BIR Ruling No. 610-12

November 8, 2012 BIR RULING NO. 610-12 Secs. 106, 108 of the NIRC of 1997; RMO 09-00; RMC 74-99; RR 16-05, as amended by RR 04-07 CCT-Toyo Consortium 3rd Floor Princess Bldg., 104 Esteban St., Legazpi Village, Makati City Attention: Mr. Manabu Tokita Treasurer Gentlemen : This refers to your letter dated June 7, 2012 requesting a reconsideration of the denial of the application for value-added tax (VAT) zero-rating under Application No. 2012-00002480 received last May 7, 2012 on the sale of services to Allegro Microsystems Phils., Inc. ("ALLEGRO" for brevity) which was denied by the Audit Information Tax Exemption and Incentives Division (AITEID). It is represented that CCT-TOYO CONSORTIUM ("Consortium" for brevity), with TIN 235-898-479-000 entered into a construction contract with Allegro for the construction and expansion of its export facility; that Allegro, with TIN 000-419-293-000 is registered with the Board of Investments (BOI) as an expanding export producer of semiconductor devices (gear tooth sensors); that ALLEGRO is a 100% exporter claiming incentives under Executive Order (EO) No. 226 or the Omnibus Investments Code of 1987 which entitled it to automatic zero-rating of purchases per Revenue Memorandum Order (RMO) No. 9-2000; that in cognizance of RMO No. 9-2000, the Consortium's contract price excluded the VAT and it applied for confirmation of the zero-rating of its construction services to ALLEGRO; that the Consortium's application was denied on the ground that " the construction services delivered to Allegro was not among those services performed by subcontractors/contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production pursuant to Section 4.108-5 (b) of RR 16-2005 "; and that reconsideration of the denial is being sought based on the following reasons: 1) Consortium's reliance in good faith on the BOI Certification and guidelines of RMO 9-2000 that the transaction is entitled to zero-rating; 2) RMO No. 9-2000 provides for the benefit of automatic zero-rating to sales by VAT-registered suppliers to BOI-registered manufacturers-exporters whose manufactured products are 100% exported; 3) Allegro is not an enterprise whose export sales exceed 70% of the total annual production, but a 100% exporter; 4) RMO No. 9-2000 deals with the policy of automatic zero-rating, not inconsistent with RR 16-05. In reply, please be informed that considering that the transaction at hand is the Consortium's sale of services (construction) to ALLEGRO which does not directly relate to the latter's production of goods or final products that are to be exported but on the construction and expansion of the export facility of ALLEGRO, we hereby affirm the disapproval of the Consortium's application for zero-rating filed with AITEID. AaSTIH There is no dispute that sale of service by the Consortium is subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended, as implemented by the provisions of RR No. 16-05, as amended by RR No. 04-07, to wit: "SEC. 4.108-1. VAT on the Sale of Services and Use or Lease of Properties . Sale or exchange of services, as well as the use or lease of properties, as defined in Sec. 108(A) of the Tax Code shall be subject to VAT, equivalent to twelve percent (12%) of the gross receipts (excluding VAT) starting February 1, 2006. SEC. 4.108-2. Meaning of "Sale or Exchange of Services". The term "sale or exchange of services" means the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: (1) construction and service contractors;" On the other hand, Section 4.108-5 of RR No. 16-05, as amended, implementing Section 108 (B) of the Tax Code expressly enumerates the sales of services which qualify for VAT zero-rating: "SEC. 4.108-5. Zero-Rated Sale of Services . (b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; ScaCEH (2) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code starting February 1, 2006; (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the total annual production; (6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to a percentage tax of three percent (3%) based on their gross receipts as provided for in Sec. 118 of the Tax Code but shall not to be liable to VAT; and (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power." HAICcD The Consortium's sale of services to ALLEGRO therefore, is not among those services qualified for VAT zero-rating under the foregoing provision. It is not among those services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the total annual production included in the foregoing provision. Neither does the transaction qualify for VAT zero-rating under Section 4.106-5 of RR No. 16-05, as amended, because the Consortium's sale of services (construction) to ALLEGRO does not directly form part nor contribute to the latter's goods or final products that are to be exported. They are not "supplies", "raw-materials", and "semi-manufactures products" used in the manufacture, processing or production of ALLEGRO's export products and forming part thereof, exported directly or indirectly by ALLEGRO pursuant to Article 39 (k) of EO No. 226. RMO No. 09-00 should be interpreted in harmony with the rationale of its issuance as well as statutory provisions. The foregoing premises considered, the request for reconsideration of the denial of your application for zero-rating covering the sale of services (construction) by the Consortium to ALLEGRO is hereby denied. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue