SGV & Co.

December 3, 2008 BIR RULING [DA-(VAT-048) 480-08] RR 16-2005; DA-079-2006 SGV & Co. 6760 Ayala Avenue Makati City, Philippines Attention: Atty. Mark Anthony P. Tamayo Gentlemen : This refers to your letter dated June 5, 2007 requesting, on behalf of Mindanao Corrugated Fibreboard, Inc. (Mincorr), for a confirmation that the following transactions are automatically Value-Added Tax (VAT) zero-rated: 1. The sales by Mincorr to a nonresident foreign corporation (NRFC) of knocked down (KD) boxes for delivery by the said NRFC to banana export growers in the Philippines for eventual exportation, which are considered as export sales; EHCDSI 2. The sale of service by Mincorr to a NRFC for the manufacture of KD boxes and the subsequent delivery of said boxes to the said NRFC who, in turn, delivers the same to banana export growers in the Philippines for eventual exportation; and 3. The sale by local suppliers to Mincorr of raw materials to be placed in the latter's Common Bonded Warehouse (CBMW) for processing into KD boxes, which is considered as export sale. It is represented that Mincorr is a domestic corporation engaged in the manufacture of KD boxes for sale locally and abroad; that it is registered with the Board of Investments (BOI) as an Expanding Indirect Export Producer of Corrugated Carton Boxes under Executive Order (E.O.) No. 226 or the Omnibus Investments Code of 1987, as amended; that it is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer with Tax Identification Number (TIN) 004-471-427. It is further represented that, in the manufacture of KD boxes, Mincorr utilizes imported and local raw materials which are placed in a Customs Bonded Manufacturing Warehouse (CBMW) of which Mincorr is a member; that in the case of imported raw materials, the same may either be purchased by Mincorr or supplied by a NRFC-buyer/customer; that furthermore in cases where the imported raw materials are supplied by a NRFC-buyer/customer, Mincorr provides manufacturing services to the NRFC-buyer/customer. In addition, the sale of goods and services by Mincorr to NRFC in transaction numbers (1) and (2) are paid for in acceptable foreign currency. Lastly, Mincorr sells the manufactured KD boxes to a NRFC for delivery by the said NRFC to local resident export-oriented enterprises, i.e., banana export growers in the Philippines, who, in turn, will use the KD boxes as packaging materials for their exports; that in cases where Mincorr merely renders manufacturing services to the NRFC-buyer/customer, Mincorr delivers the same to local export-oriented enterprises also for eventual exportation. TADaCH In reply, please be informed as follows: Sale of KD boxes by Mincorr to NRFC Section 106 (A) (2) (a) (2) of the Tax Code, as amended, as implemented by Section 4.106-5 (a) (2) of Revenue Regulations (RR) No. 16-05 dated September 1, 2005, treats as an export sale subject to the 0% VAT the sale to a non-resident buyer of raw materials and packaging materials, for delivery to a resident local export-oriented enterprise which will be used by the said resident local export oriented enterprise in manufacturing, processing, packing or repacking in the Philippines of the said non-resident buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) (BIR Ruling No. DA-079-06 dated March 6, 2006). In the present case, the sale of KD boxes by Mincorr to the NRFC for delivery by the said NRFC to banana export growers for eventual exportation is similarly situated as ruled in the aforementioned ruling where a Philippine resident sold goods to a non-resident for delivery to a Philippine client of the said non-resident. On this basis, we confirm your opinion that the sale of goods by Mincorr to the NRFC, which is considered export sales under Section 106 (A) (2) (a) (2) of the Tax Code, as amended, is automatically subject to 0% VAT, provided that the KD boxes are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Sale of Service by Mincorr to NRFC Section 108 (B) (1) of the Tax Code, as amended, as implemented by Section 4.108-5 (b) (1) of RR No. 16-05, treats as sale of services subject to 0% VAT those services performed in the Philippines by a VAT-registered taxpayer for the processing, manufacturing or repacking of goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. DEcSaI In the present case, the sale of service by Mincorr to the NRFC for the manufacture of the KD boxes for delivery to the said NRFC who, in turn, delivers the said KD boxes to banana export growers for eventual exportation, falls under the aforecited provision, and hence, is considered a sale of service automatically subject to 0% VAT. On this basis, we likewise confirm your opinion that the sale of service by Mincorr to the NRFC, which is considered a zero-rated sale of service under Section 108 (B) (1) of the Tax Code, as amended, is automatically subject to 0% VAT, provided that the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Sale by Local Suppliers to Mincorr of Raw Materials to be placed in CBMW Under Section 106 (A) (2) (a) (5) of the Tax Code, as amended, as implemented by Section 4.105-5 (a) (1) of RR 16-2005, as amended by RR No. 4-2007 dated February 7, 2007, the sale of goods to bonded manufacturing warehouses of export-oriented manufacturers, which is considered as an export sale by way of constructive exportation under E.O. 226, is subject to 0% VAT. In the present case, the sale by local suppliers to Mincorr of raw materials which are placed in a CBMW of which Mincorr is a member, for processing into KD boxes, clearly falls under the aforecited provision. On this basis, we confirm your opinion that the said sale by local suppliers to Mincorr, which is considered as export sale, is automatically subject to 0% VAT. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner