BIR Ruling [DA-652-99]

November 29, 1999 BIR RULING [DA-652-99] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated November 9, 1999 requesting in behalf of your client, Koyo Manufacturing (Philippines) Corporation (KMPC), for a ruling that the sale of construction services by Taisei Philippines Incorporated (TPI) to KMPC, a PEZA-registered export enterprise, is effectively zero-rated for VAT purposes pursuant to Revenue Memorandum Circular (RMC) No. 74-99 in relation to VAT Ruling Nos. 032-98 dated November 5, 1998 and 012-99 dated January 14, 1999. cdlex It is represented that KMPC and TPI are corporations duly organized and existing under and by virtue of Philippine laws are both registered as VAT taxpayers; that KMPC is an export enterprise duly registered with the Philippine Economic zone Authority (PEZA) under Certificate of Registration No. 98-012 issued on February 6, 1998, with principal address at the Lima Technology Center-Special Export Processing Zone in Malvar, Batangas, that its export products consist of ball and roller bearings, parts and parts for other precision instruments, machinery and equipment; that all these products are destined for use and consumption outside the Philippines; that as a PEZA-registered export enterprise, KMPC presently enjoys income tax holiday for a period of four (4) years as a non-pioneer firm and has been included in the May 21, 1998 PEZA Master List (listed as Company No. 432), which was endorsed to the Bureau on May 22, 1998 for the purpose of VAT zero-rating of its transactions with its local suppliers; that KMPC has engaged the services of TPI for the construction of its factory building and/or plant at the Lima Technology Center; that TPI is primarily engaged in the construction business, with principal office at 2nd Floor, PDCP Bank Building, 371 Gil Puyat Avenue, Makati City. In reply, please be informed that pursuant to Section 3(2)(b) of RMC No. 74-99, the sale of services by a VAT registered supplier from the Customs Territory to a PEZA-registered enterprise, which is subject to taxes under the National Internal Revenue Code (NIRC) rather than the 5% special tax regime , shall be treated as subject to zero-percent (0%) VAT under the "cross border doctrine" of the VAT system, pursuant to VAT Ruling No. 032-98 dated November 5, 1998. KMPC, as a PEZA-registered export enterprise, is subject to taxes under the NIRC as it presently enjoys income tax holiday for a period of four (4) years as a non-pioneer firm and is not embraced by the 5% special tax regime. Accordingly, the sale of services to such company shall be treated as subject to zero percent (0%) VAT pursuant to the above provision of RMC No. 74-99 subject to the applicability of the "cross border doctrine" as enunciated in VAT Ruling No. 032-98 Pertinent portions of VAT Ruling No. 032-98 are adopted as follows: "Our VAT law, which was first adopted and promulgated under E.O. No. 273 effective January 1, 1988, basically adheres to the Consumption Type VAT Regime and, in general, follows the cross border doctrine enunciated in the above-cited ruling, viz : "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade the origin principle (export taxable, import exempt), or the destination principle (export exempt, imports taxable)" (Value -Added Tax VAT by Antonio Carlos Rodriguez, Harvard Law School, 1995 citing Shoup (1986) on destination principle, viz: "the country taxes all value added, at home and abroad that have as their destination the consumers of that country. Exports are exempt, imports taxable. This is comparable with the consumption type VAT.") "The onus of taxation under our VAT System is that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT law: goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT." "There are different types of PEZA-registered enterprise under R.A. No 7916. An ECOZONE may contain any or all of the following Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers. Of the foregoing classification of ECOZONE Enterprises, those under the Export Processing Zone, are the ones whose products are destined to, used or consumed abroad. Following our VAT Regime, which adheres to the Consumption Type VAT or the Destination Principle, sales of goods, property and services to ECOZONE enterprises engaged in export processing business shall, accordingly, be considered qualified for effective zero-rated VAT considering that their export products must be free from VAT which otherwise are indirectly passed on by suppliers of goods, property or services. Since KPMC is a PEZA-registered Export Enterprise and whose products are destined to be used or consumed outside of the Philippines, the sale of construction services by TPI to KPMC shall, accordingly, be entitled to the zero percent (0%) VAT. (VAT Ruling Nos. 12-99 dated January 14, 1999, 32-98 dated November 5, 1998) prcd 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)