Renaissance Makati City Hotel Manila

April 30, 2007 BIR RULING [DA-277-07] DA-344-2003; Sec 108 (A), NIRC; Secs. 4.108-5 (b) (3) & 4.108-6, RR 15-2006; Sec. 2, RMC 74-99 Renaissance Makati City Hotel Manila Esperanza St. cor. Makati Avenue Makati City Attention: John Kwok Director of Finance Gentlemen : This refers to your letter dated February 20, 2007, requesting this Office to clarify whether or not the services you render to your PEZA clients are entitled to the benefit of VAT zero-rating despite the fact that such services are not rendered within a PEZA Ecozone. It is represented that Renaissance Makati City Hotel Manila (" Renaissance ", for brevity) is rendering room accommodation and food services at its business location to some PEZA-registered clients. Specifically, these members are: 1. Toyota Autoparts Phils., Inc. 2. T & S Global Solutions Inc. 3. Sumitronics Philippines Inc. 4. Mitsua Phils., Inc. 5. Infonxx (Philippines), Inc. 6. Accenture, Inc. 7. Hoya Glass Disk Philippines, Inc. 8. Temic Automotive (Phils.) Inc. It is further represented that all the applications for VAT zero-rating filed by the eight (8) abovementioned taxpayers with the BIR were all denied with respect to Renaissance's services to the former. The BIR Large Taxpayers Service (BIR-LTS), in denying their applications for VAT zero-rating, stated that Renaissance's food and accommodation services to these taxpayers were not rendered within the ECOZONE, and thus such services are subject to 12% VAT prescribed under Section 108 (A) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337. ASaTHc Renaissance now seeks a ruling from this Office to clarify whether or not its clients are entitled to claim VAT zero-rating for the former's food and accommodation services rendered at its premises in Makati City. Renaissance would also like to determine if PEZA-registered call centers are entitled to the same VAT zero-rating with respect to services rendered by the former to them. In reply, please be informed that Sections 4.108-5(b)(3) and 4.108-6 of Revenue Regulations (RR) No. 16-2005 provide that: "SEC. 4.108-5. Zero-Rated Sale of Services . xxx xxx xxx (b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: xxx xxx xxx (3) Services rendered 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 percent (0%) rate;" xxx xxx xxx SEC. 4.108-6. Effectively Zero-Rated Sale of Services . The term "effectively zero rated sales of services" shall refer to the local sale of services by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. Under these Regulations, effectively zero-rated sale of services shall be limited to local sales to persons or entities that enjoy exemptions from indirect taxes under subparagraph (b) nos. (3), (4) and (5) of this Section. The concerned taxpayer must seek prior approval or prior confirmation from the appropriate offices of the BIR so that a transaction is qualified for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating." xxx xxx xxx 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 as such entities are exempt from VAT pursuant to Section 24 of Republic Act (RA) No. 7916. However, 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. Section 2 of Revenue Memorandum Circular (RMC) No. 74-99 dated October 15, 1999 clearly states the policy regarding such incentives, to wit: "SEC. 2. Background . In general, enterprises registered and operating under the said Act, otherwise known as ECOZONE or PEZA registered enterprises, shall only be imposed with a 5% special tax, based on "gross income earned" in lieu of all taxes, except the real property tax. However, this tax incentive only applies in respect of the registered enterprise's operations within the ECOZONE. The ECOZONES are selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial tourist/recreational, commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the following: industrial estates, export processing zones, free trade zones, and tourist/recreational centers." xxx xxx xxx It is clear from the foregoing then that even if Renaissance'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 Renaissance 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 RA 9337. The above rule applies with respect to any food and/or accommodation services Renaissance renders to call centers. The fact that such call centers may be registered as PEZA enterprises does not affect the requirement that the services rendered to them must be made within the boundaries of an Ecozone and not within the Customs Territory before any VAT zero-rating on such services can be granted. cEITCA 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