Propmech Corporation

November 13, 2007 BIR RULING [DA-590-07] R.A. 9295; R.R. 4-2007; DA-513-2004 Propmech Corporation Marine Technology Center Building Aduana cor. Arzobispo Street Intramuros, Manila Attention: Mr. Edward G. Antonio Office of the Managing Director for Business Development Gentlemen : This refers to your letter dated October 19, 2007 requesting for confirmation that the importation by Propmech Corporation ("Propmech") of Caterpillar marine engine spare parts to be used in the repair of Lorenzo Shipping Corporation ("Lorenzo") merchant marine vessel operated or to be operated in the domestic trade is a VAT-exempt transaction pursuant to Republic Act (RA) No. 9295 and Revenue Regulations (RR) No. 4-2007. SHADEC Background 1. On 30 March 2005, Propmech, a 100% Filipino-owned company, was duly granted a license (Marina License No. MLA-117) to engage in ship repair (afloat) by the Maritime Industry Authority (MARINA), which is valid until 29 March 2008. A copy of MARINA License No. MLA-117 is enclosed, for reference. 2. On 02 February 2007, Lorenzo through Magsaysay Maritime Corporation engaged Propmech to repair the engine of one of its merchant marine vessels operated or to be operated in the domestic trade. Such repair entails the importation of Caterpillar marine engine spare parts. aTcSID 3. Prior to the importation of the said ship engine spare parts, Propmech secured an Authority to Import dated 12 February 2007 from MARINA. A copy of the MARINA Authority to Import dated 12 February 2007 is enclosed, for reference. 4. On same date, MARINA also issued a Qualification Certificate to Propmech and referred to the Department of Finance (DOF) the request of Propmech to avail of the VAT exemption for the importation of the Caterpillar marine engine spare parts pursuant to RA No. 9295. A copy of the MARINA Qualification Certificate dated 12 February 2007 is enclosed for reference. 5. Moreover, MARINA issued a letter dated 12 February 2007 endorsing to the DOF the concerned importation of Propmech and confirming that: (a) Propmech is a duly licensed ship repair entity by MARINA, categorized as "Afloat"; (b) The articles to be imported are not manufactured domestically in sufficient quantity of comparable quality and at reasonable price; (c) The articles are directly imported by Propmech as a MARINA registered ship repairer (afloat); and ETaHCD (d) The articles are reasonably needed and will be used exclusively by Propmech as ship repairer (afloat). A copy of the MARINA letter-endorsement dated 12 February 2007 IS enclosed, for reference. 6. On 15 February 2007, the DOF endorsed to the Bureau of Customs (BOC) that the importation of the articles described in MARINA's Qualification Certificate dated 12 February 2007 may be released without payment of VAT pursuant to Sec. 19 of RA No. 9295. A copy of the DOF endorsement dated 15 February 2007 is enclosed, for reference. 7. Specifically, Sec. 19 (a) of RA No. 9295, which took effect on 28 May 2004, provides: CIHTac "Sec. 19. Shipbuilding and Ship Repair Investment Incentives . To encourage investments and to ensure the development of a viable shipbuilding and repair industry, the following incentives are hereby granted: "a. Exemption from value-added tax on the importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel plates and other metal plates, including marine grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. "The importation of the above articles shall be granted exemption from value-added tax subject to the following conditions: (1) That said articles are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; (2) That said articles are directly imported by a MARINA-registered shipbuilder and ship repairer; (3) That said articles are reasonably needed and will be used exclusively by the registered shipbuilder and ship repairer; (4) That the approval of MARINA was obtained prior to the importation of said articles; and (5) That shipbuilders and ship repairers may avail of the exemption from value-added tax provided herein within a period of ten (10) years from the approval of this Act. (Emphasis supplied) HATICc "Any sale, transfer or disposition of articles under Section 19(a) within ten (10) years from the effectivity of this Act to another registered shipbuilder or repairer enjoying similar incentive shall require prior approval of MARINA. If the sale, transfer or disposition was made without prior approval of MARINA, both the vendor and the transferee or assignee shall be liable to pay twice the amount of the value-added tax exemption given him: Provided, further, That if the sale, transfer or disposition was made to a nonexempt entity or to a party other than a registered shipbuilder or repairer within ten (10) years from the effectivity of this Act, both the vendor and the transferee or assignee shall be solidarily liable to pay twice the amount of the value-added tax waived: Provided, finally, That the sale, transfer or disposition made after ten (10) years from the effectivity of this Act shall be made by informing MARINA in writing, The purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. The BIR shall be furnished with notice of actions taken by the MARINA." 8. Notably, since RA No. 9295 took effect on 28 May 2004, ship repairers may avail of the VAT exemption incentive until 27 May 2014. Accordingly, Propmech's request to avail of the VAT exemption incentive is well within the availment period provided under RA No. 9295. IaHCAD 9. Also, Section 14 of RR No. 4-2007, amending Sec. 4.109-1 (8) (1) of RR No. 16-2005 provides that the importation of spare parts to be used in the repair of a merchant marine vessel operated or to be operated in the domestic trade is a VAT-exempt transaction pursuant to RA No. 9295. 10. From the foregoing, it is clear that the importation by Propmech of Caterpillar marine engine spare parts to be used in the engine repair of Lorenzo's merchant marine vessel operated or to be operated in the domestic trade is a VAT-exempt transaction pursuant to RA No. 9295 and RR No. 4-2007. In reply thereto, please be informed that Section 19, Chapter VIII of Republic Act (RA) No. 9295, otherwise known as "the Domestic Shipping Development Act of 2004", provides: IaESCH "SEC. 19. Shipbuilding and Ship Repair Investment Incentives . To encourage investments and to ensure the development of a viable shipbuilding and ship repair industry, the following incentives are hereby granted: (a) Exemption from value-added tax on the importation of capital equipment, machinery, spare parts, life-saving and navigational equipment steel plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. The importation of the above articles shall be granted exemption from value-added tax subject to the following conditions: (1) That said articles are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; (2) That said articles are directly imported by a MARINA registered shipbuilder and ship repairer; (3) That said articles are reasonably needed and will be used exclusively by the registered shipbuilder and ship repairer; (4) That the approval of MARINA was obtained prior to the importation of said articles; and (5) That shipbuilders and ship repairers may avail of the exemption from value-added tax provided herein within a period of ten (10) years from the approval of this Act. cHDaEI Any sale, transfer or disposition of articles under Section 19(a) within ten (10) years from the effectivity of this Act to another registered shipbuilder or repairer enjoying similar incentive shall require prior approval of MARINA. If the sale, transfer or disposition was made without prior approval of MARINA, both the vendor and the transferee or assignee shall be liable to pay twice the amount of the value-added tax exemption given him: Provided, further, That if the sale, transfer or disposition was made to a nonexempt entity or to a party other than a registered shipbuilder or repairer within ten (10) years from the effectivity of this Act, both the vendor and the transferee or assignee shall be solidarily liable to pay twice the amount of the value-added tax waived: Provided, finally, That the sale, transfer or disposition made after ten (10) years from the effectivity of this Act shall be made by informing MARINA in writing. The purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. The BIR shall be furnished with notice of actions taken by the MARINA." On the other hand, Section 14(u) of Revenue Regulations (RR) No. 4-2007 provides, to wit: "Section 14. VAT-Exempt Transactions . Sec. 4.109-1(B)(1) of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.109-1. VAT-Exempt Transactions . xxx xxx xxx. (B) Exempt transactions. Subject to the provisions of Sec. 4.109-2 hereof, the following transactions shall be exempt from VAT: HIEASa xxx xxx xxx. (u) Importation of capital equipment, machinery, spare parts, lifesaving and navigational equipment, steel plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act. No. 9295, otherwise known as 'The Domestic Shipping Development Act of 2004';'' In view of the foregoing and considering that Propmech has already complied with all the requisites before availing of the VAT exemption as mandated under RA 9295 and RR No. 4-2007 and as evidenced by the Indorsement made by the Department of Finance dated February 15, 2007, this Office hereby confirms that the importation by Propmech of Caterpillar marine engine spare parts to be used in the repair of Lorenzo Shipping Corporation's merchant marine vessel operated or to be operated in the domestic trade is exempt from the payment of VAT. This ruling is being issued on the basis of foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. ADSTCa Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group