BIR Ruling [UN-174-94]

June 6, 1994 BIR RULING [UN-174-94] MEMORANDUM FOR : The Commissioner This refers to the internal revenue tax case of Precision Engineered Components Corporation (PECCO) (formerly Components and Parts, Inc.) Km. 24 East Service Road, Cupang, Muntinlupa, Metro Manila involving the amount of P6,388,303.00 representing deficiency value added-tax inclusive of increments thereon for the year 1988. aisadc Records of this case disclosed that PECCO is a VAT-registered taxpayer who sells metal press parts, plastic injection parts, die cast parts and other component parts to Matsushita Communication Corporation of the Philippines (MCP); that MCP is a BOI-registered exporter under Executive Order No. 226 otherwise known as the Omnibus Investments Code of 1987 which uses the aforesaid parts as raw materials in the manufacture of its export products; that PECCO started selling the said raw materials to MCP in March 1988; that PECCO filed with the BIR's VAT Division its application for the effective zero-rating of its sales of raw materials to MCP pursuant to Revenue Regulations No. 2-88 only on September 27, 1988; that this Office issued against PECCO Assessment Notice and Letter of Demand both numbered FAS-4-88-91-002971 both dated October 25, 1991 involving the amount of P6,388,303.00 representing deficiency value added tax for the year 1988 for its sale of raw materials to MCP prior to the approval of its application for effective zero-rating on January 25, 1989 retroactive to January 4, 1989; that in letters dated November 26, 1991 and August 5, 1992 counsel for the taxpayer alleged that the sale by its client of raw materials to MCP prior to January 4, 1989 is not subject to the 10% VAT since its client did not pass on any value added tax to MCP on the sale of its raw materials to MCP from March 1988 to January 3, 1989; that MCP on its part did not claim any tax credit or refund with respect to imputed tax on said sales such that no revenue loss actually resulted to the government; that applying the "catching up" effect in the VAT system to the aforesaid case of its client and MCP in terms of collection of taxes by the BIR, the result would be the same if its client passed on the VAT to MCP and MCP in turn would claim the corresponding tax credit or refund; that the fact that the zero-rating of PECCO's sales of raw materials to MCP was made effective only on January 4, 1989 does not mean that its sale made prior thereto is subject to the 10% VAT; that at most its client's sales to MCP prior to January 4, 1989 is exempt from VAT pursuant to Section 103(u); and that under RMO No. 22-92 dated May 14, 1992 which was issued to clarify the implementation of Revenue Regulations No. 2-88, it is provided that in case of sale of raw materials to BOI registered exporters prior to the issuance of RR 2-88 which would have qualified for effective zero-rating shall be exempt from VAT provided that the seller did not issue VAT invoices and that the buyer did not claim input tax credits. Pursuant to RMO No. 22-92 dated May 14, 1992 transactions prior to the issuance of RR 2-88 which would have qualified for effective zero-rating shall be exempt from VAT provided that the seller did not issue VAT invoices and that the buyer did not claim input tax credits. Moreover, in VAT Ruling No. 031-92 dated March 11, 1992, this Office ruled that if a BOI-registered exporter under Executive Order No. 226 otherwise known as the Omnibus Investment Code of 1987 failed to comply with the procedural condition of applying and obtaining approval for zero-rating, such sale shall be considered exempt as of January 1, 1988 because the substantive bases for the availment of the privilege are deemed to exist as of said date. Such being the case, sales by PECCO of raw materials to MCP to be used by it in the manufacture of its export products prior to the approval of its application for the effective zero-rating of its sales to MCP pursuant to Revenue Regulations No. 2-88 on January 25 1989 retroactive to January 4, 1989 i.e. specially from March 1988 to January 3, 1989 is considered exempt pursuant to Section 103(u) of the Tax Code, as amended, considering that PECCO did not pass on any value-added tax to MCP on the sale of its raw materials to MCP from March 1988 to January 3, 1989 and that MCP did not claim any input tax credits on said sales. Moreover, failure to comply with the procedural condition of applying and obtaining approval for zero rating does not make the sale subject to the 10% VAT. The sale shall be considered exempt as of January 1, 1988, because the substantive bases for the availment of the privilege are deemed to exist as of said date. (VAT Ruling No. 031-92 dated March 11, 1992). In view thereof, it is respectfully recommended that the assessment issued to Precision Engineered Components Corporation (PECCO), Km. 24 East Service Road, Cupang, Muntinlupa, Metro Manila, involving the amount of P6,388,303.00 representing deficiency value added tax inclusive of increments thereon for the year 1988 be withdrawn and cancelled and this case considered closed. cdt Respectfully submitted: ALICIA L. TOMACRUZ Chief, Leg., Ruling & Research Division I CONCUR: JAIME M. MAZA Assistant Commissioner Legal Service APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue