Duty Free Philippines

October 13, 2008 BIR RULING [DA-(VAT-014) 286-08] Sec. 106 (A) (2) (b) (c); DA-119-06; VAT Ruling No. 080-99 Duty Free Philippines Fiesta Mall, EBA Building, Ninoy Aquino Avenue, Paraaque City Attention: Michael Christian U. Kho General Manager Gentlemen : This refers to your letter dated April 14, 2008 requesting a ruling on whether the sales of goods in duty free shops operated by Duty Free Philippines (DFP) are zero-rated transactions pursuant to Section 106 (A) (2) (b) of the Tax Code of 1997, as amended by Republic Act (R.A.) 9337. STIHaE It is represented that DFP is a VAT-registered taxpayer. It was established pursuant to Executive Order No. 46 issued by then President Corazon C. Aquino, which authorized the Ministry of Tourism, now Department of Tourism, to establish a tax and duty free merchandising system in the country in order to augment the service facilities for tourists and to generate foreign exchange and revenue for the government. It is also represented that merchandise in DFP stores are either purchased locally or procured from foreign suppliers and sold to a limited market of travelers. Pursuant to Customs Administrative Order No. 3-87 (CAO 3-87), 1 the sale of tax and duty free articles in duty free shops is limited to the following: 1) incoming passengers, immediately upon arrival from a foreign country; 2) departing passengers for foreign countries; and 3) embassies, legations, consular and other offices of foreign governments, offices of international organizations, agencies and associations, entitled to tax and duty exemption pursuant to Philippine law or agreements to which the Philippine Government is signatory. All DFP stores are located within the vicinity of international airports and seaports, and as provided in Section 1.3.1 of CAO 3-87, all stores are considered as extensions of the main bonded warehouse. It is finally represented the sales of duty and tax free articles to authorized buyers in duty free shops are paid for in acceptable foreign currency in accordance with Section 12 of the same Order and which provision was reiterated in Executive Order (E.O.) 250 issued by then President Fidel V. Ramos. Thus, the pricing of merchandise sold in duty free stores is denominated in US dollars and paid for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. Moreover, E.O. 250 also provided the duty free shopping purchase limits of tourists and Filipino travelers going to or returning from foreign destinations, overseas contract workers and Balikbayans to US100 dollars. Based on the foregoing, you now seek an opinion that the sales of goods made by DFP are considered foreign currency denominated sales and, thus, zero-rated under Sec. 106 (A) (2) (b) of the Tax Code of 1997, as amended by R.A. 9337. In reply, please be informed that Sec. 106 (A) (2) (b) of the Tax Code of 1997, as amended by R.A. 9337, provides thus: aSACED "Sec. 106. Value-added tax on sale of goods or properties . A. Rate and Base of Tax. . . . (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate xxx xxx xxx "(b) Foreign Currency Denominated Sale. The phrase "foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). xxx xxx xxx" The abovequoted provision is implemented by Sec. 4.106-5 (b) of Revenue Regulations No. 16-2005, as amended, which states that: (b) "Foreign Currency Denominated Sale". "Foreign Currency Denominated Sale" means the sale to a non-resident of goods, except those mentioned in Secs. 149 and 150 of the Tax Code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency and accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales." THaDEA Foreign currency denominated sales which are referred to as "foreign exchange denominated sales or internal exports in LOI No. 1355" shall be considered as export sales if the following conditions are present: (i) The buyers are Filipinos abroad returning overseas Filipinos or other non-residents of the Philippines; (ii) The goods are assembled or manufactured in the Philippines for household and personal use; (iii) The goods are paid for in convertible foreign currency inwardly remitted through the banking system in the Philippines; and (iv) The sales do not exceed an aggregate foreign exchange value of US$1,000 or its equivalent in other convertible foreign currencies. 2 The Internal Export Program of the Government was incorporated in the Tax Code for the purpose of conserving foreign currency that is otherwise spent abroad by returning citizens and other non-residents in buying gifts, or pasalubong in the vernacular, for their relatives residing in the Philippines. Hence, by allowing the returning citizens or balikbayans and other non-residents to buy goods in the Philippines, no precious foreign currency goes out of the country. Applying the foregoing, the sale of goods locally purchased and subsequently sold by DFP in duty free shops can be treated as foreign currency denominated sales under Section 106 (A) (2) (b) of the 1997 Tax Code, as amended, subject to 0% VAT rate considering that goods to be purchased from DFP are paid for in foreign currency by returning overseas Filipinos, balikbayans or other non-residents and are generally intended as pasalubong to specific individuals or relatives for their household and personal use. CcADHI On the other hand, the sale by DFP of goods procured from foreign suppliers may also qualify for zero-rating pursuant to the destination principle of the value added tax system. The destination principle provides that goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated because the consumption of goods is made outside the Philippines, while imports are subject to the regular VAT rate because they are consumed in the Philippines. Essentially, the goods in DFP shops are sold to a limited market of international travelers such as international organizations and diplomats as well as departing passengers and tourists who purchase the goods for consumption in foreign countries. Applying the destination principle, such sales of DFP paid for in acceptable foreign currency and accounted for in accordance with BSP rules intended for consumption outside the Philippines shall be subject to VAT at 0% rate, while the sales made to international organizations and diplomats, who are tax-exempt under special laws or international agreements, are effectively zero-rated in accordance with the provisions of Section 106 (A) (2) (c) of the 1997 Tax Code, as amended, which states thus: "Sec. 106. Value-added tax on sale of goods or properties . A. Rate and Base of Tax. . . . (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." 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 as represented are different, then this ruling shall be considered null and void. cHITCS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Rules, Regulations and Procedures Governing the Establishment, Operation and Control of Duty and Tax Free Stores and Warehouses. 2. VAT Ruling 080-99 dated August 9, 1999.