BIR Ruling [DA-418-03]

November 18, 2003 BIR RULING [DA-418-03] S.107 (A); 27 (A) VAT Ruling No. 011-2001/3-8-01 Ortega, Del Castillo, Bacorro Odulio, Calma & Carbonell ALPAP 1 Bldg., 5th & 6th Floors, 140 L.P. Leviste St., Salcedo Village, Makati City Attention: Attys. Renato G. Calma & Aleli T. Militsala Gentlemen : This refers to your letter dated October 17, 2003 requesting on behalf of your client, Samsung Electronics Philippines Corporation (SEPCO for brevity),for confirmation that sale of goods to entities located in Special Economic Zones consummated outside the Philippines is not subject to Value Added tax (VAT for brevity). The facts, as you represent, are as follows: SEPCO is a corporation duly organized and existing by virtue of Philippine laws. It is principally engaged in the marketing and distribution of consumer electronics and electrical products such as cell phone units purchased from Samsung Electronics Korea and/or its subsidiaries. SEPCO intends to sell cell phone units to Lets Do Mobile Philippines Inc. (LDMPI for brevity),a domestic corporation duly registered with the Subic Bay Metropolitan Authority (SBMA for brevity) as a Subic Bay Freeport Enterprise. LDMPI is an international trader and sell cell phones to its clientele in the Asia/Pacific Region. Demand for all phone units in the Asia/Pacific Region is in the delta of 40,000 to 60,000 cell phone units annually. Philippine demand is anywhere from 5,000 to 10,000 cell phone units annually. In order for its cell phone units to be competitive, SEPCO proposes to sell cell phone units to LDMPI while in transit or outside the Philippines so that LDMPI will acquire title over the cell phone units prior to their entry into the Philippines. Hence, in the shipping documents SEPCO will be the owner but the consignee will be LDMPI. By virtue of the aforecited facts, you claim that the ultimate importer of the goods will be LDMPI since the goods will be sold by SEPCO while in transit. Hence, upon landing LDMPI will now be the owner of the goods, and being a Subic Bay Freeport Enterprise, SEPCO would not be burdened with any VAT liability on said transaction. In reply, please be informed that in BIR VAT Review Committee Ruling No. 011-2001 dated March 8, 2001 where the sale of imported goods to a VAT exempt entity occurred while the same was in transit or outside the Philippines, thus, acquiring title over it before entering Philippine territory, the BIR ruled that such importation is exempt from VAT. Thus, ". . . pursuant to Section 107(A) of the Tax Code of 1997, `there shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any', such tax to be imposed on the IMPORTERS thereof. Nonetheless, if, under the instant case, the importer/consignee of the subject goods to be imported is the Duty Free Philippines, the said importation is exempt from taxes ..." Accordingly, since ownership of the imported goods was transferred while in transit or outside Philippine territory, LDMPI is considered the importer of such goods. And since LDMPI is a duly registered Subic Bay Freeport Enterprise, its importation of the said good is not subject to VAT in accordance with Article IV of its Certificate of Registration and Tax Exemption issued by SBMA, which states that: "ARTICLE IV. The Company shall be entitled to tax-and duty-free importation of raw materials, capital equipment, and household and personal items for use solely within the Subic Bay Freeport Zone pursuant to Section 12(b) and 12(c) of the Act and Sections 43, 45, 46, and 49 of the Implementing Rules. The Company shall have the burden of showing that their Subic Bay Freeport Enterprise is in compliance with the foregoing laws and regulations." Moreover, since the sale of cell phone units to LDMPI was consummated outside the territorial jurisdiction of the Philippines, the same is not subject to VAT. The proceeds, however, shall be subject to the ordinary corporate income tax under Section 27(A) of the 1997 Tax Code. DTIACH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIA C. BUAG Deputy Commissioner Legal & Inspection Group