ITAD BIR Ruling No. 264-12

June 14, 2012 ITAD BIR RULING NO. 264-12 Section 108, NIRC; BIR Ruling No. ITAD No. 011-10; BIR Ruling No. ITAD 183-11 Isla Lipana & Co. 29th floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Zayber B. Protacio Principal, Tax Gentlemen : This refers to your letter dated October 11, 2011 on behalf of your client, PANASONIC SYSTEMS NETWORKS PHILIPPINES CORPORATION ("Panasonic-Philippines") , requesting clarification of BIR Ruling No. ITAD 227-11 dated September 12, 2011 where it was held that royalties paid by Panasonic-Philippines to PANASONIC SYSTEMS NETWORKS CO., LTD. ("Panasonic-Japan") are subject to the 10 percent preferential tax rate under the Philippines-Japan Tax Treaty and to the 12 percent value-added tax (VAT) under Section 108 (A) of the 1997 National Internal Revenue Code (Tax Code), as amended. The clarification is sought in respect of the VAT treatment so that the royalty payments to Panasonic-Japan by Panasonic-Philippines may be declared exempt from VAT in view of the additional representation that Panasonic-Philippines is duly registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under amended Certificate of Registration No. 00-075 dated December 9, 2009. In reply, please be informed that under Section 108 (A) of the Tax Code, as amended, the royalties mentioned, being payments for the use of intangible properties in the Philippines, are subject to value-added tax ("VAT"), thus: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: . . ." However, since Panasonic-Philippines is an enterprise registered with PEZA and covered by the provisions of Republic Act No. 7916, it cannot be indirectly made to bear VAT on its purchases as held by the Supreme Court in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005). viz. : "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 the 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. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and 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. Exceptio 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. aITECA 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." Accordingly, Panasonic-Philippines, as an exempt entity, is not liable to VAT directly on its sale of goods or services to its customers, and indirectly on its purchase of goods or services from its suppliers. With respect to the supply of intangible properties by Panasonic-Japan, a nonresident foreign corporation not registered for VAT purposes, this transaction is considered exempt from VAT instead of being subject to VAT at zero percent. Such being the case, the royalty payments of Panasonic-Philippines, being a PEZA-registered export enterprise, to Panasonic-Japan should be, as it is hereby confirmed to be, exempt from VAT. This ruling is deemed incorporated in and modifies BIR Ruling No. ITAD 227-11 dated September 9, 2009 to the extent of the above pronouncement that royalties paid by Panasonic-Philippines are exempt from VAT. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue