BIR Ruling [DA-164-96]

May 9, 1996 BIR RULING [DA-164-96] Governor Ofelia V. Bulaong Board of Investments Industry & Investments Building 385 Gil J. Puyat Avenue Makati City M a d a m : This refers to your faxed letter dated May 8, 1996, in effect, requesting for our response to certain issues raised by Mr. David M. Jerome, Director, Corporate Affairs of General Motors Asian and Pacific Operations (Pte) Ltd.,relative to the tax consequences of locating and operating a General Motor (GM) automotive industry plant in the Philippines. Given the fact that the projected plant is registered with BOI and to be located within the Philippine Export Processing Zone (PEZA),the issues addressed to the BIR for resolution are: 1. Tax credit incentives under the Omnibus Investments Incentives Code of 1987 (E.O. 226). 2. Uses of internal revenue Tax Credit generated by the exporter of locally-assembled cars. 3. Liability to excise taxes and VAT of locally assembled cars. 4. Transferability of excise tax credits to GM suppliers. 5. Whether tax credits are/are not rebates or reimbursement of actual duties and taxes paid 6. Whether the 10% VAT and 15% excise tax are imposed on locally sold vehicles. 7. Whether raw materials or components of GM plant's finished products are subject to 10% VAT or 10% excise tax. 8. Whether the projected GM Plant will enjoy an 8-year income tax holiday with 5% gross income tax only beginning year 9. 9. Whether there is no other national tax beyond the 5% tax on gross income earned. 10. Whether its receipt import of capital equipment is subject to or exempt from VAT. In reply, please be informed as follows: 1. Tax credit incentives of BOI-registered firms: 1.1 Tax credit for VAT and/or excise tax on raw materials actually paid by the suppliers of raw materials and semi-manufactured products used in the manufacture, processing or production of registered export products and forming part thereof. (Rule VI, Sec. 12, Rules & Regulations Implementing E.O. 226.) 1.2 Exemption from VAT and/or excise tax on imported supplies and spare parts in a Bonded Manufacturing Warehouse (Sec. 13, Rules & Regs. implementing E.O. 226.) 2. Uses of Tax Credit Certificates tax credit certificates for taxes and duties that would have been paid on raw materials, supplies and semi-manufactured products used in the manufacture processing and production of its export products. 3. Liability to VAT and ad valorem tax on GM products Locally assembled cars and utility vehicles designed for passenger use not exceeding nine passengers and not specifically used for the transport of cargo are subject to VAT and ad valorem tax. VAT is imposed from the initial sale of the product by the manufacturer to and in all of distributions. Ad valorem tax is paid only once when the finished product, i.e.,the car/taxable utility vehicle is removed from the place of production pursuant to Sections 100 and 149, of the Tax Code. 4. Transferrability of tax credit to GM suppliers. 4.1 The effective zero-rating feature in the VAT system is a virtual transfer of tax credit for VAT paid on purchases of raw materials. 4.2 Tax credit certificates for domestic purchase of raw materials/supplies directly used by GM is transferable only to its domestic raw materials suppliers. 5. Tax Credits under the VAT system amounts to rebates/reimbursement of VAT paid on purchases of raw materials and supplies. 6. 10% VAT is imposed on all types of vehicles whether categorized as cars or trucks, whether locally-assembled or imported. On the other hand, ad valorem tax is imposed only on imported or locally assembled cars or utility vehicles classified as automobiles at graduated rates ranging from the lowest rate of 15% to the highest rate of 100% based on engine displacement pursuant to Section 149 of the Tax Code. 7. Imported or locally-purchased raw materials/components are subject to 10% VAT but not subject to ad valorem tax. (excise tax) 8. The projected GM plant if registered as a new registered firm, is only entitled to a 6-year income tax holiday starting from its commercial operation. (Sec. 2, Rules and Regulations, implementing E.O. No. 226) DIETcC 9. If operating within the Special Economic Zone, i.e.,SBMA, Clark, etc.,a registered firm, as a rule is exempt from all other internal revenue taxes in lieu of the 5% tax on gross income earned. 10. Importation of capital equipment is subject to VAT pursuant to Section 101 (a) of the Tax Code as amended by R.A. 7716. This Act has withdrawn the tax exemption privilege granted originally to BOI-registered enterprises under E.O. 226. SHacCD Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue By: (SGD.) ALICIA P. CLEMENO Assistant Commissioner Legal Service