BIR Ruling [DA-437-99]

July 28, 1999 BIR RULING [DA-437-99] TMS Ship Agencies, Inc . 8/F Carolina Building, 2106 Madre Ignacia St., Malate, Manila Attention: Luzviminda K. Coronel Chief Accountant M a d a m : This refers to your letter dated May 13, 1999, requesting for a ruling to the effect that your sale of services to foreign international shipping lines shall be subject to zero percent (0%) VAT pursuant to Section 108(B)(4) of the Tax Code of 1997. It is represented that TMS acts as the General Agent in the Philippines of three (3) foreign shipping lines, namely: Pacific International Lines Pte Ltd.,Pacific Eagle Lines Pte Ltd.,and Advance Container Lines, Pte.,all corporations organized under the laws of Singapore; that as General Agent, TMS undertakes to handle all vessels, containers and other equipment of the said shipping lines while in the Philippines; that TMS also acts as the sales agent of the said foreign shipping lines to promote their services to foreign destinations and collects freight and other charges for both inbound and outbound shipment; that you also act on behalf of the foreign principals for any claims to be handled locally; and that you based your charges in US dollars. In reply, please be informed 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: cACEHI "...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 (exports 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 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, 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, sale of 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 amendable to apply the zero percent (0%) VAT on the transhipment services rendered by TMS Ship Agencies, Inc. 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)(4) of the Tax Code of 1997. (VAT Ruling Nos. 050-98; 062-98) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)