BIR Ruling [DA-736-06]

December 20, 2006 BIR RULING [DA-736-06] RMC No. 74-99; BIR Ruling No. 463-06 Aranas Consunji Barleta Law Offices Unit 106, Le Metropole Bldg. Dela Costa cor. Tordesillas Streets Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas Partner Gentlemen : This refers to your letter dated December 14, 2006 requesting on behalf of your client, Pilipinas Total Gas Inc. (PTGI) , for confirmation of your opinion that the contracts for the sale of industrial gases and equipment entered into by PTGI with various PEZA-registered enterprises prior to the effectivity of R.A. 9337 are considered as automatically zero-rated and do not require an application for VAT zero rating. HTaSEA It is represented that PTGI is a corporation duly organized and existing under Philippine laws with principal place of business located at Philippine Stock Exchange Center, 8/F West Tower, Exchange Road, Ortigas Center, Pasig City; that it is duly registered as a VAT enterprise with the Bureau of Internal Revenue; that PTGI's primary business purpose is to sell, transport and distribute industrial gases and equipment; that in the ordinary course of its business, PTGI sold industrial gases and other equipment to PEZA registered enterprises ("customers"); that these customers are all duly certified by PEZA as qualified enterprises for purposes of VAT zero-rating on their transactions with their local supplier of goods, properties and services. It is also represented that for the year 2005 and prior to the effectivity of R.A. 9337, PTGI entered into several contracts for the sale of industrial gases and equipment to several customers; that PTGI did not file prior applications for effective VAT zero-rating on the said contracts and instead subjected all of its collection pertaining to the said contracts to automatic VAT zero-rating based on the provisions of Revenue Memorandum Circular 74-99 (RMC 74-99). In reply, please be informed that the sale of industrial gases and equipment by PTGI to its customers pursuant to contracts entered into prior to the effectivity of R.A. 9337 is subject to zero percent (0%) VAT and requires no prior approval for zero-rating based on RMC 74-99. Section 3(3) of RMC 74-99 provides: aEHAIS "In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to Art. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. 7916 and the "Cross Border Doctrine" of the VAT system. This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular." In BIR Ruling No. 463-2006 dated 28 July 2006, it was held that the sale of service by a local supplier from the customs territory to a PEZA registered enterprise prior to the effectivity of R.A. 9337 is subject to zero percent (0%) VAT and requires no prior approval for zero-rating. "In reply, please be informed that under Section 3(3) of Revenue Memorandum Circular No. 74-99, sales of goods, property or services by a VAT registered supplier from the Customs territory to a PEZA registered enterprise operating in the ecozone shall be subject to zero percent (0%) VAT. For this purpose, no prior approval for zero-rating is necessary to entitle the supplier of goods, property or services to the benefit of zero-rating as the RMC serves as a sufficient basis for entitlement to the zero percent rate. In addition, suppliers entitled to the benefit of zero-rated sale of goods, property or services may apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales." HcACTE It is noted, however, that RMC 74-99 has been deemed amended by Revenue Regulations No. 16-2005 by classifying sales to enterprises duly registered and accredited with PEZA as effectively zero-rated. Under the new regulations, sales to PEZA-registered enterprises shall require prior application with the appropriate BIR Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Revenue Memorandum Order No. 7-2006 dated December 15, 2005 was likewise issued in prescribing for the guidelines and procedures in the processing of application for zero-rating of effectively zero-rated transactions for VAT purposes. Since the contracts for the sale of industrial gases and equipment of PTGI were entered into prior to the effectivity of R.A. 9337 and Revenue Regulations No. 16-2005, the provision of the said Revenue Regulation on the requirement of securing prior application for zero-rating shall not apply. Accordingly, the sale of industrial gases and equipment by PTGI to its PEZA-registered customers pursuant to contracts entered into prior to the effectivity of R.A. 9337 is subject to zero percent (0%) VAT and requires no prior approval for zero-rating based on RMC 74-99. ECSHID 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. 07tax3up Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Asst. Commissioner Legal Service