BIR Ruling [DA-367-06]

June 13, 2006 BIR RULING [DA-367-06] R.A. 7227; RR 16-2005; DA-029-01; #122-98; DA-017-97 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. M. F. A. Balili Tax Division Gentlemen : This refers to your letter dated January 23, 2006 requesting on behalf of your client, Maxxium Philippines Fine Wines & Spirits, Inc. ("Maxxium-Phils"), for confirmation of your opinion that the sale by Allied Domecq Freeport, Inc. ("Allied-Freeport") to Maxxium-Phils. of the former's inventory of wines in the Subic Bay Freeport Zone ("SBFZ") is not subject to value-added tax (VAT) and excise tax, and the sale by Maxxium-Phils. of the same inventory to Winning Touch in the SBFZ is effectively zero-rated and not subject to excise tax. It is represented that Allied-Freeport is a domestic corporation registered with the Subic Bay Metropolitan Authority (SBMA) and engaged in the sale and distribution of wines carrying the Fundador brand. Maxxium-Phils is a domestic corporation not registered with the SBMA but operating within the Customs Territory with office address at Level 15 Wynsum Corporate Plaza, Emerald Avenue, Ortigas Center, Pasig City. Pursuant to a global reorganization, Allied-Freeport sold its inventory in the SBFZ to Maxxium-Phils, which, in turn, sold the same inventory to Winning Touch, a corporation registered with the SBMA, which later sold the inventory to Duty Free Philippines (DFP), also an SBMA-registered enterprise. While legally, Allied-Freeport's inventory was sold to an entity within the Customs Territory, the goods physically remained within the SBFZ at all times for direct delivery to Winning Touch and subsequently, to DFP. In reply, please be informed as follows: 1. Sale by Allied-Freeport to Maxxium-Phils Under Republic Act No. 7227, otherwise known as "The Bases Conversion and Development Act", as implemented by Revenue Regulations No. 1-95, as amended, the removal of goods from the SBFZ to other parts of the Philippine territory is treated as an importation subject to VAT. Section 12(b) of the said law provides, viz: ". . . However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code and other relevant tax laws of the Philippines . . ." Based on the aforequoted provision, removal of goods from the special ecozone constitutes importation into the Customs Territory by a non-locator, which subjects the latter to the payment of excise taxes as well as the VAT ( BIR Ruling No. DA-029-01 dated March 8, 2001 ). There being no removal of the goods from the SBFZ to the Customs Territory, there is deemed to be no importation which would trigger the imposition of the VAT and excise tax. Consequently, the sale by Allied-Freeport to Maxxium-Phils of the former's inventory in the SBFZ is not subject to VAT and excise tax. Under Section 1202 of the Tariff and Customs Code, "importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein"; and "it is deemed terminated upon payment of the duties, taxes and other charges due upon the articles or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or in case said articles are free from duties, taxes and other charges, until they have legally left the jurisdiction of the customs" ( Viduya vs. Berdiago 73 SCRA 553 ). The intention to unload, an essential element of importation, is manifested only at the time when the shipment is withdrawn from the customs house upon payment of the corresponding duties and taxes, or upon issuance of a permit to withdraw; otherwise, if the same are not paid, importation is illegal ( BIR Ruling No. 122-98 dated August 18, 1998 ). DTcACa Thus, importation, as defined under Section 1202 of the Tariff and Customs Code, requires as an essential element the intention to unload the goods in Philippine territory. 2. Sale by Maxxium-Phils to Winning Touch Under Section 4.106-5(c) of Revenue Regulations No. 16-2005 implementing R.A. No. 9337, sales of goods or property to enterprises duly registered and accredited with the SBMA pursuant to R.A. No. 7227 are qualified for the effective zero percent (0%) VAT. For purposes of effective zero-rating, Section 4.106-6 of said R.R. No. 16-2005 requires a prior application for effective zero-rating from the Audit Information, Tax Exemption and Incentives Division (AITEID) of this Office. Failure on the part of the seller to secure the aforementioned approved application for VAT zero-rating, the transaction shall be considered only as exempt from VAT. Furthermore, no excise tax is due since there is no importation. In principle, sales of goods by a domestic vendor in the customs territory to a registered locator within the SBFZ are considered export sales and effectively zero-rated on the part of the seller ( BIR Ruling No. DA-017-97 dated January 14, 1997 ). Accordingly, there being no removal of the goods from the SBFZ to the Customs Territory, there is deemed to be no importation. Thus, the sale by Allied-Freeport to Maxxium-Phils of the former's inventory in the SBFZ is not subject to VAT and excise tax. On the other hand, the sale of goods (inventory of wines) by Maxxium-Phils to Winning Touch, being a sale of goods by a VAT-registered taxpayer in the customs territory to a registered locator, is considered as export sales and consequently, qualifies for the effective zero percent (0%) VAT pursuant to R.A. No. 7227. However, since the goods did not move in and out the customs territory as they remain inside SBFZ, the transaction shall only be considered exempt from VAT. 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