Purchase of Personal Computers by BOI- and PEZA-registered Enterprises for Their Employees Subject to 0% VAT

December 22, 2000 BIR RULING NO. 074-00 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty . Vic C . Mamalateo Gentlemen : This refers to your letter dated August 29, 2000 stating that your clients, Intel Philippines Manufacturing, Inc. (IPMI) and Intel Technology Philippines, Inc. (ITPI), are respectively a BOI-registered enterprise and a PEZA-registered Ecozone Export Enterprise and are likewise VAT-registered companies; that IPMI is a 100% exporter; that both IPMI and ITPI intend to provide home Personal Computers (home PCs) to all their employees; that the objective of the program is to develop improved internet, e-business and PC skills for Intel employees and their families and likewise to advance Intel products to employees and their families; that IPMI and ITPI will purchase these home PCs from a local vendor, Hewlett Packard Phils. Corporation (HPPC), a VAT-registered company; and that these home PCs will be delivered to the individual employees of IPMI and ITPI at their respective homes. In connection therewith, you now request for confirmation of your opinion that "1. Intel Philippines Manufacturing, Inc. purchases of home PC from Hewlett Packard Phils. Corporation are subject to zero-percent (0%) VAT pursuant to Revenue Memorandum Order No. 9-200; "2. Intel Technology Phils. Inc. purchases of home PC from Hewlett Packard Phils. Corporation are subject to zero percent (0%) VAT pursuant to Revenue Memorandum Circular No. 74-99." In reply, please be informed that your opinion is hereby confirmed as follows: 1. Section 3 of RMO No. 9-2000 provides that sales of goods, properties or services made by a VAT-registered supplier to a BOI-registered exporter shall be accorded automatic zero-rating, i.e., without necessity of applying for and securing approval of the application for zero-rating as provided in Revenue Regulations No. 7-95, subject to the following conditions: (1) The supplier must be VAT-registered; DAHEaT (2) The BOI-registered buyer must likewise be VAT-registered; (3) The buyer must be a BOI-registered manufacturer/producer whose products are 100% exported. For this purpose, a Certification to this effect must be issued by the Board of Investments (BOI) and which certification shall be good for one year unless subsequently re-issued by the BOI; (4) The BOI-registered buyer shall furnish each of its suppliers with a copy of the aforementioned BOI Certification which shall serve as authority for the supplier to avail of the benefits of zero-rating for its sales to said BOI-registered buyers; and (5) The VAT-registered supplier shall issue for each sale to BOI-registered manufacturer/exporters a duly registered VAT invoice with the words "zero-rated" stamped thereon in compliance with Sec. 4.108-1(5) of Revenue Regulations No. 7-95. The supplier must likewise indicate in the VAT-invoice the name and BOI-registry number of the buyer. Considering that IPMI is a BOI-registered enterprise and at the same time a VAT-registered taxpayer as shown by its Certificate of Registration No. EP-97-319 duly issued by the Board of Investments as a 100% exporter and Certificate of Registration No. 000-125-079 duly issued by the Bureau of the Internal Revenue while its supplier, HPPC, is likewise a VAT-registered company with VAT Registration No. 003-956-294-000, in accordance with the aforementioned conditions of RMO 9-200, this Office is of the opinion as it hereby holds that the sale by HPPC of home PCs to IPMI shall be subject to zero-percent (0%) VAT pursuant to Section 3 of RMO No. 9-2000. 2. Section 3(1) (a) of RMC No. 74-99 provides that sales made by a VAT-registered supplier to a PEZA-registered enterprise shall be subject to zero-percent (0%) VAT pursuant to Section 106(A)(2)(a)(5) of the Tax Code of 1997 and Section 23 of RA No. 7916. Accordingly, the sale by HPPC of home PCs to ITPI, a PEZA-registered enterprise shall be subject to zero-percent (0%) VAT pursuant to Section 106(A)(2)(a)(5) of the Tax Code of 1997 as clarified in RMC No. 74-99. However, it should be stressed that the VAT Registration of ITPI is considered as an erroneous registration. Thus, ITPI is not entitled to input taxes on its purchases of home PCs from HPPC. As represented, IPMI and ITPI shall grant home Personal Computers to the employees in consonance with the objective to develop, improve internet, e-business and PC skills and likewise to advance Intel products to the said employees and their families. Thus, the grant of said benefits is necessary to the trade or business of IPMI and ITPI. However, since there is no clear showing on whether or not ownership to said personal computers shall be immediately transferred to the employees but that such benefits are to be brought to the respective homes of the employees such that the same will not only be utilized by the latter but may be used by the members of their families, who may be able to use them for their own benefit, the following tax implications are pertinent If ownership and possession is transferred to the employees, the grant to managerial and supervisory employees is subject to the fringe benefits tax (FBT) imposed under Section 33 of the Tax Code of 1997, as implemented by Revenue Regulations No. 3-98 while those granted to rank-and-file employees shall be subject to the tax imposed under Section 24(A)(1)(c) of the same Code and, consequently, to the withholding tax on compensation under Revenue Regulations No. 2-98, the valuation of which shall be the entire acquisition cost of the computer. In this case, the value of the benefits consisting of the acquisition cost of the computers shall be taken up under the Fringe Benefits expense account, not capitalized, and, therefore, not subject to depreciation. cECTaD If ownership over said computers is retained by IPMI and ITPI and only the right of usufruct is transferred to the employees, it is our opinion that 50% of the monetary value of said benefit is subject to the FBT, if granted to the managerial and supervisory employees, or to the withholding tax on compensation in the case of the rank-and-file employees, applying by analogy the rules on the FBI imposed on the grant of motor vehicles under Sec. 2.33(B)(3)(e) of Revenue Regulations No. 3-98, which states, that "If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employee, the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery service and other non-personal use divided by five (5) years. The monetary value of the fringe benefits shall be fifty percent (50%) of the value of the benefit." (Emphasis supplied) While computers, and other office equipment, do not exactly belong to the category of motor vehicles, yet the application of the FBT rule on motor vehicles, which are not entirely used in business, in so far as company-owned equipment are concerned, is in order, for both are similarly situated. Corollary to this, generally accepted accounting principles dictate that the acquisition cost of the computers shall be capitalized and subjected to the periodic depreciation charges which are allowable as deductions for income tax purposes, together with the fringe benefits tax paid thereon. This ruling is being issued based on 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, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue