Alas, Oplas & Co., CPAs

January 14, 2009 BIR RULING [DA-(VAT-003) 010-09] RR 16-2005; RR 4-2007; VAT Ruling No. 010-2005 Alas, Oplas & Co., CPAs 25/F Philippine AXA Life Centre 1286 Sen. Gil Puyat Avenue Makati City Attention: Richard Hernandez Tax Analyst Gentlemen : This refers to your letter dated December 18, 2008 requesting for and in behalf of your client, TERRA COTTA ARTWORKS, INC. ("TCAI", for brevity) for confirmation that your client's sale of raw materials to RIVIERA CLAY PHILIPPINES, INC. ("RCPI", for brevity), a BOI-registered manufacturer/producer whose products are 100% exported, being considered export sales shall be subject to zero percent (0%) VAT rate without need of prior approved application with the appropriate BIR office for effective zero-rating. aATCDI The facts as represented are as follows: TCAI is a corporation organized and existing under the laws of the Republic of the Philippines with registered address at San Pablo Proper, San Simon, Pampanga. It is a duly registered value-added tax (VAT) taxpayer. RCPI is a domestic corporation organized and existing under the laws of the Republic of the Philippines. It is engaged in the business of exporting of all kinds of products and materials such as but not limited to architectural ceramics. And as such, is a duly registered Value-Added Tax (VAT) taxpayer. It is likewise a BOI-registered producer whose products are 100% exported. Pursuant to Revenue Regulations No. 16-2005, sales of raw materials made by VAT-registered suppliers to a BOI-registered manufacturer/producer whose products are considered export sales are subject to zero percent (0%) VAT rate. Hence, the sales by TCAI, a VAT-registered supplier to RCPI, are subject to 0% VAT rate. In view, however, of the issuance of Revenue Regulations No. 4-2007, wherein the requirement of securing approved applications for VAT zero-rating under Revenue Regulations No. 16-2005 and Revenue Memorandum Order No. 7-2006 was deleted, you are of the opinion that the approval for VAT zero-rating of your sales to RCPI is no longer required. In reply, please be informed that in VAT Ruling No. 028-00 dated August 21, 2000, wherein a company registered with the BOI as an export trader engaged 100% in export sought clarification of the automatic VAT zero-rating characterization of its purchases of products for export, this Office had the occasion to rule that: "[P]ursuant to Revenue Memorandum Order (RMO) No. 9-2000, sales of goods, properties or services by VAT-registered suppliers to BOI-registered exporters shall be treated as automatically zero-rated sales, without need of prior approval from this Office, provided that supplier and the BOI-registered buyer are both VAT-registered taxpayers and provided further that the buyer is classified as 100% exporter by the Board of Investments (BOI)." SDECAI That sales to BOI-registered enterprises whose manufactured products are 100% exported to foreign countries shall be accorded automatic zero-rating without the necessity of applying for and securing prior approval for zero-rating has been consistently ruled by this Office in VAT Ruling Nos. 054-00 dated November 20, 2000, 059-01 dated September 12, 2001, 003-02 dated February 6, 2002, 062-02 dated September 16, 2002 and 010-05 dated July 28, 2005. Corollary thereto, Section 106 (A) (2) (a) (5) of the Tax Code of 1997 provides that: "Section 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. The term "export sales" means xxx xxx xxx (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987 , and other special laws." (Emphasis supplied) Implementing the above provision is Section 4.106-5 (a) (5) of Revenue Regulations (RR) No. 16-2005, wherein the sales of goods, properties or services made by VAT-registered supplier to a BOI-registered manufacturer/producer whose products are 100% exported (such as RCPI) are considered export sales subject to VAT at zero percent (0%) rate, to wit: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . xxx xxx xxx The following sales by VAT-registered persons shall be subject to zero-percent (0%) rate: (a) Export Sales. "Export Sales" means: xxx xxx xxx (5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. 'Considered export sales under Executive Order No. 226' shall mean the Philippine F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer or the net selling price of export product sold by a registered export producer to another export producer or export trader that subsequently exports the same. Provided, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents . . . . . . Provided, finally, that sales of goods, properties or services made by VAT-registered supplier to a BOI-registered manufacturer/producer whose products are 100% exported are considered export sales. " . . . (Emphasis supplied) CacISA Hence, since the sale of raw materials by TCAI, a VAT-registered supplier to RCPI (a registered 100% export producer), which are for the exclusive use of the latter's production of ceramic products, fall within the definition of export sale under E.O. No. 226 such sale is the export sale contemplated by Section 106 (A) (2) (a) (5) of the Tax Code of 1997 as implemented by Section 4.106-5 (a) (5) of Revenue Regulations No. 16-2005, which is subject to VAT zero-rating. (VAT Ruling Nos. 003-2002 dated February 6, 2002 and 010-2005 dated July 28, 2005) . Furthermore, under Section 4.106-6 of RR 16-2005, sales to a BOI-registered enterprise [Sec. 4.106-5 (a) above] whose products are 100% exported which are subject to VAT at zero percent (0%) rate do not require prior approved application with the appropriate BIR office for VAT zero-rating, viz. : "SEC. 4.106-6. Meaning of the Term 'Effectively Zero-rated Sale of Goods and Properties' . The term 'effectively zero-rated sale of goods and properties' shall refer to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. Under these Regulations, transactions which, although not involving actual export, are considered as 'constructive export' shall be entitled to the benefit of zero-rating, such as local sales of goods and properties to person or entities covered under pars. (a) no. (3) (sale to export-oriented enterprises), (a) no. (6) (sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations), (b) (Foreign Currency Denominated Sale) and (c) (Sales to Tax-Exempt Persons or Entities) of the preceding section. TIcEDC Except for Export Sale under Sec. 4.106-5(a) and Foreign Currency Denominated Sale under Sec. 4.106-5(b), other cases of zero-rated sales 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. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating." (Emphasis supplied) However, with the issuance of Revenue Memorandum Order (RMO) No. 7-2006 [Section II (7)] which requires approval for VAT zero-rating for transaction falling under the provisions of Sections 106 (A) (2) (a) (5) of the Tax Code of 1997, as implemented by Section 4.106-5 (a) (5) of RR 16-2005, the treatment previously accorded to VAT-registered suppliers of RCPI as automatically zero-rated sellers was changed, thus: " II. GUIDELINES AND POLICIES xxx xxx xxx 7. Approval for VAT zero-rating shall be required only for transactions which fall under the provisions of Sections 106(A)(2)(a)(3), (5) and 6; 106(A)(2)(c); and 108(B)(3), (4) and 5 of the National Internal Revenue Code (NIRC) of 1997, as last amended by Republic Act No. 9337. . . ." With the issuance, however, of Revenue Regulations (RR) No. 4-2007, specifically Section 6 thereof which amends Section 4.106-6 of RR No. 16-2005, it dispensed with the requirement for prior BIR approval for effectively zero-rated sales of goods and properties, to wit: " Section 6. EFFECTIVELY ZERO-RATED. Sec. 4.106-6 of RR No. 16-2005 is hereby amended to read as follows: ' SEC. 4.106-6. Meaning of the term 'Effectively Zero-Rated Sale of Goods and Properties' . The term 'effectively zero-rated sale of goods and properties' shall refer to the local sale of goods and properties by a VAT registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement.' As a consequence, the appropriate BIR offices who were tasked to receive and process applications for VAT zero-rating mentioned in RMO No. 7-2006 stopped receiving/processing VAT zero-rating applications. Instead the VAT zero-rated sellers have to submit the supporting documents as required by the existing rules and regulations to qualify for VAT zero-rating to the concerned BIR Offices for post-audit and for validation of the zero-rated transactions. In the case of Commissioner of Internal Revenue vs. Seagate Technology (Philippines) G.R. No. 153866 dated February 11, 2005, it was held that: "The Bureau of Internal Revenue (BIR) regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of respondent's transactions. The scope of such regulations is not "within the statutory authority granted by the legislature. A mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter. The courts will not countenance one that overrides the statute it seeks to apply and implement. HCITDc Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer's transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefore was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never estopped by the omissions, mistakes or errors of its officials. Granting that such application is required by law, there is still the presumption of regularity in the performance of official duty. Registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero-rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed by both the administrative officials and the applicant." Accordingly, this Office hereby confirms that the sales of raw materials by TCAI, a VAT-registered supplier, to RCPI being considered export sales shall be subject to zero percent (0%) VAT rate without the necessity of applying for and securing prior approval for VAT zero-rating. The supporting documents, however, as required by existing BIR rules and regulations to qualify for VAT zero-rating, shall be submitted by the VAT zero-rated sellers to the concerned BIR offices to validate their status as zero-rated sellers. (BIR Ruling Nos. DA-307-2007 dated May 18, 2007 and DA-747-2006 dated December 29, 2006) 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