BIR Ruling [DA-146-A-96]

April 11, 1996 BIR RULING [DA-146-A-96] MEMORANDUM FOR : The Commissioner This refers to the protest filed by Joaquin Cunanan & Co. for and on behalf of their client Labtech Manufacturing Industries, Inc. (Labtech),No. 62 1st Street, Cubao, Quezon City, against the assessments of this office involving the respective amounts of P22,019,175.22 and P20,072,689.00, representing its deficiency VAT liabilities for 1988 and 1990 covered by Assessment Notice Nos. FAS-4-88-91-003459 dated December 20, 1991 and FAS-8-90-92-003839 dated September 1, 1992 respectively. The assessments are based on the findings of the revenue examiners that Labtech's sales transactions in 1988 do not qualify as export sales as defined in Section 100 (a) (1) of the Tax Code, as amended. Thus, the sales were treated as local sales subject to 10% VAT. FACTS: Investigation disclosed that Labtech is registered with the Board of Investments as export producer of semi-conductor products on a pioneer status; that while it also undertakes direct export, during the years 1988 and 1990 it sold electronic silicon diodes and transistors (as is) to Pilipinas Nissan, a BOI-registered export-trader, and treated such sale as effectively zero-rated relying on the provision of Section 23 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987 stating that "Export sales" shall mean the Philippine port 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 products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same: Provided, that sales of export products to another producer or to an export trader shall be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents. Accordingly, and since the products sold by Labtech to Pilipinas Nissan are not raw materials subjected to further processing, but finished goods, they are not entitled to zero-rating pursuant to Revenue Regulations No. 2-88 which provides for the zero-rating of sales to BOI Registered export-traders if the articles sold are raw materials to be further processed into finished products and exported, subject to prior application for zero-rating by the supplier pursuant to Section 8 (d) of Revenue Regulations No. 5-87.Consequently, deficiency VAT Assessment Nos. FAS-4-88-91-003459 dated December 20, 1991 and FAS-B-90-92-003839 dated September 1, 1992 were issued, demanding payment of the amounts of P22,019,175.22 and P20,072,689.00, for 1988 and 1990, respectively. TaHDAS FINDINGS: In VAT Ruling No. 111-92 dated October 8, 1992, this office ruled that if the articles sold to a BOI-registered manufacturer-exporter are not raw materials to be further processed, the sale will not qualify for effective-zero-rating under Revenue Regulations No. 2-88. However, under VAT Ruling No. 31-92, dated March 11, 1992, if the sale by the supplier to a BOI-registered manufacturer-exporter did not meet the requirements for zero-rating, the sale is not taxable, but exempt. DaTICE Section 23 of Executive Order No. 226 undoubtedly treats as "export sales" and exempts from tax the sale of goods "as is" by the producer to an exporter. On the other hand, Section 102 (a) (2) of the Tax Code, as amended, defines export sale as "actual shipping out of the goods from the Philippines to a foreign country." In other words, to be zero-rated under Section 102 (a) of the Tax Code, as amended, the goods should be actually shipped out by the seller. It is observed that the provisions of Section 23 of Executive Order No. 226 and Section 102 (b) of the Tax Code, as amended, do not necessarily contradict each other. In fact, they are reconciled under VAT Ruling No. 31-92. If a transaction is exempt under Section 23 of Executive Order No. 226, but did not qualify for zero-rating under Section 102 (a) of the Tax Code, as amended; or for effective-zero rating pursuant to Revenue Regulations No. 2-88 (because the goods sold are not raw materials), the transaction is not necessarily taxable, but exempt. The raw materials used in the manufacture of goods for export were consigned by Labtech's principal, Shindengen Electric Manufacturing Co., Ltd. (SEM-Japan) and the finished goods were actually exported by Pilipinas Nissan. Per memorandum report of the Regional Director, Quezon City, and documents submitted by counsel, although LABTECH has issued zero-rated VAT sales invoices to Pilipinas Nissan which ultimately exported the goods to Japan, it was pointed out in the letter of Joaquin Cunanan & Co. dated October 15, 1992 that Pilipinas Nissan has not claimed any input tax credit or refund on the subject transactions. Such being the case, since there is no resulting loss to the government, and there being no claim made for input taxes, the taxpayer's request for reconsideration of the above assessments should be given due course. In view thereof, it is respectfully recommended that the VAT deficiency assessments in the respective amounts of P22,019,175.22 and P20,072,689.00 for 1988 and 1990 be cancelled and this case considered closed. CAScIH Respectfully Submitted: (SGD.) MILAGROS V. REGALADO Chief, Law Division CONCURRING: (SGD.) ALICIA P. CLEMENO Assistant Commissioner Legal Service APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue