Services Rendered by Non-Resident Foreign Licensor to PEZA-registered Firm, Deemed Effectively Zero-Rated Transaction

June 29, 1998 BIR RULING NO. 104-98 R.A. 7916-033-96-009-98-104-98 Dae Ryung Ind., Inc. (Philippines) Suite #401 Peninsula Court Paseo de Roxas Cor. Makati Avenue Makati City Attention: Kun Sup Lim Accounting Adviser and Benneth Aldaba General Accounting Supervisor Gentlemen : This refers to your undated letter requesting, in effect, for ruling that the services rendered by a non-resident foreign licensor to a PEZA-registered enterprise like your company be considered effectively zero-rated transactions, and as such, you are not required to withhold the 10% VAT on your royalty payments to the former. LLpr It is represented that Dae Ryung Ind ., Inc . (Philippines) is a PEZA-registered Korean electronics firm with Certificate of Registration No. 91-036 dated November 11, 1991; that it is a wholly-owned subsidiary of Dae Ryung Ind ., Inc . (Korea) which started operation in September, 1992; and that it is engaged in the manufacture of printed circuit boards and other telecommunications equipment, such as satellite video receivers, radar detectors and cordless phones. In reply, please be informed that under Section 24 of R.A. No. 7916, otherwise known as the "Special Economic Zone Act of 1993", business and enterprises within the ECOZONE as defined by Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of the five percent (5%) preferential tax rate based on gross income earned, distributed as follows: (1) three percent (3%) to the national government; (2) one percent (1%) to the local government units affected by the declaration of the ECOZONE; and (3) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE. The aforementioned 5% preferential tax is a commutation of all the national and local taxes otherwise due from businesses and enterprises operating within the ECOZONE. Such being the case, Dae Ryung Ind., Inc. (Philippines) is considered exempt from all direct and indirect taxes hence, may not legally be passed-on with the value-added tax otherwise due from its foreign licensor vis-a-vis the said royalty payments. (BIR VAT Ruling No. 033-96 dated October 30, 1996; VAT Ruling No. 009-98 dated February 5, 1998) prLL In view thereof, and considering that your foreign licensor is a non-VAT registered person, your aforesaid royalty payments are accordingly exempt from the value-added tax. Consequently, you are also exempt from the obligation to withhold and remit the 10% value-added tax on your payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 110 of the National Internal Revenue Code, as amended by R.A. No. 7716 as further amended by R.A. No. 8241 (now Section 114 of the Tax Code of 1997) and as implemented by Section 4.110-3(b) of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations. 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.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue