BIR Ruling [DA-435-06]

July 19, 2006 BIR RULING [DA-435-06] 106 (2) (a) (1); VAT Ruling 084-01 Chevron Philippines, Inc. 6/F 6750 Ayala Avenue 1226 Makati City Attention: Mr. Augusto C. Cabugao Acting General Manager-Finance and Atty. Raissa R. Bautista Tax Manager Gentlemen : This refers to your letter dated May 12, 2006 stating that Chevron Philippines, Inc. [formerly Caltex (Philippines), Inc.] (CPI) is a corporation duly organized and existing under the laws of the Philippines; that on the other hand, Ventech Offshore, S.A. (Ventech) is a company registered in the Cayman Islands, with office address at P.O. Box 309 Grand Cayman, Cayman Island British West Indies; that on March 22, 2006, CPI and Ventech entered into an Option Agreement whereby CPI (Seller), as owner of ex-refinery assets (Properties), grants to Ventech (Buyer) a six-month exclusive option period to purchase said properties for a total purchase price of US$8,500,000; that upon execution of the Option Agreement, a non-refundable deposit of US$637,500 (or the equivalent of 7.5% of the total purchase price) became due to the Seller, and an additional non-refundable deposit of US$637,500 (or the equivalent of 7.5% of the total purchase price, or a total of 15% non-refundable deposit) will be due forty-five (45) days after the execution of the Option Agreement; that this 15% total non-refundable deposit will be credited to the purchase price; that if the Buyer exercise this option, the 85% balance thereof will be due in accordance with the terms and conditions of the Option Agreement, and the Sale and Purchase Agreement shall be executed by all parties; that all payments shall be made by wire transfer to Chevron Philippines, Inc. or its nominated bank account; that the Properties are idle assets of CPI, the latter having ceased its refinery operations in October 2003; that they consist of equipment and processing units, including component materials, structural supports and piping, and dedicated spare parts, together with related warranties, drawing; specifications, operating and maintenance manuals, inspection record, engineering drawings and vendor drawings which were utilized when CPI was still a refinery; that the sale does not include assets in service that are necessary to support the current operation of the Batangas Terminal; that the Properties are located in Batangas Terminal of CPI, which sit on a leased land belonging to the Batangas Land Company (BLC); that BLC is a joint venture company between CPI (holding 40%) and the National Development Company (NDC, holding 60%); that the Buyer warrants that the Properties are being purchased for export from the Philippines; and that they shall be removed, dismantled and shipped out of the Philippines by the Buyer, at Buyer's sold cost and expense, within eighteen (18) months from the execution of the Sale and Purchase Agreement. Based on the foregoing representations, you now request confirmation of your opinion that the sale of ex-refinery assets (Properties) by CPI to Ventech is subject to 0% value-added tax (VAT) pursuant to Section 106(A)(2)(a)(1) of the Tax Code of 1997, as amended, and is not subject to the documentary stamp tax (DST) under Section 196 of the said Code. In reply thereto, please be informed that Section 106 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations No. 16-2005, provides that "xxx xxx xxx "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate; "(a) Export Sales. The term 'export sales' means: "(1) The sale and actual shipment of good from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); Thus, in BIR VAT Ruling No. 084-01 dated December 18, 2001 , this Office ruled that "xxx xxx xxx "It is clear from the above-cited section that Reysons' export sales and actual shipment of its assorted foodstuffs to foreign countries irrespective of any shipping arrangements and paid for in foreign currency and accounted for in accordance with the rules and regulations of the BSP is indeed subject to value-added tax at zero percent (0%) rate considering further that such foodstuffs are destined, used or consumed outside the Philippines. ( VAT Ruling No. 047-00 dated October 26, 2000 ) EHTISC "xxx xxx xxx" Accordingly, the sale of Properties by CPI to Ventech is deemed an export sale and consequently subject to VAT at 0% rate pursuant to Section 106(2)(a)(1) of the Tax Code of 1997, as amended by R.A. No. 9337. On the other hand, Section 196, supra , provides that "Sec. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments, or writings other than grants, patents, or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax at the rates hereinbelow prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, provided, that when one of the contracting parties if the Government, the tax herein imposed shall be based on the actual consideration: "xxx xxx xxx" Based on the foregoing provisions, it is clear that in order for the disposition of the above properties to be subject to the DST, the same should be in the nature of real properties whether by immobilization or destination. However, in the instant case, the subject Properties are located on a leased property and CPI has ceased to be a refinery effective October 2003, indicative of what were sold are personal properties. Thus, these Properties are not considered immovable properties within the contemplation of Section 196, supra . Similarly situated is BIR VAT Ruling No. 154-90 dated May 28, 1990 , where this Office ruled that ". . . under Article 415(5) of the Civil Code, machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or work, are considered real properties by destination or purpose. Under this provision, the following requisites must be satisfied: 1) The placing must be made by the owner of the tenement, his agents, or his duly authorized legal representative; 2) The industry or works must be carried on in the building or on the land; 3) The machines, etc., must tend directly to meet the needs of said industry or work; 4) The machines must be essential and principal elements in the industry and not merely incidental. Considering that Sime Darby is a mere tenant, the foregoing requisites cannot be satisfied. Moreover, it is represented that the machinery and equipment are sold to a buyer who shall undertake the transfer of said machinery and equipment to a new site, a circumstance indicative that what were sold are personal properties. Thus, it has been held by the Supreme Court that machineries placed by a tenant for use in a sawmill on the land of the landlord s considered personal property. Immobilization by destination or purpose cannot generally be made by a person whose possession of the property is only temporary. ( Davao Sawmill Co. v. Castillo, 61 Phil. 709 )" IHEDAT From the foregoing circumstances, the Buyer, in the instant case, will remove, dismantle, set up and utilize the Properties in another site which is outside of the Philippines, signifying the movable nature of the said Properties. Accordingly, the sale of these Properties shall not be subject to DST under Section 196 of the Tax Code of 1997, as amended. WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that 1. The sale of these Properties by CPI to Ventech is deemed export sale and consequently subject to VAT at 0% rate pursuant to Section 106(2)(a)(1) of the Tax Code of 1997, as amended by R.A. No. 9337; and 2. The sale of these Properties which are movable in nature is not subject to DST under Section 196, supra , as amended. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service