BIR Ruling No. 352-11

September 28, 2011 BIR RULING NO. 352-11 Sec. 106 NIRC; DA-306-2006 Dy Go and Company 3rd Floor Saville Bldg. 8728 Paseo de Roxas, Makati City Attention: Peter Santos Director Gentlemen : This refers to your letter dated December 1, 2010 requesting for legal opinion on the VAT zero-rating of the sales by your client, Elixir Gaming Technologies Philippines, Inc. (hereinafter referred to as "Elixir" for brevity), to Stotsenberg Leisure Park and Hotel Corporation, a Clark Special Economic Zone (CSEZ) enterprise and whether or not Elixir may claim a refund of the Input VAT pertaining to the said transaction. It is represented that Elixir is duly organized and existing under Philippine laws with SEC Registration No. CS2007-11745 dated July 26, 2007. The Company is primarily engaged in the business of developing, producing, promoting, distributing and selling wholesale, leasing and servicing advanced information technology (IT) infrastructure, systems, services, processes, and solutions, including gaming and entertainment IT, providing system integration, network services and other related IT services to all its clients within and outside the Philippines, as well as registering and licensing all such IT for its protection, without engaging as an internet service provider. The Company is registered with the Bureau of Internal Revenue (BIR) as a Value Added Taxpayer as evidenced by its BIR Certificate of Registration with Tax Identification No. 006-806-373-000. It started commercial operations in August 2007, and its registered address is at 3rd Floor of 32nd and 5th Street Building, 32nd corner 5th Street Fort Bonifacio, Taguig City. On the other hand, Stotsenberg Leisure Park and Hotel Corporation (herein referred to as "Stotsenberg") is an entity duly organized and existing under the laws of the Philippines and with principal office located at Gil Puyat Avenue corner Andres Soriano Sr. Street, Clark Special Economic Zone (CSEZ), Pampanga. Stotsenberg is a registered Clark Special Economic Zone (CSEZ) Enterprise, under Registration No. 2005-176. Subsequent to the license obtained by Stotsenberg, it entered into an agreement with Elixir wherein the latter shall provide Stotsenberg with the number of new units of electronic gaming machines for installation and operation as well as technical support within the premises under an agreed lease arrangement. As a result, Elixir acquired gaming equipment in compliance with its agreement with Stotsenberg. These purchases included input VAT which was supposed to be applied to output tax on revenues of Elixir. However, since Stotsenberg is a CSEZ-registered enterprise, it enjoys various incentives, one of which is zero-rating on its purchases, including that from Elixir. Having no output tax on its revenue transactions with Stotsenberg, Elixir was unable to utilize its input tax. In reply, please be informed that in the case of Coconut Oil Refiners Association, Inc., et al. vs. Hon. Executive Secretary Ruben Torres, BCDA, et al. , (G.R. No. 132527, July 29, 2005), the Supreme Court held that "for as long as the goods remain within the zone, whether we call it an economic zone or a freeport zone, for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain there, consumed there or re-exported in that place, then they are not subject to duties and taxes in accordance with the laws of the Philippines." Moreover, Section 3 of Revenue Memorandum Circular (RMC) No. 50-2007 1 dated July 30, 2007 provides, viz. : "Q2: What will be the treatment of sale, barter, exchange or lease of goods, properties and sale or exchange of services to a registered Freeport Zone enterprise by sellers/contractors from the Customs Territory? A2: If the seller is a VAT taxpayer, such sale, barter or exchange shall be subject to VAT at zero-percent (0%). If the seller is a non-VAT taxpayer, the transaction shall be exempt from VAT." The said RMC further defines the coverage of transactions subject to VAT Zero Rating, to wit: "Q5: What is the coverage of VAT zero-rating? A5: The zero-rating will cover sale, barter, exchange or lease of all goods, properties and/or services by a VAT-registered seller/contractor from the Customs Territory to a Freeport Zone-registered enterprise. . . ." Based on the foregoing, since the subject equipment were purchased by Stotsenberg from Elixir, which is a VAT registered enterprise, the sale thereof by Elixir shall be effectively subject to VAT at zero-rate. A zero-rated sale of goods, properties and/or services (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulations. Under this type of sale, no VAT shall be shifted or passed-on by VAT-registered sellers/suppliers from the Customs Territory on their sale, barter or exchange of goods, properties or services to the subject registered Freeport Zone enterprises. Moreover, applying Section 112 (A) of the National Internal Revenue Code, the creditable input tax paid attributable to zero-rated sales may be refunded by Elixir. To claim VAT refund, Elixir must show proof of payment of the VAT on the equipment it purchased and subsequently sold to Stotsenberg. 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