Sales of Construction Services to PEZA-registered Export Enterprises Are Effectively Zero-Rated Transactions

April 13, 1998 BIR RULING NO. 033-98 033-98 Quisumbing Torres & Evangelista 11th Floor, Pacific Star Bldg. Makati cor. Sen. Gil J. Puyat Avenues Makati City Attention: Attys . Edgardo M . de Vega and Shennan A . Sy Gentlemen : This refers to your letter dated September 1, 1997 requesting on behalf of your client, CORREA ZENITAKA , INC . (ZENITAKA) , for confirmation of your opinion that the sales of construction services to export enterprises registered within the Philippine Economic Zone Authority (PEZA) are effectively zero-rated transactions under RA No. 7716, otherwise known as the Expanded Value-Added Tax Law, as amended by RA 8241. It is represented that Zenitaka is a domestic corporation engaged in providing construction services; that it is a VAT-registered general contractor; that most of its clients are export enterprises registered within the Philippine Economic Zone Authority (PEZA) located within the Special Economic Zones (SEZs); that in billing its clients for construction services rendered, Zenitaka passes on the 10% VAT to its clients, that to survive and expand its operations in the Philippines, Zenitaka needs to be competitive and financially viable; that in order to remain competitive in the construction services industry, Zenitaka intends to reduce the amount of fees it charges to its PEZA registered export enterprises clients by not passing on the VAT to them; that, however, in order not to jeopardize its financial viability, Zenitaka does not want to shoulder the payment of the VAT; that to meet the twin objectives of market competitiveness and financial viability, Zenitaka must avail of incentives granted under Philippine laws (e.g., Expanded Value-Added Tax Law) to exporters and export-related industries; and that under the E-VAT Law, export sales of goods and services and sales of goods and services by export related enterprises may qualify as VAT-exempt transactions, zero-rated transactions or effectively zero-rated transactions. In reply, please be informed that your opinion is hereby confirmed. Section 4.102-2(b)(3) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that services rendered by VAT-registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero-rate. Effectively zero-rated sale of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Effectively-zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subparagraph (b), Nos. (3), (4) and (5) of Section 4.102-2 of Revenue Regulations No. 7-95, as amended. Such being the case, the domestic sales of construction services by Zenitaka, a VAT-registered general contractor to export companies registered within the PEZA, are zero-rated. The sale of services by Zenitaka shall not result in any output tax. However, the input tax on its purchases of goods, properties or services related to such zero-rated sale shall be available as a tax credit or refund in accordance with Revenue Regulations No. 7-95. dctai It shall be understood, however, that your client, Zenitaka, shall apply with the Revenue District Officer concerned having jurisdiction over its principal place of business for the effective zero-rating of sales of services to the export enterprises, registered with PEZA within the SEZ, pursuant to Revenue Regulations No. 7-95, as amended. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue