BIR Ruling [DA-155-03]

May 14, 2003 BIR RULING [DA-155-03] VAT Ruling No. 097-99 106 (A) (2) (a) (1) SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. M.F.A. Balili Tax Division Gentlemen : This has reference to your letter dated December 3, 2002 stating that BP Oil & Chemicals International Philippines, Inc. ("BPOC") is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) and with principal office located at 30th Floor, LKG Tower Building, 6801 Ayala Avenue, Makati City; that it is primarily engaged in the business of manufacturing, processing, developing, blending, buying, importing, exporting, handling, selling and trading on a wholesale basis and regularly dealing in products, goods and merchandise, including but not limited to oils, gases, lubricants and chemicals, whether mixed, animals or vegetable; that it was registered with the BIR on February 20, 1998 as a VAT taxpayer with TIN No. 005-300-291-000-V; and that BP Oil International ("BPOI") is a non-resident foreign corporation duly organized under the laws of the United Kingdom. It is further represented that BPOC plans to sell marine oils, lubricants and other marine products to BPOI; that the goods to be sold by BPOC to BPOI will be delivered by BPOC to vessels of foreign registry plying international waters, while the vessels are temporarily docked in Manila in the course of their voyage on international waters; that these vessels are owned by, and registered in the name of, foreign/international shipping companies who source their global marine products requirements from BPOI, so that they are assured of their marine products requirements in whichever port or in whichever country these vessels may be temporarily docked between points on their voyage on international waters; that BPOC will invoice and bill BPOI; that BPOI will then pay BPOC for the marine products delivered to the said vessels in acceptable foreign currency duly accounted for under the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). Based on the foregoing representations, you are now requesting for confirmation that BPOC's sales of marine oils, lubricants and other marine products to BPOI which goods are delivered by BPOC to vessels of foreign registry plying international waters, while the vessels are temporarily docked in Manila in the course of their voyage on international waters, are considered as export sales and hence, subject to the zero percent (0%) VAT rate, pursuant to the explicit provisions of Section 106(A)(2)(a)(1) of the Tax Code of 1997 and Section 4.100-2 of Revenue Regulations No. 7-95, as amended. In reply thereto, please be informed that BPOC's sales of marine oils, lubricants and other marine products to BPOI which goods are delivered by BPOC to vessels of foreign registry plying international waters, while the vessels are temporarily docked in Manila qualify as export sales and are as such subject to the zero percent (0%) VAT rate pursuant to Section 106(A)(2)(a)(1) of the Tax Code of 1997, pertinent portion of which is quoted below: "SEC. 106. Value-added tax on Sale of Goods or Properties . "(A) Rate and Base of Tax . . . . "(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); xxx xxx xxx" Similarly, Section 4.100-2 of Revenue Regulations No. 7-95, as amended, provides: "Sec. 4.100-2. Zero-rated Sales . "(1) Export sales " Export Sales " shall mean: (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 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); xxx xxx xxx" Accordingly, although the goods are delivered to the international vessel while temporarily docked in the Philippines, there is technically and legally a sale and delivery of the goods to a foreign country, that is, the foreign country whose flag the foreign vessel flies, because international vessels, whether or not docked in the Philippines, carry the nationality of the State under whose flag they sail. Article 91 of the United Nations International Convention on the Law on the Sea, to which the Philippines is a signatory, explicitly provides: IcHSCT "Article 91 Nationality of Ships 1. Every state shall fix the conditions for the grant of its nationality to ships, for the registration of ships in its territory, and for the right to fly its flag. Ships have the nationality of the State whose flag they are entitled to fly . . . ." In the case of US vs. Look Chaw (18 Phils 573), the Supreme Court recognized that a foreign vessel is considered as an extension of its own nationality. In BIR Ruling No. 210-90, dated October 24, 1990, the BIR held that ". . . a common carrier engaged in international transportation or contract of carriage between places situated in different territorial jurisdictions is an international carrier. Under Section 3(e) of P.D. No. 474, a vessel is a foreign flag international carrier if registered under the laws of a foreign country; hence, it is the place of registration, rather than the nationality of the owner, that determines the country of the carrier . . ." International vessels are therefore considered part of the territory of the nation whose flag they carry. As such, delivery of the goods to such vessels, even while temporarily docked in Philippine waters, is considered delivery to another country/territory. Moreover, although delivery of the goods initially takes place while the said foreign vessels are temporarily docked in Manila, the goods so delivered are in fact subsequently physically shipped out when the said vessel leaves the port in Manila and crosses Philippine borders to continue its international voyage. Indeed, in VAT Ruling No. 097-99, dated September 16, 1999, the BIR ruled that the sale of crew uniforms by a domestic corporation to a non-resident foreign shipping corporation for the use of the latter's Filipino crews, but are delivered to the respective local manning agents which in turn deliver the uniforms to the individual crews leaving the Philippines for their vessels assignments are considered zero-rated because they actually crossed Philippine borders, viz. : "In reply, we hold that since the crew uniforms sold by EBMS Enterprise would actually cross Philippine border in that the same would be used by crews on board vessels plying international routes and paid for by the non-resident shipping corporation, then zero-rating of the transaction is proper under the Cross Border Doctrine which is the underlying principle of the VAT system being followed in this jurisdiction ( VAT Ruling No. 062-98 dated December 05, 1998 )." In VAT Ruling No. 062-98, the BIR explained the Cross Border Doctrine, as follows: "Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined to, used or consumed abroad are subject to zero percent (0%) VAT. Thus, unless otherwise expressly provided for by law, sales of services, such as those rendered to vessels engaged exclusively in international shipping business, may be treated qualified for the zero percent VAT provided the use or benefit from such services crosses the Philippine territory, in accordance with the Cross Border Doctrine, which is the underlying principle of our VAT System . . ." Consistent with this doctrine, Section 106(A)(2)(a)(2) of the Tax Code of 1997 treats as an export sale subject to the 0% VAT rate the sale to a non-resident buyer of raw materials and packaging materials, for delivery to a resident local export-oriented enterprise, which will be used by the said resident local export-oriented enterprise in manufacturing, processing, packing or repacking in the Philippines of the said non-resident buyer's goods, viz. : "(2) Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in the manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" Foregoing premises considered, the fact that the marine oils and lubricants and other marine products sold by BPOC to BPOI are admittedly neither raw materials nor packaging materials for use in the manufacture of export products, the same still qualifies as an export sale subject to the 0% VAT pursuant to the above-quoted section because (1) There is technically and legally a sale and delivery of the goods to a foreign country that is, the foreign country whose flag the foreign vessel flies; (2) Although delivery of the goods initially takes place while the said foreign vessels are temporarily docked in Manila, the goods so delivered are in fact subsequently physically shipped out when the said vessel leaves the port in Manila and crosses Philippine borders to continue its international voyage; (3) BPOC is paid by BP-UK in acceptable foreign currency accounted for in accordance with BSP rules and regulations; and (4) BPOC is a VAT-registered taxpayer. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group