Punongbayan & Araullo

March 17, 2008 BIR RULING [DA-170-08] VAT039-00 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated September 21, 2007 stating that your client, JGC Philippines, Inc. (the Company), is a service company in the field of engineering, procurement and construction; that it is a domestic corporation whose primary purpose is to engage in the business of architectural and engineering activities, technical consultancy and any other activities incidental thereto or in any way connected therewith, for domestic or overseas projects for industrial and other facilities in various fields; that the Company is also registered with the Philippine Economic Zone Authority (PEZA) as an Information Technology (IT) Enterprise with Certificate of Registration No. 07-14-IT; that pursuant to the Registration Agreement dated February 27, 2007, the scope of its registered activities shall be limited to the provision of IT-enabled engineering, procurement and construction (EPC) services and importation of machinery, equipment, tools and goods, wares, articles, or merchandise directly used in its registered operations at the JGC Philippines Building; that on March 12, 2007, per Letter of Authority No. 07-0479, PEZA approved the Company's request to sell its services to the local market to the extent of thirty percent (30%) of its total sales of its IT services; that as authorized under the said Letter of Authority, the Company was engaged to render IT-enable EPC services for various entities located within the customs territory; and that in the performance thereof, the Company purchases goods and services mostly from its local suppliers, and some from suppliers located outside the country. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The sale of services by the Company to those entities located within the customs territory is subject to 12% VAT in accordance with Section 5 (2) of Revenue Memorandum Circular No. 74-99; 2. The local suppliers of the Company may shift or pass-on to the latter the input VAT on the purchases of goods and services, directly attributable to the transaction described in letter (a); and accordingly, the Company may deduct the input VAT shifted or passed-on to it against any output VAT arising from said local sales; and 3. The Company may claim as creditable input tax against the output Vat arising from local sales described in letter (a), any VAT paid on importation of materials and supplies that are directly attributable and to be used directly in connection with sales of services described in letter (a). SCHIac In reply thereto, please be informed that it has been consistently held by the Supreme Court, and by the BIR in numerous rulings, that the Philippine VAT Law adheres to the "cross border doctrine" of the VAT system, which basically means that no VAT shall be imposed to form part of the costs of goods destined for consumption outside the territorial border of the Philippine taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely, those goods destined for use or consumption and services to be rendered within the Philippines shall be subject to the 12% VAT. ( CIR vs. Seagate Technology Philippines, G.R. No. 153866, February 11, 2005. Corollarily, Section 8 of Republic Act (R.A.) No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. ( CIR vs. Toshiba Information Systems (Philippines), Inc., G.R. No. 150154, August 9, 2005) Thus, the Company's gross income earned from its export sale of services, or those rendered within the ECOZONE, shall be subject to the 5% special tax regime, in lieu of all taxes, national and local, or ITH as the case may be. On the other hand, the Company's local sale of services, not being embraced by the said special tax regimes, shall be subject to the 12% VAT, hence, to this extent, the Company is required to register with the BIR as a person subject to the provisions of the VAT Law and to issue VAT-registered invoice on the aforesaid local sales of services. (VAT Ruling No. 039-00 dated October 23, 2000) Further, through Letter of Authority No. 07-0479 dated March 12, 2007, PEZA allowed the Company to sell to the local market, or to those within the customs territory, its IT-enabled services under the condition, among others, that its revenue from its local sales shall be subject to existing Customs and Internal Revenue rules and regulations including the payment of duties and taxes, if any are applicable, and other applicable internal revenue taxes, including VAT. ECTSDa In accordance with the "cross-border doctrine", performance of service within the customs territory by PEZA-registered firms or sale of goods by PEZA-registered firms to a company within the customs territory is subject to 12% VAT. Since the sale of services and goods by PEZA-registered enterprises to customers located in the Customs Territory is subject to 12% VAT, it would necessarily follow that input VAT arising from local purchases of goods and services, including the VAT on the importation of materials/supplies, that are used directly in connection with these local sales may be recognized and credited against the output VAT arising from the sales made in the customs territory. The crediting of the input tax against the output tax should be allowed as long as said purchases from suppliers from customs territory are supported either by VAT invoice or VAT official receipt, as the case may be, and by the appropriate importation documents in case of imported materials/supplies, as well as proof of payment of VAT on importation. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. The sale of services by the Company to those entities located within the customs territory is subject to 12% VAT in accordance with Section 108 in relation to Section 105, both of the Tax Code of 1997. 2. The local suppliers of the Company may shift or pass-on to the latter the input VAT on the purchases of goods and services, directly attributable to the transaction described in letter (a) and consequently, the Company may deduct the input VAT shifted or passed-on to it against any output VAT arising from the said local sales. 3. The Company may claim as creditable input tax against the output VAT arising from local sales described in letter (a), any VAT paid on importation of materials and supplies that are directly attributable and to be used directly in connection with sale of services described in letter (a). 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. SAEHaC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service