BIR Ruling [DA-082-97]

February 27, 1997 BIR RULING [DA-082-97] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. S.U.S. Salvador Gentlemen : This refers to your letter dated March 4, 1996 representing that your client, Analog Devices General Trias (ADGT), is a domestic corporation registered and existing under the laws of the Philippines; that ADGT is a duly registered Philippine Economic Zone Authority (PEZA) export enterprise; and that ADGT entered into a construction contract with Fluor Daniel Pacific Inc. (FDPI), a Philippine branch of a US Company, for the construction of ADGT's factory located at Gateway Business Park at General Trias, Cavite. You now request for a ruling that the sale of services by FDPI to ADGT are effectively zero rated under Section 102 (b) (3) of the National Internal Revenue Code (NIRC), as amended by R.A. 7716, otherwise known as the Expanded VAT law. In reply, please be informed that under Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1993, businesses and enterprises within the ECOZONE as defined by Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of the five (5%) preferential tax rate based on gross income earned distributed as follows: (1) three percent (3%) to the national government; (2) one percent (1%) to the local government units affected by the declaration of the ECOZONE; and (3) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE. HASTCa Section 102 (a) of the Tax Code as amended by Republic Act 7716 and as implemented by Revenue Regulations No. 7-95 provides that sales of goods and services to persons or entities whose exemption under special laws, (e.g. duly registered and accredited enterprises of the PEZA under R.A. 7916) or international agreements to which the Philippines is a signatory effectively subject the supply of such goods or services to zero rate. Such being the case, since R.A. 7916 is a special law which grants exemptions from national taxes to PEZA-registered business establishments operating within the ECOZONE, except payment of the preferential tax rate of 5% on gross income earned, the sales of goods and services by FDPI to ADGT shall be effectively zero-rated. It shall be understood that the VAT-registered service contractors shall apply with the Revenue District Officer concerned having jurisdiction over their principal place of business for the effective zero-rating of their sales of services to PEZA-registered enterprises within the ECOZONE pursuant to Revenue Regulations No. 7-95. Without an approved application for zero-rating, the transactions otherwise entitled to zero-rating shall be considered exempt. (VAT Ruling No. 033-96 dated Oct. 30, 1996) EHTSCD Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)