Whether the Gross Receipts Paid for in Acceptable Foreign Currency Derived by HANSEATIC MARITIME PHILIPPINES CORPORATION (HMPC), a Domestic Corporation Engaged in Overseas Shipping, from Time-Charter Hire of Its Philippine-Registered Vessels and Accounted for With the Rules and Regulations of the Bangko Sentral ng Pilipinas (BSP) Qualifies as VAT Zero-Rated Sales

October 23, 1995 BIR RULING NO. 165-95 99 24 (e) 000-000165-95 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated May 30, 1995 representing that your client, HANSEATIC MARITIME PHILIPPINES CORPORATION (HMPC), is a domestic corporation engaged in overseas shipping; that on January 1, 1988, it was issued VAT Registration Certificate No. 25-7-001282, by Revenue District Office No. 25 of BIR Manila Region; that since 1992, HMPC is a disponent owner and operates ocean-going vessels under Philippine flag registry; that the vessels are under time-charter contract with non-resident foreign corporations; that pursuant to the provisions of the time-charter contract, HMPC is obligated to pay for the insurance of the vessel, and for all provisions, cabin, deck, engine-room, and other necessary stores, wages of crew, consular shipping, and maintenance of the vessels' hull, machinery and equipment; that the charterer, on the other hand, provides and pay the fuel, port charges, pilotages, towages, canal dues, consular charges and fumigation of cargoes on-board the vessels; that since the charterer conducts its business abroad and does not make any call on Philippine ports, HMPC appointed B.V. Maatshappij-Motorship "Meerdrecht" as its ship agent in Europe; that under this set-up, the charterer remits the payments of the time-charter hire to the ship agent, and the latter deposits the same in Deutsche Bank in Bremen, Germany for the account of HMPC; that all payments necessary for maintenance and provisions of the vessels are paid directly by the ship agent out of this account, and the unused balance remitted to HMPC in the Philippine; that for calendar year 1992, HMPC reported its foreign gross receipts from time-charter hire of P79,268,255.01, out of which the amount of $499,780.38 was inwardly remitted into the Philippines. cdll Based on the foregoing, you now request for a ruling to confirm your opinion that the gross receipts paid for in acceptable foreign currency derived by HMPC from time-charter hire of its Philippine-registered vessels and accounted for with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) qualifies as VAT zero-rated sales. In reply, please be informed that Section 99 of the Tax Code, as amended, by Executive Order No. 273, which imposes a 10% value-added tax on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, and renders services, should be understood to mean that the sale of goods and/or services takes place in the Philippines. Like any other business tax, VAT is subject to the inherent limitation of taxation, among others, the principle of territoriality that is, taxation may be exercised only within the territorial jurisdiction of that taxing authority. (Jose C. Vitug. Tax Law and Jurisprudence, 1993, 3rd Revised Edition, p. 9 citing 51 Am. Jur. 88). Since, HMPC's shipping operation is performed abroad as certified by the Maritime Industry Authority of the Philippines (MARINA), the income derived therefrom is considered foreign sourced income and therefore not subject to VAT. Accordingly, your request that HMPC's gross receipts from time-charter hire of its Philippine-registered vessels, even if paid for in acceptable foreign currency derived and accounted for with the rules and regulations of the Bangko Sentral ng Pilipinas, qualifies as VAT zero-rated sales is hereby denied. However, being a domestic corporation, HMPC is subject to income tax imposed under Section 24(a) of the Tax Code, as amended, on its worldwide income. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue