Keppel Cebu Shipyard, Inc.

February 6, 2009 BIR RULING [DA-(VAT-016) 068-09] RR 16-2005; RR 4-2007; VAT Ruling No. 010-2005 Keppel Cebu Shipyard, Inc. Dad Cleland Avenue, Lapu-Lapu City Cebu Attention: Ms. Ma. Dolores P. Tampus Finance Manager Gentlemen : This refers to your letter dated January 19, 2009 requesting for confirmation of your opinion that the sale of goods, materials, properties and services by VAT-registered suppliers to Keppel Cebu Shipyard, Inc. ("KCSI" for brevity) for the exclusive use of the latter as service exporter in the field of ship repair and the sale of goods (tugboats) by KCSI to foreign buyers, 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. It is represented that KCSI is a domestic corporation duly organized and registered under the laws of the Republic of the Philippines with principal place of business at Dad Cleland Avenue, Looc, Lapu-Lapu City, Philippines. KCSI is a BOI registered enterprise with BOI Certificate of Registration No. 2007-149 as new export producer of tugboats and BOI Certificate of Registration (Service Exporter) No. 81-090 as a service exporter in the field of ship repair. As an export producer of tugboats, it exports 100% of its products. As a service exporter in ship repair, at least 70% of its service is exported. KCSI is a duly VAT registered taxpayer with BIR Certificate of Registration No. OCN SRC0000016803. As an export oriented enterprise, its sales are paid for in acceptable foreign currency duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. 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)." 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. CcSEIH In relation thereto, Section 106 (A) (2) (a) (5) of the Tax Code of 1997 provides that: "Sec. 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, as amended by RR No. 4-2007, 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 KCSI) 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) Hence, since the sale of goods, materials, properties and services by VAT-registered suppliers to KCSI (a registered 100% export producer of tugboats), which are for the exclusive use of the latter's production, fall within the definition of export sale under E.O. No. 226, such sale is "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 RR 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, BIR RULING [DA-066-08] February 1, 2008) Furthermore, under Section 4.106-6 of RR 16-2005, as amended by RR 4-2007, 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: TSDHCc "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 persons 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. 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) With regard to the sale of services by VAT-registered suppliers, Section 108 (B) (4) of the Tax Code of 1997, as amended provides that: "Sec. 108. Value-Added Tax on Sale of Services and Use or Lease or Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate . xxx xxx xxx (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; Implementing the above provision is Section 4.108-5 (b) (4) of Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007, wherein the sale of services made by VAT-registered supplier to persons engaged in international shipping or international air transport operations (such as KCSI) are considered subject to VAT at zero percent (0%) rate, to wit: "SEC. 4.108-5. Zero -Rated Sale of Services . xxx xxx xxx (b) Transactions Subject to Zero Percent (0%) VAT Rate . The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: xxx xxx xxx (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to 10% VAT under Sec. 108 of the Tax Code;" Hence, since the sale of services by VAT-registered suppliers to KCSI, which are being used by the latter in its international shipping operations, fall within the transaction contemplated under Section 108 (B) (4) of the Tax Code of 1997, as implemented by Section 4.108-5 (b) (4) of RR No. 16-2005, as amended by RR No. 4-2007, which is subject to VAT zero-rating. (VAT Ruling Nos. 003-2002 dated February 6, 2002 and 010-2005 dated July 28, 2005, BIR RULING [DA-066-08] February 1, 2008) aHcDEC 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. 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 therefor 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 be 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." In fine, Section 4.108-5 (b) (4) of RR No. 16-2005, as amended by RR No. 4-2007, limits the VAT-zero rating only to services rendered to persons engaged in international shipping or air transport operations by a VAT-registered supplier, while Section 4.106-5 (a) (3) of RR No. 16-2005 limits the VAT-zero rating only to sales of raw materials or packaging materials to export-oriented enterprises by a VAT-registered supplier. Accordingly, this Office, hereby confirms that the sale of services by VAT-registered suppliers to KCSI, being an entity engaged in international shipping operations, as well as the sale of goods, materials and services by VAT-registered suppliers to KCSI, which are all direct inputs of the exported products (tugboats), are both considered subject to zero percent (0%) VAT rate without the necessity of applying for and securing prior approval for VAT zero-rating. Furthermore, since the sale of tugboats by KCSI is considered export sale and subject to zero percent (0%) VAT, the vendors of KCSI shall not impute or shift any VAT as part of the cost to be paid by KCSI on its purchases. (BIR Ruling DA 452-07 dated August 10, 2007). As such, KCSI's suppliers shall be effectively zero-rated without need to file an application for zero-rating. However, the supporting documents as required by existing BIR rules and regulations, such as invoices/receipts with the term "ZERO-RATED SALE" written or printed prominently on the invoice or receipt pursuant to RMC No. 62-2005, 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. CEaDAc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service