Dulay Pagunsan & Ty

May 18, 2009 BIR RULING [DA-(VAT-041) 229-09] RR4-2007; #204-99; DA-429-2007 Dulay Pagunsan & Ty Strata 100 Building, Suite 1300 F. Ortigas Jr. Road, Ortigas Center Pasig City Attention: Atty. Sinfroso R. Pagunsan Gentlemen : This refers to your letter dated May 8, 2009 requesting on behalf of your client, First Cagayan Petroleum Corporation ("First Cagayan"), for confirmation of your opinion that First Cagayan, as a Cagayan Special Economic Zone-registered enterprise is automatically entitled to zero (0%) percent VAT on its purchases of petroleum products, specifically LPG products, from VAT registered suppliers from the Customs Territory. It is represented that First Cagayan is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200902734 and is also a registered enterprise with the Cagayan Economic Zone Authority (CEZA) having been issued CSEZFP Certificate of Registration No. CF-09-003 dated March 30, 2009; and that under Section 4 (c) of Republic Act No. 7922, otherwise known as "Cagayan Special Economic Zone Act of 1995", all business establishments operating within the zone are exempt from taxes, local and national, any provision of existing law, rules and regulations to the contrary notwithstanding; and in lieu of paying taxes, said business establishments shall pay and remit to the national government five percentum (5%) of their gross income. In reply, please be informed that Section 106 (A) (2) (a) (5) of the Tax Code, as amended by Republic Act (R.A.) No. 9337, provides to wit: "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) TACEDI Implementing the above provision is Section 5 of Revenue Regulations (RR) No. 4-2007, wherein the sales of goods or properties made by VAT-registered suppliers to export processing zones pursuant to Republic Act (R.A.) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones are considered export sales subject to VAT at zero percent (0%) rate, to wit: "Section 5. Zero-Rated Sales . Sec. 4.106-5 of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. . . . . The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. . . . . (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 port 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 products sold by a registered export producer to another export producer, or to an 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, further, That pursuant to E.O. 226 and other special laws , even without actual exportation, the following shall be considered constructively exported: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones pursuant to Republic Act (R.A.) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones; (3) sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority pursuant to R.A. 7227; (4) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); (5) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not." Hence, since the sales of goods (petroleum products, specifically LPG products) or properties by VAT-registered suppliers to First Cagayan (a CEZA-registered enterprises) fall within the definition of export sale under a special law which is R.A. No. 7922, otherwise known as "Cagayan Special Economic Zone Act of 1995", such sale is considered "export sale" as contemplated by Section 106 (A) (2) (a) (5) of the Tax Code of 1997 as implemented by Section 5 of RR No. 4-2007, which is subject to VAT zero-rating. (BIR Ruling Nos. 204-1999 dated December 27, 1999 and DA No. 429-2007 dated July 30, 2007) Furthermore, under Section 4.106-6 of RR 16-2005, as amended by RR 4-2007, transactions which are considered export sales under special laws [Sec. 4.106-5 (a) above] are subject to VAT at zero percent (0%) rate and 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. 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) CTDacA Accordingly, this Office hereby confirms your opinion that the sale of petroleum products, specifically LPG products, by VAT registered suppliers from the Customs Territory in favor of First Cagayan Petroleum Corporation, a Cagayan Special Economic Zone-registered enterprise, is considered as an export sale, and thus, subject to VAT at zero (0%) percent rate without the necessity of applying for and securing prior approval for VAT zero-rating. Furthermore, since the sale of LPG products to First Cagayan is considered export sale and subject to zero percent (0%) VAT, the suppliers of First Cagayan shall not impute or shift any VAT as part of the cost to be paid by First Cagayan on its purchases . (BIR Ruling DA 452-07 dated August 10, 2007). As such, First Cagayan'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 Revenue Memorandum Circular 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. HEDSCc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service