BIR Ruling [DA-165-06]

March 27, 2006 BIR RULING [DA-165-06] R.A. 9337; VAT Ruling Nos. 001-00; 119-99 SGV & Co. 6760 Ayala Avenue 1226 Makati City Philippines Attention: Atty. Jose A. Osana Partner Gentlemen : This refers to your letter dated March 2, 2006 requesting in behalf of your client, International Wiring Systems (Phils) Corporation (IWSPC) confirmation that under Republic Act No. 9337, the sale by IWSPC of its manufactured products to buyers from customs territory constitutes technical importation, and that the buyers shall be responsible for the payment of VAT and customs duties on the imported products. It is represented that International Wiring Systems (Phils.) Corp. (IWSPC), is a PEZA-registered export enterprise with EPZA Registration No. 93-04 dated January 15, 1993; that it is subject to the 5% preferential tax rate; that as part of its registered activities, it is engaged in the manufacture and export of wire harness; that it imports raw materials used in the production of the wire harness tax and duty free; that as an Ecozone export enterprise, IWSPC is required to export at least eighty percent (80%) of its total production; that under PEZA Letter of Authority No. 06-0194 dated February 2, 2006, it is allowed to engage in local sale of its registered products provided that the total sale shall not exceed twenty percent (20%) of its actual sales for CY 2006. In reply, Section 26, RA 7916 provides that "goods manufactured by the ECOZONE enterprise shall be made available for immediate retail sales in the domestic market, subject to the payment of the corresponding taxes on the raw materials and other regulations that may be adopted by the Board of PEZA." The above Section 26 is implemented by Section 3, Rule VIII, PART V of the PEZA Implementing Rules and Regulations dated May 17, 1995, which provides as follows: AaIDCS SEC. 3. Foreign Merchandise . Merchandise of foreign origin brought to the restricted areas in the ECOZONES by registered Export or Free Trade Enterprises which has not undergone any processing, manufacturing or manipulation while in the said areas of the ECOZONE, shall, when sent therefrom to the customs territory, be subject to the laws and regulations governing imported merchandise: Provided, That where said foreign merchandise is combined with or made part of any domestic article, the duties and taxes to be assessed on the final product shall be based on the value of such imported merchandise (except when the final product is exempt) and internal revenue taxes on the value-added: Provided further, That foreign merchandise included in the negative list shall not be sent from the restricted areas of the ECOZONE to the customs territory. Section 107 of the Tax Code, as amended by Republic Act No. 9337 provides that "(I)n the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof." The above Section 107 of the Tax Code is implemented by Revenue Regulations No. 16-2005 dated September 1, 2005 which provides: "SEC. 4.107-1. VAT on Importation of Goods. (a) In general. VAT is imposed on goods brought into the Philippines, whether for use in business or not. The tax shall be based on the total value used by the BOC in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges, such as postage, commission, and similar charges, prior to the release of the goods from customs custody. In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base. The same rule applies to technical importation of goods sold by a person located in a Special Economic Zone to a customer located in a customs territory . xxx xxx xxx (c) Sale, transfer or exchange of imported goods by tax-exempt persons. In the case of goods imported into the Philippines by VAT-exempt persons, entities or agencies which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof and shall be liable for VAT due on such importation . The tax due on such importation shall constitute a lien on the goods, superior to all charges/or liens, irrespective of the possessor of said goods." (Emphasis ours) The above provisions are mirrored in an earlier Revenue Memorandum Circular No. 74-99 dated October 15, 1999 which classifies sale of goods (i.e., merchandise) by a PEZA-registered enterprise to a buyer from the Customs Territory (i.e., domestic sales) as technical importation made by the Buyer. Section 5 of the RMC also provides that such buyer shall be treated as an importer thereof and shall be imposed with the corresponding import taxes. The registered enterprise's gross income earned therefrom shall be subject to the 5% special tax pursuant to Section 24 of RA No. 7916, provided, however, that its sales in the Customs Territory do not exceed the threshold allowed or permitted for such sales, pursuant to pertinent provisions of the PEZA rules and regulations, provided, further, that for income tax purposes, if such sales should exceed the aforesaid threshold, its income derived from such excess sales shall be imposed with the normal income tax pursuant to the provisions of Title II, of the same Tax Code. Pursuant to the above RMC, the BIR has held in several rulings that the sale, transfer or introduction of ECOZONE registered enterprises of products from ECOZONES into the Philippine domestic market, otherwise known as the "Customs Territory", shall be treated as a "technical importation" into the Philippines by the buyer, in which case, such buyer, rather than the ECOZONE registered enterprise or seller, shall be responsible for the tax imposed. Accordingly, the buyer shall be technically treated as the importer thereof who shall be personally liable for the tax, more particularly to the VAT on importation imposed under Section 107 of the Tax Code of 1997. ( ITAD Ruling 27-2004 dated March 25, 2004; VAT Ruling No. 001-00 dated January 6, 2000; and VAT Ruling 119-99 dated December 10, 1999). AEHTIC Considering that both Section 5 of RMC 74-99 and Section 4.107-1 of RR 16-05 classify the transfer by ECOZONE registered enterprises into the Philippine domestic market as "technical importation" wherein the buyer, rather than the ECOZONE registered enterprise, is responsible for the taxes, the same BIR rulings are also applicable in the case of IWSPC. In view of the foregoing, this Office hereby confirms your opinion that under Republic Act (RA) No. 9337 and its implementing rules, the sale by IWSPC of its manufactured products to buyers from the customs territory constitutes "technical importation" and that the buyers, and not IWSPC, shall be responsible for the payment of VAT and customs duties on the imported products. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service