7 Castles, Inc.

November 12, 2008 BIR RULING [DA-(VAT-032) 423-08] Sec. 106 (A) (2); 110 (B); RR 16-2005 7 Castles, Inc. 55-A 11th St., Brgy. Mariana, New Manila, Quezon City Attention: Ms. Norma V. Dabu Accounting Officer Gentlemen : This refers to your letter dated June 06, 2008 requesting zero-rating of the purchases made by 7 Castles, Inc. of indirect materials necessary in the production of jewelry for export under R.A. 7844 otherwise known as the "Export Development Act of 1994". aETAHD It is represented that 7 Castles, Inc. is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199915386 dated October 1, 1999; that its registered address is 4th Floor Wah Phil. Corp. Bldg.,1321 E. Rodriguez Sr. Ave.,Quezon City; that it is engaged in the production of jewelry; that its production plant is located at No. 73 Sitio Kamias II, Barangay Mambugan, Antipolo City; that 95% of its finished goods are exported abroad, the bulk of which are sent to London; that 7 Castles, Inc. is accredited by the Bureau of Export Trade Promotion (BETP) as an eligible exporter under the Export Development Act of 1994 (R.A. 7844) with Accreditation No. BETP-08-09 dated May 22, 2008; that 7 Castles, Inc. is likewise accredited by the Board of Investments (BOI) as a Qualified Jewelry Enterprise under the Jewelry Industry Development Act of 1998 (R.A. No. 8502) with Certificate of Accreditation No. 2006-030 dated November 3, 2006; and that the business dilemma of 7 Castles, Inc. is the non-inclusion of other materials necessary to produce silver/gold jewelries which are significantly material in terms of cost which results to higher VAT input compared with the VAT output and that the imbalance will likely affect the company's viability. In reply, please be informed that Rule III of the Jewelry Industry Development Act of 1998 (R.A. 8502) provides for the development incentives to qualified jewelry enterprises, such as entitlement to zero (0) duty on imported raw materials; exemption from the imposition of excise tax on all goods commonly or commercially known as jewelry; entitlement to zero (0) duty on imported capital equipment, including spare parts and tools thereof and others. Republic Act No. 7844 (Export Development Act of 1994) also provides incentives to accredited exporters. However, there is no provision which grants VAT zero-rating on the purchase of local raw materials and supplies by a qualified jewelry enterprise for use in the production of finished products. VAT is an indirect tax by nature, meaning, that although direct liability to pay this tax to the Government falls on the sellers of goods and services, they may nevertheless pass it on to their consumers as part of the cost of the goods/services sold. The Supreme Court upheld this interpretation in the case of ABAKADA vs. Ermita (G.R. No. 168056, dated September 1, 2005) where it explained VAT's indirect nature in the following words: xxx xxx xxx "The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers." (BIR Ruling No. DA-427-07 dated July 27, 2007) In view of the foregoing, the request of 7 Castles, Inc. for the zero-rating of purchases of indirect materials necessary in the production of jewelry for export is denied for lack of legal basis. DEacIT However, considering that 95% of the sales of 7 Castles, Inc.'s finished goods are export sales, they are subject to VAT at zero percent (0%) rate under Sec. 106 (A) (2) of the 1997 Tax Code, as amended. As a consequence, the VAT paid by 7 Castles, Inc. in the course of its business on the local purchase of goods and services exceeded the VAT due on the sale of its finished goods in the domestic market. As a VAT taxpayer, 7 Castles, Inc. is subject to Sections 4.108-5 and 4.110-7 of Revenue Regulations No. 16-05 dated September 1, 2005, to wit: " SEC. 4.108-5. Zero-Rated Sale of Services. (a) In general. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations . xxx xxx xxx SEC. 4.110-7. VAT Payable (Excess Output) or Excess Input Tax. (a) ... (b) If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the input tax inclusive of input tax carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output tax; Provided, That, the excess input tax shall be carried over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules ." (Underscoring supplied) Clearly, 7 Castles, Inc. has the option to apply for the refund or tax credit of the input VAT attributable to its zero-rated sales. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service