BIR Ruling [DA-380-99]

July 7, 1999 BIR RULING [DA-380-99] Reefer Phils., Inc . Rm. 253-Velco Center Building 13th Street cor. Chicago Street Port Area Manila Attention: Mr . Eduardo R . Recto President/General Manager Gentlemen : This refers to your letter dated November 18, 1998 relative to your letter dated March 1, 994 requesting for a ruling as to whether or not services rendered by shipping agents of foreign owned vessels and which are paid in foreign currency are subject to value-added tax at zero percent (0%) rate. It appears that Reefer Phils., Inc. is a newly formed corporation duly registered with the Securities and Exchange Commission (SEC); that it started its operation last February 1994; that it acts as a shipping agent of foreign owned vessels which originated from Asian countries, Australia and California; that the primary purpose for which it was organized is to engage in general shipping business including operation of passenger/cargo liners, barges and any kind of vessel, soliciting and handling of cargoes, chartering, leasing, towing, ship and/or ship handling and marine services, and/or other activities related to the general purposes, to act as ship agent; and that payment for its services are payable in foreign currency inwardly remitted through its local bank. In reply, please be informed that Section 108(B)(4) of the Tax Code of 1997 provides that services rendered to vessels engaged exclusively in international shipping shall be subject to value-added tax at zero percent (0%) rate. However, it is to be emphasized that our VAT Law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, in general, adheres to the Destination Principle or the Cross Border Doctrine. Under this doctrine, VAT exemption and VAT zero-rating are distinguished as follows: ". . . zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his PRICE or cut payments to his factors of production (capital and labor). This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero-rate." (Value-Added Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C., 1988, p. 51) "When considering a VAT, an important decisions to be made by a country concerns what regime to adopt for international trade: the origin principle (exports taxable, imports exempt), or the destination principle (export exempt, imports taxable)." (Value-Added Tax (VAT) by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz.: "the country taxes all value added, at home and abroad, or goods that have as their destination the consumes of that country. Exports are exempt, imports are taxable. This is comparable with the consumption type VAT.") IaAEHD Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. Thus, unless otherwise expressly provided for by law, sale or services, such as those rendered to vessels engaged exclusively in international shipping business, may be treated qualified for the zero percent VAT provided the use or benefit derived from such services crosses the Philippine territory, in accordance with the Cross Border Doctrine, which is the underlying principle of our VAT System. For this reason, this Office is amenable to apply the zero percent (0%) VAT on the transhipment services rendered by the domestic carriers to the aforementioned international carriers with respect to transhipment of goods or cargoes from a Philippine port to a foreign port of entry (i.e., zero percent (0%) VAT only for outbound transhipment of goods or cargoes). Conversely, Inbound Transhipment of goods or cargoes shall be subject to the 10% VAT, pursuant to Section 108(A) of the Tax Code of 1997. (VAT Ruling No. 062-98 dated December 15, 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)