BIR Ruling [DA-253-06]

April 12, 2006 BIR RULING [DA-253-06] Sec. 108 (B) (3), TC & RMC 74-99 VAT Rulings No. 032-98, 037-98 & 049-03 la O' David Agro Dev. Corp. & Realty Office No. 5 J. Luna San Lorenzo Village Makati City Attention: Mr. Gerard D. la O' Assistant Corporate Secretary Gentlemen : This refers to your letter dated March 31, 2006 requesting for confirmation of your opinion that the lease of property to a PEZA-registered enterprise is subject to zero percent (0%) value-added tax (VAT). As represented, la O' David Agro Dev. Corp. & Realty Office (la O' David) is a VAT-registered real estate lessor located in Makati City. Its tenant, Uniden Electronics Philippines, Inc. (UEPI) located at #25 Binary St., Light Industry and Science Park-1-Special Economic Zone, Diezmo, Cabuyao, Laguna is a PEZA-registered Ecozone Export Enterprise with Registration Certificate No. 05-29 dated June 9, 2005. Its registered activity is the manufacture of electronics communication products such as digital cordless telephones, digital scanners, and general mobile radio systems (GMRS). It is entitled to all incentives granted to non-pioneer projects under Republic Act (R.A.) No. 7916. In reply, please be informed that in undated BIR Ruling No. 037-98, this Office ruled as follows: "1. In accordance with DPDI's PEZA Certificate of Registration and its concomitant Registration Agreement with the PEZA, DPDI has been granted Income Tax Holiday (ITH) for a period of four (4) years; that, after this 4-year Income Tax Holiday, it shall henceforth be exempt from all national and local taxes and, in lieu thereof, it shall be subject to tax at the rate of five percent (5%) based on gross income earned. In view thereof, please be informed that during this 4-year Income Tax Holiday, DPDI shall only be exempt from income tax. However, DPDI shall be subject to other internal revenue taxes provided under the National Internal Revenue Code, such as, but not limited to value-added tax. Therefore, DPDI's sales of goods, property and services shall be subject to 10% VAT during the aforesaid 4-year period. EaCSHI 2. Under Sections 4.100-3 and 4.102-2 of Revenue Regulations No. 7-95, implementing Sections 100(a)(2)(C) and 100(b)(3) of the old National Internal Revenue Code (NIRC) [now Sections 106(A)(2)(c) and 108(B)(3) of the NIRC of 1997, as amended, the term "effectively zero-rated sale of goods, property and services" shall only apply to sales made by a VAT-registered person to a person or entity who is exempt from indirect tax, pursuant to the provisions of a special law or international agreement in which the Philippines is a signatory. The special law in this case is R.A. No. 7916, otherwise known as The Special Economic Zone Act of 1995. There is no existing provision under this law that a PEZA-registered enterprise (such as DPDI) is exempt from indirect tax. Hence, DPDI is only exempt from income taxes during its 4-year Income Tax Holiday. Even after the expiration of this 4-year Income Tax Holiday, DPDI shall only be exempt from all national and local taxes. However, all these taxes to which DPDI shall enjoy exemption refer to direct taxes. On the other hand, the 10% VAT imposed on its purchases of goods, property or services are direct taxes in the hands of its supplier but indirect taxes in the hands of DPDI since the same are passed-on as part of the cost of its purchases. . . . Accordingly, DPDI's suppliers of services cannot qualify for zero percent VAT, hence, shall be subject to 10% VAT on their sales to DPDI, pursuant to the provisions of Section 108 of the NIRC of 1997. . . . 3. Since DPDI is a VAT-registered person, the 10% VAT on its purchases of services from suppliers in the Customs Territory shall be available as Input Tax Credit in the hands of DPDI, pursuant to Section 110, NIRC of 1997. xxx xxx xxx" In view of the foregoing, it is the opinion of this Office that the lease of property by la O' David to UEPI, a PEZA-registered enterprise, during the latter's 4-year ITH is subject to the ten percent (10%) VAT. However, under Section 24 of R.A. No. 7916, no taxes, local and national, shall be imposed on business establishments operating within the ecozone. PEZA-registered enterprises shall only be imposed five percent (5%) special tax based on gross income earned, in lieu of all taxes, except the real property tax, which tax incentive only applies in respect of the registered enterprise's operations within the ecozone. Thus, UEPI which is a PEZA-registered entity is subject to the 5% special tax based on gross income earned, in lieu of all taxes. In CTA Case No . 45 dated February 28, 1986 , the CTA ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, has been generally considered a commutation tax, that is, it is a combination of two or more taxes, as an excise tax or franchise tax, payment of which would give rise to a privilege exemption from all other taxes (BIR Ruling No. UN-035 dated February 3, 1994) HSAcaE Moreover, pursuant to Section 108(B)(3) of the Tax Code of 1997, services rendered by a VAT registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory, effectively subjects the supply of such services to zero rate. Under Revenue Regulations (Rev. Regs.) No. 7-95, effectively zero-rated sales of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemption from indirect taxes under subparagraph (b), Nos. (3), (4) and (5) of Rev. Regs. No. 7-95. Such being the case, after the 4-year ITH when UEPI shall have been subject to the 5% special tax in lieu of all taxes, the domestic sales of services by la O' David, a VAT-registered enterprise to UEPI, a PEZA-registered entity will be considered zero-rated sale of services (Revenue Memorandum Circular No. 74-99). Since UEPI is a PEZA-registered Ecozone Export Enterprise whose products are destined to be used or consumed outside of the Philippines, the lease of property by la O' David to UEPI shall accordingly be entitled to the zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997. The zero-rated sale of services by la O' David will not result in any output tax. However, the input tax on its purchases of goods, properties or services related to such zero-rated sale shall be available as a tax credit or refund in accordance with Rev. Regs. No. 7-95. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service