BIR Ruling [DA-346-99]

June 14, 1999 BIR RULING [DA-346-99] Balmeo Bautista & Pea Sales Law Offices Rm. 309 Margarita Building J. P. Rizal cor. Cardona Streets Makati City Attention: Atty . Leonides F . Balmeo Gentlemen : This refers to your letter dated May 7, 1999 stating that your client, HPM Philippines, Project Management & Development, Inc. (HPM Philippines), a domestic corporation with principal place of business at Mandaue City, Cebu entered into a construction contract with Lexmark International (Philippines), Inc. (LIPI) for the construction of an ink jet cartridge manufacturing facility in Basak, Mactan Export Processing Zone-II (MEPZ II), Lapu-lapu City, Mactan Island, Philippines; that LIPI is a PEZA registered entity having been granted Certificate of Registration No. 99-07 pursuant to the provisions of R. A. No. 7916 last October 26, 1998; that it is an export producer of ink jet cartridge; that under paragraph 2 of PEZA Resolution No. 98-250, it is provided inter-alia that: "2 LIPI shall be entitled to the following incentives upon registration: "a. exemption from national and local taxes and in lieu thereof, payment of the 5% tax on gross income earned, . . ." that it does not enjoy income tax holiday under its PEZA registration; that HPM Philippines as principal contractor and project manager assigned in a document called Joint Project Agreement, the civil, electrical, mechanical, sanitary and other aspects of the construction contract to the following contractors which are all domestic corporations and are all VAT registered enterprises, viz: Contractor's Name Address TIN 1. Degalen Construction Corp. PSO 170 Edifacio 080-004-261-136-V Don Julio Subangdaku Mandaue City 2. Steel Centre Philippines, Inc. Amang Rodriguez Ave. 043-000-697-055-V Manggahan, Pasig City 3. HTE Integ. Serv. Inc. Unit 1905-B PSE Center 201-222-428-000-V West Tower Exchange Rd Ortigas Center, Pasig City 4. Enerthrust, Inc. G/F Perla Conse Bldg. 001-113-589-V #26 Stanford St. Cubao, Quezon City 5. Metal Forming Corp. 4-3 Borromeo Building 000-056-807-V Arlington Pond Street Cebu City 6. MBT (Philippines), Inc. Maguikay St. 000-839-545-V Bakilid II, Mandaue City 7. US Filter (Phils.), Inc. Unit 1-B Freestar Arcade 870-004-149-467-V Herman Cortes Street Subangdaku, Mandaue City 8. Guhit, Inc. Unit I-D Freestar Arcade 004-279-361-000-V Herman Cortes Street Subangdaku, Mandaue City that there are other assignees of minor portions of the construction contract who will sign their respective Joint Project Agreements later; that the Assignees, will work hand in hand with HPM Philippines; that HPM Philippines remain as the project manager and principal contractor of the unassigned portions of the construction contract; that HPM Philippines will collect and consolidate all bills of the contractors assignees and will bill to LIPI; and that out of the total price of the portion of the project assigned to the aforementioned Assignees, a certain percentage is retained by HPM Philippines as project manager, the rest are assigned and belong to the Assignees. Based on the foregoing, you now request for a ruling that HPM Philippines; Delgan Construction Corporation; Steel Centre Philippines, Inc.; HTE Integrated Services, Inc.; Enerthrust, Inc.; Metal Forming Corporation; MBT (Philippines), Inc.; US Filter (Phils.), Inc.; Guhit, Inc. and other assignees of minor portions of the construction contract are all eligible and can be VAT zero-rated on their gross receipts from the Lexmark Construction Contract and as such are entitled to tax credit on excess input tax. In reply, please be informed that Section 108(B)(3) of the Tax Code of 1997 provides, viz: "B) Transactions Subject to Zero Percent (0%)Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) 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;" The above-quoted provision of law is implemented by Section 4.102-2c of Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services. 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. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subpar. (b), Nos. (3), (4) and (5) of this section." Sec. 4.102-2(c), Rev. Regs. No. 7-95). Such being the case, the sales of services by HPM Philippines; Delgan Construction Corporation; Steel Centre Philippines, Inc.; HTE Integrated Services, Inc.; Enerthrust, Inc.; Metal Forming Corporation; MBT (Philippines), Inc.; US Filter (Phils.), Inc.; Guhit, Inc. and other assignees of minor portions of the construction contract to LIPI, qualify for zero percent (0%) VAT since such enterprise is an ECOZONE export producer provided, however, that a prior permit for zero rating of the sales to such enterprise is first obtained pursuant to Section 4.107-II(d) of Revenue Regulations No. 7-95. Furthermore, such corporations are entitled to tax credit on excess input tax. (VAT Ruling No. 055-98 dated December 2, 1998) 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue