BIR Ruling [DA-481-06]

August 8, 2006 BIR RULING [DA-481-06] 107 Philippine Jewelry Bourse Inc . C/o Diagem Trading Corporation 59A Paseo de Roxas, Urdaneta Village Makati City Attention: Ronald L. Velayo President Gentlemen : This refers to your letter dated April 25, 2006 requesting for clarification on the following, viz: 1. Will all importations that stay in Subic or are exported be VAT free? 2. Will Philippine Jewelry Bourse Inc. (PJBI) be exempt from the 70/30% income requirement? It is represented that PJBI is located in Subic Bay Freeport Zone with Subic Bay Freeport Enterprise Certificate No. 2004-0026; that it is a jewelry industry membership exchange for traders and manufacturers of gemstones, jewelry and fashion accessories; that membership shall be both foreign and local; that all local members will be Board of Investments (BOI) accredited; that it will operate only in Subic; that members will be buying and selling to each other through the PJBI; that PJBI is registered with the Securities and Exchange Commission under SEC Reg. No. CS200319964 dated September 11, 2003; that its primary purpose is to buy and sell everything that is required by the jewelry trading and manufacturing industries, items such as but not limited to machinery, equipment, tools, components and manufacturing equipment supplies; that which comprises jewelry such as gemstones, pearls, crystals, metals, chain, fashion accessories, ornament and works of art; and that pursuant to Article IV of the Certificate of Registration and Tax Exemption issued by Carlo L. Cruz, Senior Deputy Administrator for Business Development, Subic Bay Metropolitan Authority, PJBI is entitled to incentives, to wit: "Article IV. The Company shall be entitled to tax and duty-free importation of raw materials, capital equipment, and household and personal items for use solely within the Subic Bay Freeport Zone pursuant to Sections 12(b) and 12(c) of the Act and Sections 43, 45, 46 and 49 of the Implementing Rules. All importations by the Company are exempt from inspection by the Societe Generale de Surveillance if such importations are delivered immediately to and for use solely within the Subic Bay Freeport Zone." In reply, please be informed that there shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) (now 12%) based on the total value pursuant to Section 107(A) of the Tax Code of 1997, viz: "Sec. 107. Value-added Tax on Importation of Goods . (A) In General . There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) (now 12%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any." Moreover, Section 4(A)(a) of Revenue Regulations No. 1-95 implementing R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992 provides that: "SEC. 4. EXEMPTIONS AND INCENTIVES. CSIDTc "A. All SBMA registered enterprises doing business within the Secured Area in the Zone shall enjoy the following: "a. Exemption from customs and import duties and national internal revenue taxes on importations of raw materials for manufacture into finished products and capital goods and equipment needed for their business operation within the Secured Area. xxx xxx xxx" Such being the case, importation by PJBI of goods/articles, including raw materials and capital equipment, in connection with its business activities within the Zone shall be exempt from value-added tax. Insofar as local members are concerned, who are BOI-accredited and who will be buying and selling to each other through the exchange, they shall be subject to the twelve percent (12%) VAT as if the transactions have taken place within the custom territory. It is only the sale of goods by a domestic seller/contractor in the customs territory to PJBI that shall be considered export subject to effectively zero-percent (0%) VAT. In such case, the domestic vendor shall not impute or shift any VAT as part of cost to be paid by PJBI, on its purchases from the Customs territory. Nonetheless, the input VAT related to such zero percent (0%) sales may be a subject of claim for refund or application of tax credit certificate (TCC). It should be understood however, that VAT-registered domestic vendors in the Customs Territory shall apply for the effective zero-rating of their sales to PJBI pursuant to Section 4.106-6 of Revenue Regulations No. 16-2005. The sale by PBJI to local members shall be considered as technical importation whose VAT shall be paid by the member-importer. The input VAT paid on the said transaction can be the subject of claim for refund or application for TCC upon subsequent export or sale to PJBI. Moreover, PBJI is not exempt from the 70/30% income requirement considering that in order to be considered an export-oriented enterprise, its export sales must exceed 70% of its total annual production of the preceding taxable year. Should PJBI's domestic sales exceed the 30% threshold, its entire income shall be subject to the regular income tax of thirty five percent (35%) prescribed under Section 27 of the Tax Code, as amended by Republic Act No. 9337. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service