BIR Ruling [DA-146-03]

May 5, 2003 BIR RULING [DA-146-03] 106 (A) (2) (a) and 112 (A) DA-521-11-23-98 SGV & Co. 6760 SGV Bldg., Ayala Ave.,Makati Metro Manila Attention: Emmanuel C: Alcantara Gentlemen : This refers to your letter dated September 26, 2002 requesting for a confirmation of your opinion that the payment arrangement scheme to be adopted by your client, Pilipinas Kyohritsu Inc. (PKI), in connection with its export and import transactions will not affect its future claim for refund of its excess and unutilized input VAT relative to its zero-rated/export transactions since it will continue to be able to account for the export proceeds of its export sales in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) and it will be able to comply with the specific requirements of RMO No. 40-94 dated May 6, 1994 which prescribes the procedures and documentary requirements for the processing of claims for value-added tax credit/refund. BACKGROUND OF THE CASE It is represented that PKI is a domestic corporation registered with the Board of Investments (BOI) as a direct export producer of automotive wiring harness and plastic products; that it imports a substantial portion of the raw materials used in the manufacture of its products from a third party supplier, Marubeni Vehicle Corporation (MAVEC),a non-resident foreign corporation organized under the laws of Japan with office address at 1-2-3 Ohtemachi, Chiyoda-Ku, Tokyo, Japan; that, in turn, PKI exports all of its finished products to MAVEC; and that to facilitate the efficient processing of the collection and payment of the import and export transactions between PKI and MAVEC as trade partners, they intend to appoint Marubeni Philippines Corporation (MPC) as their collection and settlement agent. MPC is a domestic corporation with principal office at L.V. Locsin Building, corner Ayala and Makati Avenues, Makati City. It is engaged in the business of providing intercommunication services between clients, trader's agency and information services, among others. As collection and settlement agent, MPC will not acquire title to the raw materials and finished goods. PKI's payment to MAVEC for the purchase and importation of raw materials will be coursed and settled through MPC and MAVEC's payment to PKI for the purchase of the exported finished products will likewise be coursed and settled through MPC. The parties in this payment and collection scheme will use FCDU accounts in their name. MAVEC's payment for the purchase of the finished products will be inwardly remitted in MPC's FCDU account for the account of PKI separately maintained by MPC through telegraphic transfer/wiring instructions and PKI's payment for the importation of raw materials will be remitted in MPC's FCDU account for the account of MAVEC separately maintained by MPC through debit instructions of PKI's foreign currency bank account. Any netting or offsetting arrangement between PKI and MAVEC will occur in the parties' separate FCDU accounts maintained on their behalf by MPC in the Philippines. Under this payment scheme, the foreign exchange to be used by PKI in paying MAVEC thru MPC will not be sourced from the Philippine Banking system. If ever PKI will purchase the foreign exchange from the Philippine banking system that will be used in paying MAVEC for its importations, PKI undertakes to remit the same directly to the FCDU account of MAVEC to comply with BSP rules and regulations. PKI will account for its foreign exchange export proceeds through the banking system through bank certifications of inward remittances to be issued by the bank where MPC maintains a separate FCDU account on behalf of PKI and certification of bank deposits to be issued by PKI's own bank upon MPC's deposit of the foreign exchange export proceeds to PKI's FCDU bank account. Under the proposed scheme, the import and export arrangements between the parties will remain unchanged. The raw materials will continue to be imported by PKI as importer on record through its custom bonded warehouse (CBW) for processing into finished products for subsequent exportation and delivery to MAVEC. To properly account its exports and imports, PKI will invoice MAVEC for the finished products exported using the gross amount and MAVEC will invoice PKI for the raw materials imported using gross amounts. More importantly, PKI's export sales, importations/purchases of raw materials, export earnings and all other foreign exchange transactions can be easily accounted for because these transactions are duly recorded and supported by documentary evidence to comply with BIR requirements, rules and regulations. LEGAL BASIS INVOKED PKI's claim for refund of excess and unutilized input VAT is anchored under Section 112(A) of the Tax Code of 1997 in relation to Section 106(A)(2)(a) of the same Tax Code. DTCSHA REQUESTED RULING Section 112(A) of the Tax Code of 1997 provides that "(A) Zero-rated or Effectively Zero-Rated Sales . Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however ,That in the case of zero-rated sales under Section 106(A)(2)(a)(1),(2) and (B) and Section 108(B)(1) and (2),the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) ..." In relation thereto, Section 106(A)(2)(a)(1) of the 1997 Tax Code provides that: "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales . The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" Moreover, under the above proposed payment arrangement scheme, PKI will be able to show compliance with the specific requirements of Revenue Memorandum Order (RMO) No. 40-94 dated May 6, 1994 which prescribes the procedures and documentary requirements for the processing of claims for value-added tax credit/refund. It is noted that the proposed payment scheme was already found by both Bangko Sentral ng Pilipinas (BSP) and the Board of Investments (BOI) to be in accordance with their existing laws, rules and regulations as evidenced by the letter confirmations from these government agencies. Accordingly, it is hereby confirmed that given all the facts and circumstances, the above payment arrangement scheme whereby PKI and MAVEC will appoint MPC as its collection and settlement agent relative to its import and export transactions will not affect PKI's future claim for refund of excess input VAT considering that it can and will continue to account for the export proceeds of its export sales in accordance with the rules and regulations of the BSP and comply with the specific requirements of RMO No. 40-94 dated May 6, 1994 which prescribes the procedures and documentary requirements for the processing of claims for value-added tax credit/refund. This position is supported by BIR Ruling DA-521-11-23-98 previously secured by your client, PKI, whereby the BIR allowed the "offsetting arrangement" PKI entered into with another company without affecting its future claim for refund of excess Input VAT as long as there is substantive compliance with Revenue Memorandum Order No. 40-94. In connection with the transaction being contemplated above, it is however, emphasized that the services of MPC is a collection and settlement agent of both PKI and MAVEC are subject to value-added tax as provided for in Section 105 in relation to Sec. 108 of the Tax Code of 1997 and to corporate income tax imposed under Section 27(A) of the same Code. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group