Buñag & Uy Law Offices

September 18, 2009 BIR RULING [DA-(VAT-088) 557-09] Sec. 106 (A) (a) (5); RR 16-2005; RR 4-2007; DA-429-07; DA-066-08; VAT Ruling No. 10-2004 Buag & Uy Law Offices Suite A & B, 10th Floor Strata 100 F. Ortigas, Jr. Road, Ortigas Center Pasig City Attention: Atty. Jose Mario C. Buag Atty. Catherine J. Uy Atty. Anna Kristina D. Roque Gentlemen : This refers to your letter dated 10 June 2009 requesting on behalf of your client, Jade Group, Inc. ("JADE" for brevity), confirmation of your opinion that (1) the sale of goods by VAT-registered suppliers to JADE qualify as zero-rated sales, as soon as JADE becomes registered under, and conducts its business within the Subic Bay Freeport Zone (SBFZ); (2) the export sales of JADE to foreign distributors which are paid for in foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) likewise qualify as zero-rated sales; and (3) prior application with the appropriate BIR office for VAT zero-rating is no longer required, all pursuant to the existing laws and regulations on Value-Added Tax (VAT). It is represented that JADE is a domestic corporation organized and existing under the laws of the Republic of the Philippines; that it is in the process of locating and registering with SBFZ; that it is engaged in the business of exporting telecommunication ( i.e., Smart, Globe and Sun) pre-paid loads to its foreign distributors for re-sale to OFWs and Filipino expatriates abroad; that these export sales are paid for in acceptable foreign currency and coursed through local banks in accordance with the rules and regulations of BSP. In reply, please be informed that Section 4.106-5 (a) of Revenue Regulation (RR) No. 16-2005, as amended by RR No. 4-2007, states: CEASaT "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. . . . . (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); xxx xxx xxx (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. (Emphasis ours) DcTaEH xxx xxx xxx" Accordingly, this Office is of the opinion and hereby holds that once JADE has located in SBFZ and becomes duly registered with the SBMA, the sale to JADE of pre-paid load by the VAT-registered telecommunication companies shall be subject to VAT at zero percent (0%) rate. (BIR Ruling No. DA-429-07 dated 30 July 2007) It should be emphasized, however, that the input tax on the purchase of goods, properties or services attributable to such zero-rated sale of pre-paid loads by the telecommunication companies to JADE shall be limited only to the cost of the pre-paid loads for purposes of claiming for tax credit or refund. On the other hand, once JADE is registered with the SBFZ, it will be under the 5% preferential tax rate. Hence, being an SBFZ-registered enterprise, its sale of pre-paid loads to foreign distributors for re-sale to OFWs and Filipino expatriates abroad cannot qualify for VAT zero rating. Instead the aforesaid export sale of JADE is exempt from VAT and shall be subject only to the 5% preferential tax on gross income which is in lieu of both national and local taxes, except real property tax. With regard to the issue of prior application with the appropriate BIR office for VAT zero-rating, please be informed that in BIR Ruling No. DA-066-08 dated February 1, 2008, wherein a company sought clarification of the need for prior application for VAT zero-rating under RR No. 16-2005 and Revenue Memorandum Order (RMO) No. 7-2006, this Office had occasioned to rule that: cTAaDC "With the issuance, however, of Revenue Regulation (RR) No. 4-2007, specifically Section 6 thereof which amends Section 4.106-6 of RR No. 16-2005, it dispensed with the requirement of prior BIR approval for effectively zero-rated sales of goods and properties, to wit: xxx xxx xxx Accordingly, this Office is of the opinion and hereby holds that the sales of goods, materials, properties and services by VAT-registered suppliers to DIAMOND being considered exports sales shall be subject to zero percent (0%) VAT rate without the necessity of applying for and securing prior approval for VAT zero-rating." Thus, the sales by VAT-registered suppliers to JADE, being considered export sales, shall be subject to zero-percent (0%) rate. However, instead of applying for and securing prior approval for VAT zero-rating, the VAT zero-rated sellers have to submit the supporting documents as required by the existing rules and regulations to qualify for VAT zero-rating to the concerned BIR Offices for post-audit and for validation of the zero-rated transactions. 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