BIR Ruling [DA-476-04]

September 9, 2004 BIR RULING [DA-476-04] 105; RR 7-95 8-96; DA-029-97; ITAD 170-02 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue cor. H. V. dela Costa St. Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated October 15, 2003 for and in behalf of your client, Geologistics, Inc. (herein referred to as "Geologistics"), requesting for a confirmation of your opinion that the withdrawal by Geologistics from its registered customs bonded warehouse of goods which are being held in trust in behalf of its foreign company principal for delivery to ultimate buyers of the latter is not considered as a sale transaction. We quote the background of your request as follows: "Geologistics is a Philippine domestic corporation engaged in the business of providing logistics services, specifically, to provide total solutions to the various logistics requirements of the clients such as airfreight forwarding; seafreight forwarding; customs clearance; warehouse and distribution; vendor managed inventory; domestic freight forwarding; and project cargo. Its primary purpose under its Articles of Incorporation is as follows: " To forward parcels, packages, merchandise, goods and articles of every kind and description from one place to another by air, sea or land transportation and otherwise engage in the general freight forwarding business and allied undertakings throughout the world without engaging in the carriage of mail, to undertake and carry the business as non-vessel operating common carrier (NVOCC), cargo consolidators, break bulk agents, and to engage in the business of Customs Bonded Public and/or Trading Warehousing services ." "In early 2002, Geologistics applied for authority with the Bureau of Customs to operate a Customs Bonded Trading Warehouse ("CBTW") pursuant to Customs Memorandum Order No. 39-91, as amended by Customs Administrative Order No. 7-2002 dated 29 November 2002; and further amended by Customs Administrative Order No. 7-2003 dated 21 March 2003. The Bureau of Customs approved said application, and the designated warehouse of Geologistics was entered in the Customs Registry of Bonded Warehouses as CBW No. 183. "Geologistics entered into Service Agreements with foreign companies that supply raw materials to various Philippine companies in the semiconductor and electronics industry, which are duly registered with the Philippine Economic Zone Authority ("PEZA"). The raw materials are used by said PEZA-registered companies for the manufacture, assembly, testing or packaging of their goods intended for export and distribution to foreign markets . "Geologistics imports on its own name and account, under bond, raw materials and supplies from foreign company-suppliers that have existing supply agreement with PEZA-registered semiconductor and electronics companies. Although Geologistics imports said materials and supplies under its own name and account, Geologistics merely holds said ownership over said goods under the Service Agreement between Geologistics and the foreign company-suppliers . " Upon arrival of the goods in Manila, they are stored in the customs bonded warehouse of Geologistics. PEZA-registered semiconductor and electronics companies will then place their purchase orders of raw materials directly to foreign company-suppliers. If the foreign company-supplier approves the purchase order of the PEZA-registered company, it shall authorize and instruct Geologistics to deliver the ordered goods to the PEZA-registered company . " The foreign company-supplier will then directly invoice the PEZA-registered company for the withdrawn goods, and the latter remits its payments directly to the foreign company-supplier. For and in consideration of the warehousing and delivery services undertaken by Geologistics, the foreign company-supplier pays Geologistics service fee based on the actual area occupied by the goods of the foreign company-supplier inside the customs bonded warehouse of Geologistics . "In compliance with the requirements of the Bureau of Customs, Geologistics submits its liquidation of imported goods as well as their covering entries within the prescribed period as documented by the following: 1. Certificate of Identification; 2. Boatnote; 3. Packing List; 4. Copy of approved PEZA delivery form; 5. Duly authenticated proof or evidence of delivery and receipt of the delivered goods by PEZA-registered companies; 6. Warehousing Entry; and 7. Authority to Sell. " It should be noted in the above sale transactions, that Geologistics does not intervene nor take part, in any manner, in the pricing of the goods of the foreign company-supplier. In fact, Geologistics has no authority to enter for and in behalf of the foreign company-supplier and on its own name into a sale transaction with PEZA-registered semiconductor and electronics companies . The purpose of the said arrangement is to enhance efficiency in the delivery of materials and supplies to semiconductor and electronics companies in order for them to maintain their competitiveness in the global market through reduction of their management inventory costs in the form of "just-in-time" inventory. "As a way of recognizing the valuable contribution of customs bonded warehouse as a strategic support base for the semiconductor and electronics industry as the top export earner of the country, the Bureau of Customs issued Customs Administrative Order No. 07-2002 authorizing the establishment of industry-specific customs bonded warehouse servicing the semiconductor and electronics industry, which was further amended and refined by Customs Administrative Order No. 07-2003." (Emphasis supplied) In reply, please be informed that the Philippines' Value-Added Tax (VAT) law adheres to the rule that no VAT shall form part of the cost component of products which are destined for consumption outside of the territorial border of the Philippines. Hence, actual export of goods and services from the Philippines to a foreign country must be free from the imposition of VAT. Conversely, those destined for use or consumption within the Philippines shall be subject to the ten percent (10%) VAT. Thus, although Section 105 of the Tax Code of 1997 subjects to VAT any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, such person may not be subject to the payment thereof if the said goods or properties are destined for consumption outside the territorial borders of the Philippines. ( BIR ITAD Ruling No. 170-02 dated October 2, 2002 ) In BIR Ruling No. DA-029-97 dated January 15, 1997 clarifying BIR Ruling No. 8-96 dated January 19, 1996 , this Office ruled that pursuant to Section 4.100-2(a)(5), Revenue Regulations No. 7-95, importations through a customs bonded manufacturing warehouse of raw materials and spare parts used in the manufacture/assembly of products for export are not subject to 10% VAT. The customs bonded manufacturing warehouse is removed from the jurisdiction of the Philippine customs territory, thus the raw materials and/or spare parts are deemed not to have entered the customs territory, and therefore, were never introduced into Philippine commerce; hence, imported articles brought into the bonded manufacturing warehouse which are used as raw materials of finished products which are eventually exported are exempt from VAT. In view thereof, this Office is of the opinion as it hereby holds that the importation by Geologistics of raw materials through its customs bonded warehouse is not subject to VAT as said importation is still beyond the taxing authority of the Philippine government. In like manner, the withdrawal by Geologistics from its registered customs bonded warehouse of goods which are being held in trust in behalf of its foreign company principal for delivery to ultimate buyers of the latter is not considered as a sale transaction. CSAcTa If, however, the foreign company principal of Geologistics sells the goods to customers located in the customs territory, i.e. , outside the ECOZONES, the same is subject to VAT. ( BIR ITAD Ruling No. 170-02 dated October 2, 2002 ) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group