agents of foreign principals adamantly refused to give the desired information invoking the Bank Secrecy Law; that Malayan opines that the case falls squarely within the ambit of Republic Act No. 1405, approved on September 9, 1955, which expressly prohibits the disclosure of all deposits of whatever nature with any bank or banking institution; that Malayan believes that the requirement of this Office regarding the submission of a Bank Certification of dollar remittance by your shipping agents falls squarely within the prohibition against disclosure law; that it does not deal directly with its foreign principals but only through shipping agents; that under Revenue Regulations No. 16-2005 dated September 1, 2005, services rendered to persons engaged in international shipping are considered zero-rated, as such it does not require an annual application for VAT zero-rating; that Malayan invokes the case of CIR vs. Seagate Technology (G.R. No. 153866 dated February 11, 2005) wherein it was ruled that the requirement to secure prior approval for effective Zero Rating has no basis in law; that it submitted an explanation as to why Malayan has no approved prior application for Zero Rating for the years 2002 through 2005; that Malayan opines that it is engaged in purely zero-rated transactions and not an effectively zero-rated transaction which requires prior approval from the BIR; and that Malayan opines that if effectively zero-rated taxpayers will no longer be required to secure prior approval for effective zero-rating, it follows that as a zero-rated taxpayer, the requirements imposed on Malayan will no longer be enforced. DacASC In your supplemental letter dated October 17, 2006, you reiterated your request that the requirement for the submission of the Bank Certification on Inward Remittance be waived and that you be exempt from the yearly application for VAT zero-rating In reply, please be informed that paragraph (b)(2) of Section 4.108-5 of Revenue Regulations No. 16-2005 provides: "(b) Transactions Subject to Zero Percent (0%) VAT Rate . The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: xxx xxx xxx (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided , however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to 10% VAT under Sec. 108 of the Tax Code; In addition, Section 4.108-6 of the same Revenue Regulations provides: "SEC. 4.108-6. Effectively Zero-Rated Sale of Services . The term "effectively zero-rated sales of services" shall refer to the local sale of services 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, effectively zero-rated sale of services shall be limited to local sales to persons or entities that enjoy exemptions from indirect taxes under subparagraph (b) nos. (3), (4) and (5) of this Section. The concerned taxpayer must seek prior approval or prior confirmation from the appropriate offices of the BIR so that a transaction is qualified 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-rating." As gleaned from the supplemental attachments you submitted to this Office, your 2001 application for VAT zero-rate states that you are engaged in the sale of services to international shipping vessels, in which case pursuant to the above Revenue Regulations, your transactions are considered as effectively zero-rated. Hence, you are required to seek prior approval or confirmation from the appropriate offices of the BIR to qualify for effective zero-rating classification. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Hence, no tax credit can be claimed on exempt transactions. The yearly application for VAT zero-rating is actually left to the discretion of the taxpayer. cCaATD Accordingly, your transactions are considered as effectively zero-rated in which case, pursuant to the above Revenue Regulations, you are required to seek prior approval from this Office as compared to zero-rated transactions which do not require such. In addition, the submission of the certificate of inward remittance is required by this Office, for you to claim your tax credits, if any, and not as a requirement for the application for effective VAT zero-rating. Your opinion that the submission of the Bank Certification of Inward Remittance is a violation of the Bank Secrecy Law is incorrect. As a regulatory body of the National Government, this Office can compel the submission of such requirement from taxpayers as part of its regulatory function. Further still, if you fail to apply for the VAT zero-rating, your transactions shall be considered exempt from VAT and no tax credit can be claimed. This is an indispensable requirement in the processing of tax credit applications. In addition, you do not get paid in foreign currency but in Philippine currency. In one of the attached letters, one of your shipping agents, Wan Hai Lines (Phils.), Inc. made mention that to be considered as VAT zero-rated, you should have received inward remittance from the principal, and that Wan Hai Lines (Phils.) Inc. has an approved application for VAT zero-rating. Based on your representation, you do not deal directly with your foreign principals but only with shipping agents. Finally, this Office is of the opinion that, firstly, for failure to apply for VAT zero-rating, your transactions are considered exempt, hence, no tax credits can be claimed. To be able to avail of the benefits under the law i.e., to claim input tax, you should be a registered VAT zero-rated taxpayer. To claim tax credits, payments made to you should be in acceptable foreign currency and a certificate of inward remittance should be submitted. However, if you are being paid for your services in Philippine currency, the input tax created by the transaction should be deducted from the output tax, and any resulting input tax should be carried over to the next taxable year. Secondly, the requirement for the submission of the Bank Certification on Inward Remittance is a requirement to claim tax credit for services rendered and paid for in foreign currency, and not a requirement for the application for VAT zero-rating. ISTDAH Regrettably, your request that the submission of the bank certification of inward remittances of your principals be waived in view of the bank secrecy law, that the requirement for yearly application for VAT zero-rating be withdrawn and that your request for Tax Credit be given due course, is hereby denied for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service