BIR Ruling [DA-464-06]

July 28, 2006 BIR RULING [DA-464-06] RR 74-99; VAT Ruling 011-2003 Fernandez Aguja Law Firm CPA Lawyers Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated July 15, 2006 requesting on behalf of your client, Primary Structures Corporation (PSC), for confirmation of your opinion that the service construction contracts entered into by PSC with TMX Philippines, Inc. (TMX), Olympus Technology Philippines, Inc. (Olympus) and Primary Industrial Properties Corporation (PIPC), prior to the effectivity of R.A. 9337 are considered as automatically zero-rated and do not require an application for zero rating. It is represented that PSC is a corporation duly organized under Philippines laws with principal place of business located at V. Rama Avenue, Cebu City; that it is duly registered as a VAT enterprise with the Bureau of Internal Revenue doing construction business and civil engineering works; that on the other hand, TMX, Olympus and PIPC are all PEZA-registered enterprises and all duly certified by PEZA as qualified enterprises for purposes of VAT zero-rating on their transactions with their local suppliers of goods, properties and services; that prior to the effectivity of R.A. 9337, PSC entered into various construction contracts with TMX, Olympus and PIPC, as follows: TcDHSI PEZA BUYER Project Name Contract Price (Exclusive of VAT) TMX Philippines, Inc. Direct Ship Project-CB P84,525,641 Expansion Building at PEZA, Mactan Cebu Olympus Optical Technology Factory Building 93,000,000 Philippines, Inc. Expansion Primary Industrial Properties PIPC 12-Proposed 25,834,072 Corporation Warehouse Construction Primary Industrial Properties PIPC 14-Twelve Storey 65,083,719 Corporation Building that subsequent to the effectivity of R.A. 9337, PSC collected various amounts from the above construction contracts; and that PSC did not apply for effective VAT zero-rating on the said contracts but subjected all of its collection pertaining to the said contracts to automatic VAT zero-rate based on the provisions of RMC 74-99. In reply, please be informed that under Section 3(3) of Revenue Memorandum Circular No. 74-99, sales of goods, property or services by a VAT registered supplier from the Customs territory to a PEZA-registered enterprise operating in the ecozone shall be subject to zero percent (0%) VAT. For this purpose, no prior approval for zero-rating is necessary to entitle the supplier of goods, property or services to the benefit of zero-rating as the RMC serves as a sufficient basis for entitlement to the zero percent rate. In addition, suppliers entitled to the benefit of zero-rated sale of goods, property or services may apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales. It is noted, however, that RMC 74-99 has been deemed amended by Revenue Regulations No. 16-2005 by classifying sales to enterprises duly registered and accredited with the Philippine Economic Zone Authority (PEZA) as effectively zero-rated. Under the new regulations, sales to PEZA-registered enterprises shall require prior application with the appropriate BIR Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Revenue Memorandum Order No. 7-2006 dated December 15, 2005 was likewise issued in prescribing for the guidelines and procedures in the processing of application for zero-rating of effectively zero-rated transactions for VAT purposes. Since the service construction contracts of PSC were entered into prior to the effectivity of Revenue Regulations No. 16-2005, the provision of the said Revenue Regulation on the requirement of securing prior application for zero-rating shall not apply. Accordingly, the sale of construction services rendered by PSC to TMX, Olympus and PIPC is subject to zero percent (0%) VAT and requires no prior approval for zero rating based on RMC 74-99. 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