Mahle Filter Systems Philippines Corporation

May 4, 2009 BIR RULING [DA- (VAT-038) 21 8-09] VAT Ruling No. 009-99 Mahle Filter Systems Philippines Corporation Block 8 Lot 5, 6 & 7 PEZA Drive, First Cavite Industrial Estate Brgy. Langkaan, Dasmarias Cavite Attention: Mr. Satoshi Nomiyama President Gentlemen : This refers to your letter dated February 12, 2007 requesting for a ruling that the technical services rendered to Mahle Filter Systems Philippines Corporation ("Mahle Phils." or "MTP" for brevity) by the technical engineers of Mahle Filter Systems Japan Corporation ("Mahle Japan" or "MTJ" for brevity) are considered effectively zero-rated and/or exempt transactions for purposes of value added tax (VAT) and as such, payments or remittances by Mahle Philippines to Mahle Japan are exempt from creditable withholding VAT and that the related expenses that are reimbursable in nature covering fees and expenses of requested technical engineers are not subject to any final taxes as these payments do not constitute income on the part of Mahle Japan. Documents show that Mahle Phils. formerly, Mahle Tennex Philippines Corporation is operating at EPZA Drive, First Cavite Industrial Estate, Lankaan, Dasmarias, Cavite. Mahle Phils. is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under PEZA Registration No. 96-067 dated June 3, 1996. It is a 100% subsidiary of Mahle Japan formerly, Mahle Tennex Corporation. It is engaged in the manufacture of certain types of automotive parts such as automotive filters for domestic sale to automotive makers, dealers and part distributors. On the other hand Mahle Japan formerly, Mahle Tennex Corporation is a corporation duly organized and operating under the laws of Japan with principal place of business at 3-1-2, Ikebukuro, Toshima-ku, Tokyo, 171-0014 Japan. It is a manufacturer of various kinds of automotive parts. On April 1, 2002, Mahle Japan and Mahle Phils. entered into a Technical Assistance Agreement (TAA) whereby the former shall provide the latter technical assistance as regards the manufacture of automotive parts. Mahle Japan has acquired a substantial know-how in respect to the design and manufacture of such automotive parts and has the right to grant to Mahle Phils. the right and license to utilize certain technical information contained in such know-how. ACTISD In compliance with the policy that only requests for ruling without Final Assessment Notice issued shall be acted upon by this Office; Mahle Phils. submitted documents showing that to date, it has no pending assessments with the BIR. In reply, please be informed that under Article 4.1 of the TAA, upon prior written request of Mahle Phils. made from time to time during the term of the TAA and in case where Mahle Japan deems it appropriate and necessary, Mahle Japan agrees to dispatch to Mahle Phils. for a reasonable period of time, a reasonable number of its engineers and/or skilled workers to give technical guidance and instructions respecting the manufacture of the products. DHSEcI Article 2.1 of the TAA provides "2.1 Subject to the provisions of this Agreement, MTJ hereby grants to MTP during the term of this Agreement an inclusive right and license to use the Technical Information and Copyright for the manufacture and sale of the Products in the Territory and agrees to render technical assistance which shall be necessary therefore. xxx xxx xxx" Pursuant to Article 1.1 of the Agreement, "Territory" refers to "the Republic of the Philippines and the third countries with the prior written consent of MTJ". Section 108 of the Tax Code of 1997, as amended states that the lease or use of property or property rights is embraced within the definition of "sale or exchange of services" and is subject to VAT. While all Ecozone enterprises are not necessarily manufacturer-exporters of products considering that there are also service enterprises registered as Ecozone enterprises, however, taken as a whole, all their integrated activities eventually translate into manufactured products which are either actually exported to foreign countries or actually sold to buyers from the Customs Territory. If actually exported to foreign countries, no VAT must form part of the manufactured products' export price. If sold to buyers from the Customs Territory, VAT shall be paid thereon by such buyers, consistent with the "Cross Border Doctrine". EDHCSI Pursuant to Section 106 (5) of the Tax Code of 1997, as amended and as implemented by RR No. 4-07, sales by VAT-registered persons to Ecozone Enterprises are considered export sales subject to zero percent (0%) rate. The recognition of zero-rated sale of services is made to rest on the Cross Border Doctrine or Destination Principle of the VAT system, viz. : "the country taxes all value-added, at home and abroad, for goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable . . . ." (cited in VAT Ruling No. 009-99 dated January 21, 1999) Under Section 105 of the Tax Code, as amended, "(a)ny person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code". In relation, the last paragraph of Section 105 of the same Code provides that "(t)he rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business". In Commissioner of Internal Revenue vs. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005, the Supreme Court held that "special laws expressly grant preferential tax treatment to business establishments registered and operating within an Ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto". Such being the case, the VAT regime does not apply to Ecozones, a fortiori, there is no instance that a non-resident entity or person dealing within the Ecozone may also be subject to VAT. In view of the foregoing, this Office is of the opinion that the payment by Mahle Phils. to Mahle Japan for technical services/assistance rendered by the latter's technical engineers, shall be exempt from VAT provided that Mahle Phils. is located within the fenced area of the First Cavite Industrial Estate, a PEZA Ecozone. IETCAS 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service