BIR Ruling [UN-107-94]

March 28, 1994 BIR RULING [UN-107-94] Hon. Romeo L. Bernardo Undersecretary of Finance DOF Building, Ermita Manila Dear Undersecretary Bernardo, This refers to the letter dated February 16, 1994 of Deputy Administrator Rodolfo O. Reyes of the Subic-Bay Metropolitan Authority (SBMA) stating that the SBMA is about to contract a U.S. $40 Million loan from the World Bank which you will most probably negotiate on behalf of the Philippine Government; that the World Bank is in dire need to know the Department's position regarding the tax and duty practices on the following: (i) SBMA purchase of goods from a foreign vendor; (ii) SBMA purchase of goods from a domestic vendor; and (iii) Subic Bay Freeport (SBF) Enterprise purchase of goods from a domestic vendor; cdtech that it is the position of the SBMA that its purchases from a foreign vendor (imports) are exempt from tax, the SBMA being located within the freeport zone; that SBMA purchases from domestic vendor are zero-rated or exempt from value-added tax (VAT) inasmuch as domestic articles going into (admitted into) the freeport zone are considered exports by the vendor, hence, VAT should not be imputed in the sales price of the items sold to the SBMA, and finally, purchases by SBF enterprises of domestic goods should also be zero-rated. In reply, please be informed that under Section 12(c) of Republic Act No. 7227, otherwise known as the Bases Conversation and Development Act of 1992, registered enterprises within the Secured Area of the Zone as defined in Executive Order No. 97 A dated June 19, 1993 shall, in lieu of local and national taxes, be liable to the payment of the following, based on gross income earned: (1) To the National Government 3% (2) To the Local Government units affected by the declaration of the Zone 1% (3) To the Special Development Fund to be utilized for the development of municipalities outside the City of and the Municipality of Subic and other municipalities contiguous to the base areas 1% While the SBMA, as a body corporate created as an operating and implementing arm of the Bases Conversion and Development Authority (BCDA), pursuant to Section 13 of RA 7227, has no specific tax exemption, the powers and functions enumerated therein, to wit: "(1) To operate, administer, manage and develop the ship repair and ship building facility, container port, oil storage and refueling facility and Cubi Air Base within the Subic Special Economic and Free-port Zone as a free market in accordance with the policies set forth in Section 12 of this Act; "(2) To accept any local or foreign investment, business or enterprise, subject only to such rules and regulations to be promulgated by the Subic Authority in conformity with the policies of the Conversion Authority without prejudice to the nationalization requirements provided for in the Constitution. "(3) To undertake and regulate the establishment, operation and maintenance of utilities, other services and infrastructure in the Subic Special Economic Zone including shipping and related business, stevedoring and port terminal services or concessions, incidental thereto and airport operations in coordination with the Civil Aeronautics Board, and to fix just and reasonable rates, fares, charges and other prices therefor; "(4) To construct, acquire, own, lease, operate and maintain on its own or through contract, franchise, license permits bulk purchase from the private sector and build-operator-transfer scheme or joint-venture the required utilities and infrastructure in coordination with local government units and appropriate government agencies concerned and in conformity with existing applicable laws therefor. "(5) To adopt, alter and use a corporate seal; to contract, lease, sell, dispose, acquire and own properties; to sue and be sued in order to carry out its duties and functions as provided for in this Act and to exercise the power of eminent domain for public use and public purpose; "(6) Within the limitation provided by law, to raise and/or borrow the necessary funds from local and international financial institutions and to issue bonds, promissory notes and other securities for that purpose and to secure the same by guarantee, pledge, mortgage, deed of trust, or assignment of its properties held by the Subic Authority for the purpose of financing its projects and programs within the framework and limitations of this Act; "(7) To operate directly or indirectly or license tourism-related activities subject to priorities and standards set by the Subic Authority including games and amusements, except horse racing, dog racing and casino gambling which shall continue to be licensed by the Philippine Amusement and Gaming Corporation (PAGCOR) upon recommendation of the Conversion Authority; to maintain and preserve the forested areas as a national park; xxx xxx xxx" undoubtedly indicate that they are proprietary in nature, in which case SBMA falls within the scope of business enterprises operating within the Zone. It is therefore, our opinion that by undertaking the aforementioned business activities in the Secured Area of the Zone, SBMA shall be liable to the payment of the preferential tax rate of 3%, plus the amounts equivalent to 1% and 1% respectively, for the Local Government Units and Special Development Fund, as aforequoted, based on its gross income earned, in lieu of local and national internal revenue taxes. Accordingly, its importation of goods/articles in connection with such activities which are proprietary in character shall be exempted from VAT. Moreover, the sale of goods by a domestic vendor in the customs territory to SBMA shall be considered export and effectively zero-rated on the part of the seller. The domestic vendor shall not impute or shift any VAT as part of cost to be paid by the SBMA on its purchases from the Customs Territory. The same holds true with respect to purchase of goods by an SBF registered enterprise operating within the Secured Area of the Zone from a domestic vendor in the Customs Territory. It shall be understood however, that VAT registered domestic vendors in the Customs Territory shall apply for the effective zero-rating of their sales to SBMA and to SBF enterprises pursuant to Revenue Regulations No. 5-87. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue