BIR Ruling No. 199-13

May 21, 2013 BIR RULING NO. 199-13 RA 7916; CIR vs. Seagate Technology, G.R. No. 153866; CIR vs. Toshiba Information Equipment, G.R. No. 150154; CIR vs. Sekisui Jushi Philippines, G.R. No. 149671 Sapalo Velez Bundang & Bulilan Law Offices 11th Flr. Security Bank Centre 6776 Ayala Avenue Makati City Attention: Romeo H. Duran Tax Partner Gentlemen : This refers to your letter dated June 10, 2010 requesting, on behalf of your client, JGC PHILIPPINES, INC. ("JPHIL"), confirmation of your opinion on the Value-Added Tax ("VAT") implications of the IT-enabled Engineering, Procurement and Construction ("EPC") services to be performed by an unincorporated Joint Venture between JPHIL and CHIYODA PHILIPPINES CORPORATION ("CPh") for their client, TAGANITO HPAL NICKEL CORPORATION ("TAGANITO"). IHAcCS Background: JPHIL JPHIL is a corporation organized and existing under Philippine laws, with Securities and Exchange Commission (SEC) Company Registration No. 167900. Under its Articles of Incorporation, its Primary Purpose is: "To engage in the business of rendering specialty and technical services including consultation services to juridical or natural persons with respect to planning, management, procurement, construction, evaluation, estimation, supervision, inspection, maintenance, operation and any other activities incidental thereto or in any way connected therewith, for overseas or domestic projects for industrial or other facilities in various fields and to engage in general construction business, including the constructing, enlarging, repairing, developing or engaging in work both here and abroad upon petroleum refineries, petrochemical plants, gas production and processing plants, storage facilities, power stations, food and pharmaceutical plants, automobile assembling plants and other industrial plants and facilities, buildings, houses and condominium roads, plants, bridges airfields, piers, waterworks, railroads and other structures and to engage in actual and direct procurement work for both domestic and overseas projects including, but not limited to sourcing, and commercial and technical evaluation of suppliers, vendor selection, order placement, expediting and inspection, direct importation and purchase, shipping arrangement and customs clearance and other related procurement activities." On February 27, 2007, JPHIL was registered with the Philippine Economic Zone Authority (PEZA) as an "ECOZONE IT ENTERPRISE at the JGC Philippines Building" to provide engineering, procurement, and construction services at the JGC Philippines Building. Under the Registration Agreement with PEZA, the scope of JPHIL's registered activity "shall be limited to the provision of engineering, procurement and construction (EPC) services and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operation at the JGC Philippines Building." Upon the expiration of its Income Tax Holiday (ITH) incentive on March 5, 2009, JPHIL became entitled to the five percent (5%) tax on Gross Income in lieu of all national and local taxes. JPHIL is therefore under the 5% GIT regime. CPh CPh is a domestic corporation organized and existing under Philippine laws, with SEC Company Registration No. ASO95-001483. Under its Articles of Incorporation, its Primary Purpose is: "To undertake and/or engage in the business of providing and/or rendering technical services to various industrial plants and facilities, including planning, consultation, project management, construction management, supervision maintenance, operation and other activities necessary for the execution of construction projects." aESTAI On December 22, 2009, CPh was registered with PEZA as an "ECOZONE IT ENTERPRISE at the SUN PLAZA" to provide engineering design and IT-enabled EPC services at the Sun Plaza Building. Pursuant to its Registration Agreement with PEZA, the scope of CPh's registered activity shall be limited to "Engineering Design and IT-enabled EPC Services and the importation of machinery, equipment, tools, goods, wares, articles, or merchandise directly used in the registered operations at the Sun Plaza." CPh has been entitled to the 5% tax on Gross Income in lieu of all national and local taxes. CPh is therefore under the 5% GIT regime. TAGANITO TAGANITO is a domestic corporation organized and existing under Philippine laws, with SEC Company Registration No. CS200812951. Under its Articles of Incorporation, its Primary Purpose is: "To own, hold, sell, exchange, lease, mortgage or otherwise dispose of, deal in, and operate plants for processing, reducing, concentrating, smelting, converting, refining, preparing for market, or otherwise treating meals, minerals and mined products to be used in the production of nickel cobalt mixed sulfide, nickel hydroxide, and any and all ingredients, products and by-products of any thereof, and to produce, manufacture, process, refine, treat, sell, use, deals in, distribute, market and otherwise turn to account or dispose of nickel cobalt mixed sulfide, nickel hydroxide, and any and all ingredients, products and by-products of any thereof." On January 7, 2010, TAGANITO was registered with PEZA as an "ECOZONE EXPORT ENTERPRISE" to engage in nickel/cobalt mixed sulfide/mineral processing at the Taganito Special Economic Zone (TSEZ). Pursuant to its Registration Agreement with PEZA, the scope of TAGANITO's registered activity shall be limited to "nickel/cobalt mixed sulfide/mineral processing and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the TSEZ." For the Taganito HPAL Project, TAGANITO shall be entitled to all incentives granted to non-pioneer projects under Republic Act (R.A.) No. 7916, as amended, subject to the terms and conditions provided under its Registration Agreement with PEZA. Among the incentives shall be a four (4) year Income Tax Holiday (ITH) incentive, among other incentives under R.A. 7916, as amended, in accordance with the 2009 Investment Priorities Plan (IPP). aHDTAI Unincorporated Joint Venture TJCP JV On April 15, 2010, SUMITOMO METAL MINING CO., LTD., the parent company of TAGANITO, awarded on behalf of TAGANITO the design, execution, and completion of the Taganito Nickel Hydrometallurgical Processing Plant located in the TSEZ ("Taganito HPAL Project") to both JPHIL and CPh under an Engineering, Procurement and Construction ("EPC") service contract. Meanwhile, in view of the client's requirement that JPHIL and CPh work jointly on the project, JPHIL and CPh had entered into a Joint Venture Agreement effective as of October 5, 2009 under which they would collaborate with each other in the performance and execution of the contract for the execution of the Taganito HPAL Project. Pursuant to said Joint Venture Agreement, JPHIL and CPh agreed to form an unincorporated Joint Venture ("TJCP JV") exclusively for the purpose of performing all on-shore work in relation to the Taganito HPAL Project, which includes, but not limited to, engineering, procurement and construction, while subletting all the physical construction activities to PCAB-licensed contractors. JPHIL and CPHIL, through TJCP JV, shall enter into the EPC Service Contract with TAGANITO, and all activities in the Philippines relative to the Taganito HPAL Project shall take place within a special economic zone, i.e. , the JGC Philippines Building and/or the Sun Plaza Building, as the case may be. Under the Joint Venture Agreement, which provides for a profit-and-loss sharing arrangement, the share of each party in the profit or loss of TJCP JV shall be as follows: JPHIL sixty percent (60%) ; CPh forty percent (40%) , with JPHIL acting as the lead party in the joint venture. The execution of the Taganito HPAL Project shall be under the joint responsibility of JPHIL and CPh, and said parties shall be jointly and severally liable to TAGANITO for the performance and execution of the Taganito HPAL Project. TJCP JV shall maintain and register its books of accounts and official receipts. The revenue from the Taganito HPAL Project, as well as the corresponding costs/expenses, shall be recorded in the books of TJCP JV. As members of TJCP JV, JPHIL and CPh shall jointly contract with suppliers and/or subcontractors, under their joint signature, in their capacities "as members of the TJCP JV for the Taganito HPAL Project." The suppliers and subcontractors, in turn, will issue their respective invoices and/or official receipts to TJCP JV. On the basis of the foregoing facts, you now request for a confirmation of your opinion on the following: 1. The IT-enabled EPC services to be rendered by TJCP JV to TAGANITO are not considered local sales; and 2. TJCP JV, being an unincorporated joint venture between JPHIL and CPh, both PEZA-registered companies under the 5% GIT regime, is exempt from VAT; sales by local suppliers and/or subcontractors of goods, properties, or services to TJCP JV are zero-rated for VAT purposes, and the latter shall not shift or pass-on any VAT to TJCP JV. In reply, please be informed as follows: 1. The IT-Enabled EPC Services to be Rendered by TJCP JV to TAGANITO are Not Considered Local Sales . JPHIL and CPh are PEZA-registered enterprises under the 5% GIT regime, and are therefore exempt from national and local taxes on their registered activities pursuant to Section 24 of Republic Act (R.A.) No. 7916, as amended: "SEC. 24. Exemption from National and Local Taxes. Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) Three percent (3%) to the National Government; (b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." The IT-Enabled EPC Services to be rendered by TJCP JV, the unincorporated joint venture comprised of JPHIL and CPh as members, to TAGANITO, a PEZA-registered company, will be performed exclusively within the PEZA special economic zone, i.e. , the JGC Philippines Building and/or the Sun Plaza, as the case may be. Moreover, such IT-enabled EPC services by TJCP JV are all within the scope of the PEZA-registered activities of its members, JPHIL and CPh. Accordingly, the sale of EPC Services by TJCP JV to TAGANITO is considered as being performed outside the Customs Territory, and is therefore not considered a local sale. STHAID In this regard, Section 8 of Republic Act (R.A.) No. 7916, as amended, provides that: "SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. The ECOZONE shall be managed and operated by the PEZA as separate customs territory. xxx xxx xxx." In discussing the nature of a "separate customs territory", the Supreme Court in the case of Commissioner of Internal Revenue vs. Seagate Technology (Philippines) G.R. 153866 dated February 11, 2005 , the Court held that "in such zone is created the legal fiction of foreign territory." The Court further ruled that "[A]n ecozone indubitably a geographical territory of the Philippines is, however, regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone." Moreover, in the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc., G.R. No. 150154 dated August 9, 2005 , the Supreme Court ruled as follows: "This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 9716, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory . It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone has been described as . . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IE), export processing zones (EPZs), free trade zones and tourist/recreational centers. The National territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory." (Underscoring supplied) Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the legal fiction that the ECOZONE is a foreign territory. Accordingly, the sale of IT-Enabled EPC Services by TJCP JV, both of whose members are PEZA-registered companies, to TAGANITO, which services are performed exclusively within a PEZA special economic zone, i.e. , the JGC Philippines Building and/or the Sun Plaza, as the case may be, are deemed by fiction of law as being performed or rendered in foreign territory or foreign soil, and therefore not within the Customs Territory. The sale of such service should therefore not be considered as local sales since the same took place by legal fiction in a foreign territory or foreign soil. Accordingly, the IT-enabled EPC services to be rendered by TJCP JV to TAGANITO are not considered local sales and shall be exempt from VAT. 2. TJCP JV, being an unincorporated joint venture between JPHIL and CPh, both PEZA-registered companies under the 5% GIT regime, is exempt from VAT; accordingly, sales by local suppliers and/or subcontractors of goods, properties, or services to TJCP JV are zero-rated for VAT purposes, if the seller is VAT-registered; local sales by non-VAT suppliers and/or subcontractors are VAT-exempt, hence, the sellers/subcontractors shall not shift or pass-on any VAT to TJCP JV. The co-venturers of TJCP JV, JPHIL and CPh, are both PEZA-registered companies under the 5% GIT regime. The client, TAGANITO, is also a PEZA-registered company, i.e. , an Ecozone Export Enterprise. The activities of TJCP JV, through its co-venturers, JPHIL and CPh, are within the scope of the registered activities of JPHIL and CPh, and all such activities will be performed within the special economic zone, i.e. , the JGC Philippines Building and/or the Sun Plaza, as the case may be. HCEcaT As ruled by the Supreme Court in the above-cited case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. , PEZA-registered entities are VAT-exempt entities, not because of Section 24 of R.A. No. 7916, but rather because of Section 8 of the same law which establishes the legal fiction that ECOZONES are foreign territory or foreign soil. Accordingly, TJCP JV, which will be performing IT-enabled EPC services within PEZA special economic zones, is exempt from VAT. Moreover, sales by local sellers and/or subcontractors are zero-rated if the seller is a VAT registered taxpayer. If the local seller is a non-VAT taxpayer, the sale shall be exempt from VAT. Thus, such suppliers and/or subcontractors shall not shift or pass-on any VAT to TJCP JV. In discussing the extent of such VAT exemption, the Supreme Court in the same case of CIR vs. Seagate Technology (Philippines), supra , ruled: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases . Ubi lex non distinguit, nec nos distinguere debemus . Where the law does not distinguish, we ought not to distinguish." (Underscoring supplied) In describing the exemption as "both express and pervasive", the Court further ruled thus: "Moreover, the exemption is both express and pervasive for the following reasons: 'First, RA 7916 states that "no taxes, local or national, shall be imposed on business establishments operating within the ecozone. Since this law does not exclude the VAT from the prohibition, it is deemed included. Exception firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. 'Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly . Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." (Underscoring supplied) This was reiterated in the subsequent case of Commissioner of Internal Revenue vs. Sekisui Jushi Philippines, Inc. , G.R. No. 149671, dated July 21, 2006, where the Supreme Court ruled thus: "Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to tax at the rate of zero percent." Accordingly, TJCP JV is exempt from VAT. Moreover, the sale of services, goods, or properties by VAT-registered local suppliers and/or subcontractors to TJCP JV shall be zero-rated or subject to zero percent (0%) VAT if the seller is a VAT registered taxpayer. If the seller is a non-VAT taxpayer, the local sales shall be exempt from VAT. Accordingly, no VAT shall be shifted or passed-on by said local suppliers and/or subcontractors to TJCP JV. It must be emphasized, however, that in case of sale of service, the service should be performed within the Ecozone for it to be entitled to zero percent (0%) VAT or VAT exemption, as the case may be. Furthermore, to warrant zero percent (0%) VAT rate or VAT exemption, the sale of services, goods or properties by local suppliers and/or subcontractors to TJCP JV must form part of the latter's registered activity/activities as PEZA registered entities. As regards the income payments to the local suppliers and/or subcontractors in relation to the Taganito HPAL Project, such payments shall be subject to the regular income tax at thirty percent (30%) and consequently, to the creditable withholding tax under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, the same being payments to persons residing in the Philippines. Accordingly, being the party making the payments, and in control of said payments, TJCP JV shall act as the withholding agent under Section 2.57.2 of Revenue Regulations No. 2-98, as amended. DEICHc 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue