Mahle Filter Systems Philippines Corporation

June 25, 2009 BIR RULING [DA-(VAT-059) 324-09] R.A. 7916; 59-01, DA-ITAD 13-06, DA-425-06, DA-205-07 & VAT-75-99 Mahle Filter Systems Philippines Corporation Block 8 Lot 5, 6 & 7 PEZA Drive First Cavite Industrial Estate, Brgy. Langkaan Dasmarias, Cavite Attention: Ms. Eleonor F. Ledesma Department Head General Accounting and Tax Gentlemen : This refers to your letter dated May 7, 2009 requesting for a ruling or legal opinion regarding the proper taxpayer's classification for purposes of VAT. As represented, Mahle Filter Systems Philippines Corporation ("MFSP" for brevity) formerly, Mahle Tennex Philippines Corporation, was incorporated and registered with the Securities and Exchange Commission (SEC) under SEC Registration No. ASO96-5566 on May 27, 1996. It is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 96-067 on June 3, 1996 as an Ecozone Export Enterprise and the Bureau of Internal Revenue as a VAT entity on December 23, 1996. MFSP is primarily engaged in the business of manufacturing of air filter elements and other automotive products. Majority of its product line are now subject to 5% regime in lieu of other taxes under Republic Act No. 7916 after its income tax holiday incentive expired on September 30, 2007. It is a 100% subsidiary company of MFSJ, a corporation duly organized and operating under the laws of Japan and a manufacturer of various kinds of automotive parts. In reply, please be informed that in Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.) Inc., G.R. No. 150154, August 9, 2005, the Supreme Court held that PEZA-registered enterprises are VAT exempt entities because of Section 8 of Republic Act (R.A.) No. 7916, as amended, which establishes the fiction that ecozones are foreign territory. The said provision mandates that the PEZA shall manage and operate the ecozones as a separate customs territory; thus, creating the fiction that the ecozone is a foreign territory. Hence, the VAT is not imposed on sales made by a PEZA-registered enterprise destined to be consumed abroad. The goods sold to the customs territory is treated as "technical importation" into the Philippines by the buyer, in which case, such buyer, rather than the ecozone registered enterprise or seller, shall be responsible for the tax imposed. Accordingly, the buyer shall be technically treated as the importer thereof who shall be personally liable for the tax, more particularly to the VAT on importation imposed under Section 107 of the Tax Code of 1997 (BIR Ruling No. ITAD-27-04 dated March 25, 2004, VAT Ruling No. 1-00 dated January 6, 2000, and VAT Ruling No. 119-99 dated December 10, 1999). Moreover, the Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with twelve percent (12%) VAT. Finally, Section 4.109-1 of Revenue Regulations (RR) No. 16-2005 implementing Section 109 (K) of the Tax Code of 1997, as amended by R.A. 9337 reads "SEC. 4.109-1. VAT-Exempt Transactions. (A) . . . (B) Exempt transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws except those granted under P.D. No. 529 Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and xxx xxx xxx" A perusal of the terms of registration of MFSP with PEZA disclosed that it is entitled to the preferential tax of 5% on gross income earned in lieu of all other taxes and fees, national or local. Accordingly, its operations at the PEZA are subject to the 5% tax on gross income earned in lieu of all other taxes, national or local, including the VAT. Hence, the VAT regime under the National Internal Revenue Code (NIRC) does not apply. ACDIcS Since the registered activity of MFSP falls under "transactions which are exempt . . . under special laws . . . ," it follows that MFSP is exempt from VAT. Moreover, Section 236 of the Tax Code, provides that: "(1) Any person who is not required to register for value-added tax under Subsection (G) hereof may elect to register for value-added tax by registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in Subsection (B) hereof AacDHE (2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2) for the next three (3) years. For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as a 'VAT-registered person' who shall be assigned only one Taxpayer Identification Number (TIN)." Since MSFP is a PEZA-registered enterprise subject to the 5% preferential tax rate who had erroneously registered as a VAT taxpayer, MFSP is, therefore, entitled to cancel its existing VAT registration anytime. The prohibition against the cancellation of the VAT registration within three (3) years does not apply in the case of erroneous registration. ADECcI 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service