BIR Ruling [DA-496-06]

August 14, 2006 BIR RULING [DA-496-06] RMC 74-99; VAT Ruling 077-99 dtd 2/2/00 AFC Fertilizer And Chemicals, Inc. 5/F P & L Building, 116 Legaspi Street Legaspi Village, Makati City Attention: Rolando A. Basco, Jr. Vice-President Gentlemen : This refers to your letter dated August 7, 2006, requesting a confirmatory ruling on your opinion that AFC as a "technical importer" of sulfuric acid from the Philippine Associated Smelting and Refining Corporation (PASAR, for short), a PEZA-registered company is equally not liable for the deficiency VAT, being an exempt transaction under Section 109 (d) of the Tax Code of 1997. TCEaDI It is represented that AFC Fertilizer & Chemicals, Inc. (AFC, for short) during the period from May 12, 2003 to February 17, 2006, purchased from PASAR sulfuric acids which formed as principal ingredients of its product known in the market as "Sulfuric Acids of AFC"; that per certification dated February 14, 2006 of the Executive Director, Fertilizer and Pesticide Authority, AFC's Sulfuric Acid is a registered finished fertilizer; that these purchases were duly issued Authority to Release Imported Goods (ATRIG) by the Regional Director, Revenue Region No. 14 (Palo, Leyte); that the same were released by the Bureau of Customs (BOC) as exempt from excise tax and value-added tax (VAT); that subsequently the present Regional Director issued a Preliminary Assessment Notice (PAN) dated June 8, 2006, billing PASAR deficiency VAT on the aforesaid importations, which were previously released from BOC's custody as exempt from VAT; that PASAR argues that the sales of the sulfuric acid to the local market by an ECOZONE enterprise like PASAR is considered "export sale" pursuant to Section 17, of Presidential Decree (PD) No. 66, Article 17 of the Omnibus Investments Code of 1987 (E.O. #266) and Section 5 (1) of RMC No. 74-99 and as such "exporter", PASAR is not liable to pay VAT on said sales; that PASAR points to AFC, being considered as the "importer" as the one liable for the VAT being billed; that it is AFC's opinion that being an "importer" of sulfuric acid from PASAR, a PEZA enterprise, it is equally not liable for the deficiency VAT. In reply, please be informed that ECOZONE or PEZA-registered enterprises under RA 7916 otherwise known as the Special Economic Zone Act of 1995, which created the Philippine Economic Zone Authority (PEZA), shall only be imposed with a 5% special tax based on gross income earned in lieu of all taxes. However, this tax incentive only applies in respect of the registered enterprise's operations within the ECOZONE. The products manufactured or produced within the ECOZONE are generally destined for export to foreign countries. The ECOZONE under RA 7916 is a separate customs territory. Any sale outside the ECOZONE to other customs territory are technically considered as importation by such buyer from the Customs Territory. Since the ECOZONE is technically treated as another separate Customs Territory, the buyer is treated as an importer and is imposed with the corresponding import taxes and customs duties on his purchase of products from within the ECOZONE. Since in the case at bar, PASAR is a PEZA-registered enterprise, and it sold the sulfuric acid to AFC as an ingredient in its product, the Sulfuric Acid of AFC, a registered finished fertilizer as certified by the Fertilizer and Pesticide Authority, the conduct of PASAR is one of an export, since the ECOZONE is considered a separate customs territory. Corollarily, AFC is a technical importer from the ECOZONE. As this is one of an "export" transaction of PASAR to another customs territory in which case, 10% VAT shall be paid thereon by such buyer (AFC) consistent with the "Cross Border Doctrine of VAT System." However, under Section 109 (d) of the Tax Code of 1997, quoted hereunder as follows: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx "(d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);" xxx xxx xxx AFC is not equally liable for VAT, as its "importation" of sulfuric acid from PASAR is exempt from VAT pursuant to Section 109 (d) of the Tax Code of 1997, 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