The Peninsula Manila

March 28, 2008 BIR RULING [DA-202-08] Sec. 108 (A), NIRC; RMC 74-99; RR 4-2007; BIR Ruling No. DA-277-2007 The Peninsula Manila Ayala Avenue cor. Makati Avenue Makati City Attention: Virgie N. Gula Financial Controller Gentlemen : This refers to your letter dated June 5, 2007 requesting a clarification on whether or not the services that Peninsula Manila (Hotel) renders to its various clients in its business location enjoy the benefits of VAT zero-rating or tax exemption. It is represented that Manila Peninsula Hotel provides room accommodation, food and beverage services to PEZA-registered companies; that they present their respective PEZA Certificate in order for them to avail of the supposed benefits of VAT zero-rating or exemption; that however, having been previously advised by the Chief, BIR Large Taxpayers Assistance Division that the zero-rating applies only to transactions rendered within the ecozone, the Hotel would advise its respective clients of the same and thus contest their claims; that to maintain good business relationship with the clients, the Hotel usually end up shouldering the 12% VAT absent any ruling to the effect that since the service is done outside the ecozone, the same is subject to VAT; that the following is the list of some of the Hotel's PEZA-registered clients: 1. Fujihiro Philippines, Inc. 2. Adriste Philippines 3. APAC Customer Services, Inc. 4. Convergy's Phils. Services Corporation 5. Delta Design Phils. LLC 6. People Support (Phils.), Inc. 7. Shindengen Phils. Corporation 8. Sunpower Phils. Man. Ltd. 9. Hoya Glass Disk Phils., Inc. 10. Sutherland Global Services Phils., Inc. 11. First Sumiden 12. Honda Trading Phil. Ecozone Corporation, and 13. PSPIC Corporation SAEHaC In reply, please be informed that Section 5 (a) of RR 4-2007, provide that: "SEC. 5. Zero-Rated Sales . "(a) Export Sales. . . . . "(5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. "Considered export sales under Executive Order No. 226" 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 only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; Provided, further, That pursuant to E.O. 226 and other special laws, even without actual exportation, the following shall be considered constructively exported: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones pursuant to Republic Act (R.A.) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones; (3) sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority pursuant to R.A. 7227; (4) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); (5) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. "xxx xxx xxx. "(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations; Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port is for the purpose of unloading passengers and/or cargoes that originated from abroad; Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel goods and supplies shall be subject top twelve percent (12%) output VAT starting February 1, 2006." From the foregoing, it is evident that sales of services by VAT-registered entities from the Customs Territory to PEZA-registered enterprises are entitled to avail of effective VAT zero-rating. The basis of VAT zero-rating is the fact that under R.A. 7916, as amended (PEZA Law), ECOZONEs are declared as separate customs territories which by legal fiction are considered foreign soil. In BIR Ruling No. DA-344-2003 dated October 7, 2003, this Office held that the special tax incentives only apply with respect to the registered enterprise's operations within the ECOZONE. The Philippine VAT System is premised on "destination principle", thus, imports are subject to VAT and exports are free of VAT. Where the supplier of services is a VAT-registered taxpayer, sale of services to a PEZA-registered enterprises shall be subject to VAT at zero percent (0%), provided that the services are rendered within the ECOZONE, and provided further, that the services are rendered in connection with the registered activity/ies of the buyers, i.e. , PEZA-registered entities. Conversely, if the service is rendered within the customs territory, such sale of service by a VAT-registered person shall be subject to the 12% VAT irrespective of the status of the buyer as ECOZONE registered enterprise. TDSICH This is in consideration that the situs of VAT for sale of services is the place where the service is rendered. Thus, where the service by a VAT-registered person from customs territory is rendered within the ECOZONE, such sale of service shall effectively be subject to zero percent (0%) VAT. It is clear from the foregoing then that even if Peninsula Manila's clients are PEZA-registered enterprises, in order to avail of VAT zero-rating, the services rendered to such clients should be made with respect to their operations within the Ecozone. In the present case, the food and accommodation services which Peninsula Manila renders to its PEZA-registered clients are made at the former's premises in Makati City and not within any Ecozone. Thus, there is no basis for the aforementioned clients to claim that such services are entitled to VAT zero-rating and accordingly, these services are subject to 12% VAT under Section 108 (A) of the Tax Code of 1997, as amended by R.A. 9337. 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. SCHIcT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service