BIR Ruling [DA-430-06]

July 18, 2006 BIR RULING [DA-430-06] R.A. 7227; RR 2-98; 109 (K); VAT Ruling Nos. 057-2003; 015-2000; DA-165-2004 Jorgman Construction & Development Corporation Unit 117 Alpha Bldg.,Subic International Hotel Rizal Highway, CBD, SBFZ 2222 Attention: Mr. Jorge B. Aquino President Gentlemen : This refers to your undated letter stating that Jorgman Construction and Development Corporation is engaged in construction business under SEC Certificate of Registration No. A200008195 dated June 22, 2000; that it is located within the Subic Bay Freeport and Economic Zone and duly accredited by SBMA as evidenced by Certificate of Registration and Tax Exemption No. 2006-0032 issued on June 5, 2006; and that as an SBMA-registered enterprise (SBRE), it is subject to the 5% preferential tax rate pursuant to Section 12(c) of Republic Act (RA) No. 7227. Based on the foregoing, you now request for confirmation of your opinion that Jorgman Construction and Development Corporation is exempt from creditable expanded withholding taxes on its income payments and value-added taxes on its purchases of supplies and services within, as well as outside the Subic Bay Freeport Zone. In reply, please be informed as follows: 1. Section 12(c) of RA No. 7227, as amended, otherwise known as the Bases Conversion and Development Act of 1992, provides that, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu thereof, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the national government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income, earned by all businesses and enterprises within Subic Special Economic Zone to be utilized for the development of the municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. This exemption from the payment of national internal revenue taxes is reiterated in Section 43, Chapter V(A) of the Rules and Regulations Implementing Republic Act No. 7227, as amended, and implemented through Revenue Regulations (RR) No. 16-99. Furthermore, Section 2.57.5(B) of RR No. 2-98 also provides that the withholding of creditable withholding tax shall not apply to income payments made to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. Accordingly, since Jorgman Construction and Development Corporation is an SBRE, enjoying exemption from the payment of income taxes pursuant to a special law, i.e , RA No. 7227, it is exempt from the payment of the creditable withholding tax imposed under RR No. 2-98, as amended, on income payments received during its 5% preferential tax regime in connection with its registered activity. ( BIR Ruling Nos. 155-95 dated October 12, 1995, 089-97 dated March 5, 1997 and DA-070-2006 dated March 1, 2006 ) 2. Section 7 of RA No. 9337 provides, to wit: "SEC. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; The aforequoted provision of RA 9337 is explicit that the value-added tax (VAT) is not applicable to transactions which are exempt under special laws. TaCSAD Therefore, since Jorgman Construction and Development Corporation is an SBRE, created under RA 7227, its purchases of supplies and services within Subic Bay Freeport Zone, as well as those within the Customs Territory shall be exempt from VAT. 3. Section 12 (b) and (c) of R.A. 7227 provides: xxx xxx xxx "(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations or raw materials, capital and equipment. However, exportation or removal of "goods from the territory of the Subic Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local at national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent, (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of the Subic, and other municipalities contiguous to be base areas. (Emphasis ours). In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;" In general, as a duly registered Subic Bay Freeport Enterprise, no taxes, local or national, may be imposed upon Jorgman Construction and Development Corporation vis-a-vis its transactions within the ecozone. ( VAT Ruling No. 046-99 dated April 12, 1999 ) At the same time, 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 or 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 decision to be made by a country concerns what regime to adopt for international trade: the origin principle (export-taxable, imports-exempt),or the destination principle (export-exempt, import-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 consumers of that country. Exports are exempt imports are taxable. This is comparable with the consumption type VAT.") Accordingly, the onus of taxation under our VAT System is in that country, where goods, properties and 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 in the Philippines are subject to zero percent (0%) VAT. ( BIR VAT Ruling No. 057-2003, dated December 15, 2003 ) An ecozone such as the SBFSEZ is indubitably a geographical territory of the Philippines; however, it is regarded in law as foreign soil. Said legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone. ( Commissioner of Internal Revenue vs. Seagate Technology Philippines, G.R. No. 153866, February 11, 2005 ).Therefore, SBFSEZ is considered removed from the jurisdiction of the Philippine Customs Territory. ECTSDa In view of the foregoing, Jorgman Construction and Development Corporation's intra zone purchases of goods and services, as well as purchases from Customs Territory, which are directly destined for use or consumption within the SBFEZ shall be totally free of the VAT (i.e., without any VAT component). With regard to the seller of goods and services in the Customs Territory, their sale to Jorgman Construction and Development Corporation shall be subject to VAT at zero-percent (0%) rate. However, for purposes of effective zero-rating, Section 4.106-6 of Revenue Regulations 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. ( BIR VAT Ruling No. 015-2000 dated March 20, 2000 ) 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