Sale of Locally Assembled Motor Vehicle to a PEZA-Registered Export Enterprise Subject to VAT

June 4, 1999 BIR RULING NO. 074-99 074-99 Honda Cars Alabang Alabang Zapote Road cor. Investment Drive Ayala Alabang, Muntinlupa City Attention: Ms . Marie Kristine I . Calpo Accounting Assistant Manager Gentlemen : This refers to your letter dated April 13, 1999 requesting for a ruling as to whether or not the sale of locally assembled motor vehicle to Daeduck Philippines, Inc., a Philippine Economic Zone Authority (PEZA) registered export enterprise, is effectively zero-rated pursuant to Sections 106(A)(2)(c) of the Tax Code of 1997. It is represented that you sold one (1) unit of motor vehicle to Daeduck Philippines, Inc., a corporation established and existing by virtue of Philippine laws and with principal office address at Lot 1-13 Block 20 Phase 4 Main Avenue, PEZA, Rosario, Cavite, as evidenced by Vehicle Delivery Invoice No. 5403 dated April 6, 1999; that the said locally assembled motor vehicle is more particularly described as follows: Model: EK1-1.6-AT-1999 Frame No. PADEK 1650XV101888 Engine No. P6FD6-P401893 Color: K. Silver to which the amount of P58,090.90 for the one (1) unit of motor vehicle was deducted as value-added tax. prLL In reply, please be informed that Section 106(A)(2)(c) of the Tax Code of 1997 provides that sales to persons or entities whose exemption under special laws (e.g., R.A. 7227 and R.A. 7916) or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. However, in interpreting and applying the above-cited section, this Office in RMC No. 25-99 declared that the sales of ordinary automobiles to PEZA, or SBMA and other ECOZONE registered enterprises are not entitled to VAT zero-rating. This is so because under Section 2(ii) of R.A. No. 7916 provides that the term "Merchandise or Goods" shall collectively refer to raw materials, supplies, equipment, machineries, spare parts, packaging materials or wares of every description to be used in connection with the registered activity of an ECOZONE enterprise . (Underscoring supplied) The phrase "to be used in connection with the registered activity of an ECOZONE enterprise" in describing what comprises merchandise or goods imparts the presumption that the same are somehow utilized in the production activity of an ECOZONE enterprise. Such being the case, since the sale of locally assembled motor vehicle to Daeduck Philippines, Inc., is not directly related to its registered activity as PEZA enterprise the same could not be covered within the classification of goods or merchandise entitled to the benefit of tax exemption. Moreover, since value-added tax is an indirect tax, the amount of tax may be shifted or passed on to the buyer of the goods, properties or services. Accordingly, the sale of one (1) unit of motor vehicle to Daeduck Philippines, Inc. is subject to 10% value-added tax. 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue