BIR Ruling [DA-730-06]

December 18, 2006 BIR RULING [DA-730-06] RR 86-98 dtd Nov. 10, 1998 Noritake Porcelana Mfg. Inc. J.P. Rizal St., Concepcion Marikina City Attention: Ms. Florencia F. Roxas Vice-President-Finance Gentlemen : This refers to your letter dated July 7, 2004, requesting clarification of certain issues relative to the processing of claims for VAT credit/refund. It is represented that your company NORITAKE PORCELANA MFG. INC. (NORITAKE for short) is an export-oriented firm registered with the Board of Investments (BOI) as a pioneer enterprise engaged in the manufacture of porcelain dinner wares; that up to 1999, you were able to file your tax credit claims for VAT and duties paid on raw materials forming part of the exported finished products pursuant to the tax credit incentive from BOI; that due to the expiration of the said incentive, you started to file your tax credit claims for duty from the Bureau of Customs and for VAT from the Bureau of Internal Revenue, both of which are filed at the One-Stop Shop Center (Center) of the Department of Finance; that in 2001, you had received several tax credit certificates covering your claims for the years 1997 to 1999 which had accumulated due to the delay in processing and release by the Center; that these tax credit certificates indicated only the total amount and did not show the breakdown for VAT and duty; that hefty amount was used in the payment of VAT and duties on your importations at that time; that the VAT paid were recorded in the company's books as Input Taxes and partially offset against your output tax on local sales while the excess amount was claimed as input VAT credit with the Tax and Revenue Group-One-Stop Shop Center; that with reference to Revenue Memorandum Circular No. 42-2003, clarifying certain issues relative to the processing of claims for VAT credit/refund, you would like to clarify further on the following issues which were not raised in the said circular, to quote: "1. If a TCC issued by DOF-One-Stop Shop Center pursuant to the tax credit incentive of BOI (VAT and duties paid on imported raw materials used for exports) is used to pay VAT on importation, can the input VAT on imported purchases be the subject of claim for refund/TCC or offset against output tax? TEAcCD "2. Can a TCC issued by the Bureau of Customs pursuant to Section 106 of the Tariffand CustomsCode as duty drawback be used in payment of VAT and duty on importations and can the input tax be the subject of claim for refund/TCC or offset against output tax? "3. What do TCC's issued from another agency mean or refer to?" that, further in a letter dated June 9, 2005, you submitted additional explanation and justifications which were aimed to further appreciate the facts of your case; that the main issue in this case is the disallowance made by Tax and Revenue Group-One Stop Shop Center (TRG-OSSC) on your tax credit claims for VAT on importation paid with BOI TCC's which you have been protesting; that, actually in August, 2004, you were able to get a confirmatory letter from the Office of the Executive Director Ernesto Hiansen stating that the BOI TCC's applied in the payment for import VAT at the Bureau of Customs (BOC) have always been and still are eligible for VAT refund at the One Stop Shop Center; that despite this confirmation, that TRG has been disallowing the same for reasons not very clear to you; that it was only on March 8, 2005 that the OSS-Center issued a letter advising you to secure a BIR ruling which will allow you to claim tax credit for VAT paid with BOI TCC's; that you wish to clarify the background of the BOI TCC's because you believe that this is material in this case, to wit: that these TCC's were not issued by the BOI itself but by the One Stop Shop Center (OSS), Department of Finance (DOF) pursuant to Article 39 (K) of the Omnibus Investments Code, which allows BOI-registered companies to claim tax credit for taxes (VAT) and duties paid on raw materials used in the production of exported finished products; that the tax credit incentive is not an outright tax exemption meaning it is not an incentive granted pursuant to special law for which no payment was made as specified under Section 204 of the Tax Code of 1997; that, it is required by the tax credit incentive that the claimant has to pay first for the taxes and duties and claim for refund later after exportation of the finished products for which the taxes and duties on raw materials were paid for; that, it simply means that you have to prove that you have indeed exported your products before you can be entitled to the refund; that this refund is in the form of tax credit certificate (TCC) and not in cash which you can utilize in payment of VAT and duty on importations at the Bureau of Customs; that this cycle continues (pay-claim) as long as you export your finished products; that you strongly believed that it is just and reasonable to allow you to claim tax credit for VAT paid with BOI TCC's. SDAcaT In reply, please be informed as follows: 1. Section 10 of Revenue Regulations No. 5-87 provides that the input VAT on imported purchases of raw materials used in the manufacture of finished products for export, of which a BOI TCC was used to pay the VAT on importation can be claimed as refund or tax credit certificate (TCC) or it may be offsetted against output tax. However, under Sec. 4.112-1 (a) of Revenue Regulations No. 16-2005, only the proportionate share of input taxes allocated to zero-rated sales or effectively zero-rated sales can be claimed as refund or tax credit. The BOI had been issuing tax credit certificates (TCC's) to BOI-registered enterprises based on Article 39 (K) of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987. These TCC's were utilized by the registered enterprises for the payment of their taxes, duties and charges due to the National Government. But this practice has been affected by the issuance of BIR Revenue Memorandum Order No. 86-98, which states, to wit: "SEC. 5.2. TCC issued under the OmnibusInvestmentsCode . A TCC issued by the Board of Investments, or its duly authorized representative, pursuant to the provisions of the OmnibusInvestmentsCode, as amended, may only be used for the purposes for which the same has been issued to the grantee , in accordance with the provisions of the OmnibusInvestmentCode and its implementing rules and regulations. Any TCC issued jointly by the Board of Investments (BOI) and the Bureau of Internal Revenue (BIR), pursuant to the provisions of the OmnibusInvestmentsCode and its implementingrulesand regulations, may be used by the grantee or his qualified transferee, in payment of the grantee/transferee's internal revenue taxes, except his withholding tax liabilities; Provided, however, That any TCC issued jointly by the Board of Investments (BOI) and the Bureau of Customs (BOC), pursuant to the provisions of the OmnibusInvestmentsCode and its implementing rules and regulations, shall not be used in payment of the grantee/transferee's liability for any internal revenue tax directly payable to the BIR, the provisions of Section 12(a) of the NIRC notwithstanding, hence, the same may only be used in payment of customs duties, charges and taxes on his importation, directly payable to the Bureau of Customs." ( Sec. 5.2, Revenue Regulations No. 86-98 ) Accordingly, RMO No. 86-98 contemplates a situation wherein the issued TCC's of the One Stop Shop Center, Department of Finance (OSSC-DOF) may either be a TCC issued pursuant to Section 106 of the Tariff and Customs Code as Duty Drawbacks or TCC issued pursuant to Section 110 of the Tax Code of 1997 as creditable input taxes. Since it is a TCC issued by OSSC-DOF, the same was issued on the basis of taxpayer's importation, hence issued by BOC. Therefore, it can be used to pay VAT on importation and duty being assessed by the BOC. 2. A TCC issued by the Bureau of Customs (BOC) pursuant to Section 106 of the Tariff and Customs Code as duty drawback may be used in payment of VAT on importation or may be offsetted against output tax. It may also be claimed as refund/TCC. However, under Sec. 4.112-1 (a) of Revenue Regulations No. 16-2005, only the proportionate share of input taxes allocated to zero-rated sales as effectively zero-rated sales can be claimed as refund or tax credit. 3. Lastly, as to the meaning of Tax Credit Certificates issued from another agency, this refers to any TCC duly issued pursuant to the provisions of any law, other than the National Internal Revenue Code, subject to the limitations of the law and regulations under which the same has been issued, to wit: " TCC issued by the Bureau of Customs . Any TCC issued by the Commissioner of Customs, or his duly authorized representative, pursuant to Section 106 of the Tariffand CustomsCode, as Duty Drawbacks, may only be used in payment of the grantee's liability to the Bureau of Customs for duties, charges and taxes on his importation, the provisions of Section 12(a) of the NIRC notwithstanding. It may not be used in payment of his internal revenue tax liabilities directly payable to the Bureau of Internal Revenue. ( Sec. 5.1, Revenue Memorandum Order No. 86-98 ) DHaEAS " TCC issued under the OmnibusInvestmentsCode . A TCC issued by the Board of Investments, or its duly authorized representative, pursuant to the provisions of the OmnibusInvestmentsCode, as amended, may only be used for the purposes for which the same has been issued to the grantee, in accordance with the provision of the OmnibusInvestmentsCode and its implementing rules and regulations. Any TCC issued jointly by the Board of Investments (BOI) and the Bureau of Internal Revenue (BIR), pursuant to the provisions of the OmnibusInvestmentsCode and its implementingrules andregulations, may be used by the grantee or his qualified transferee, in payment of the grantee/transferee's internal revenue taxes, except his withholding tax liabilities; Provided, however, That any TCC issued jointly by the Board of Investments (BOI) and the Bureau of Customs (BOC), pursuant to the provisions of the OmnibusInvestmentsCode and its implementingrules andregulations, shall not be used in payment of the grantee/transferee's liability for any internal revenue tax directly payable to the BIR, the provisions of Section 12(a) of the NIRC notwithstanding, hence, the same may only be used in payment of customs duties, charges and taxes on his importation, directly payable to the Bureau of Customs." ( Sec. 5.2, Revenue Memorandum Order No. 86-98 ) 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.) GREGORIO V. CABANTAC Deputy Commissioner