ITAD BIR Ruling No. 375-15

December 29, 2015 ITAD BIR RULING NO. 375-15 Articles 5, 7, 11 and 22, Philippines-Japan tax treaty, as amended NSG Micro Optics Philippines, Inc. LTI Standard Factory Building 134 East Main Avenue Special Export Processing Zone Laguna Technopark Bian, Laguna Attention: Ms. Marieta C. Pelayo General Manager for Administration Gentlemen : This refers to your tax treaty relief application filed on September 7, 2007 requesting confirmation that technical assistance fees, interest, and guarantee fees paid by NSG Micro Optics Philippines, Inc. ("NSG Philippines") (now GF Micro Optics Philippines, Inc. ) to Nippon Sheet Glass Company Ltd. ("Nippon Sheet Glass") are subject to relief pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") , as amended by protocol. 1 Facts NSG is a foreign corporation which is a resident of Japan based on the Corporate Representative Certificate issued by the Tokyo Legal Affairs Bureau on June 16, 2007 and the Certificate of Residence issued by the Shiba Tax Office on August 29, 2007. NSG is located at 5-27, Mita 3-chome, Minato-ku, Tokyo, Japan. NSG is engaged in the manufacture and sale of glass used in architecture, automotive industry, and other technical purposes. For architecture: solar control glass, thermal insulation glass, fire-resistant glass, noise control glazing, safety and security glazing, self-cleaning glass, and glass for solar energy. For automobiles: absorbing solar control, infrared reflective solar control, heatable glazing, hydrophobic glazing, integrated antennas, tinted automotive glazing, laminated sideglazing, and glazing systems. For other technical uses: thin LCD glass, copier/printer lenses, glass cord, battery separators, and glass fibers. NSG is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 21, 2007. On the other hand, NSG Philippines is a domestic corporation located at LTI Standard Factory Building, 134 East Main Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna, Philippines. NSG Philippines is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise under Certificate of Registration No. 03-068 issued on September 10, 2003. Memorandum for Technical Assistance On February 26, 2007, NSG and NSG Philippines entered into a Memorandum for Technical Assistance where NSG agreed to provide technical assistance to NSG Philippines with respect to the manufacture of fiber optics components. NSG will send its engineers to the Philippines for this purpose. In consideration, NSG Philippines will pay NSG the expenses incurred in providing the assistance in accordance with the latter's rule of allocation of costs and charges. Costs and charges invoiced by NSG to NSG Philippines are payable on or before the end of the month following the month such invoice was sent. Based on affidavits dated January 29, 2014 and April 8, 2008 issued by NSG Philippines , NSG has sent its personnel, Mr. Eiji Okuda and Mr. Taku Ito, to the Philippines to provide technical assistance to NSG Philippines . They were present in the country on: Taxable Year 2005 Total Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. - - - - - - - - - - 13-17 - - - - - - - - - - 5 5 days Taxable Year 2006 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. - - - - - - - - - 5-30 1-15 - - - - - - - - - 26 15 41 days Taxable Year 2007 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. - - 25-31 1-4 - - - - - - - - - - 7 4 - - - - - - - - 11 days Loan Agreements On April 1, 2005, April 23, 2007 and May 21, 2007, NSG and NSG Philippines entered into three Loan Agreements where NSG granted loans to NSG Philippines amounting to 183,000,000.00 (" Loan 1 "), 18,300,000.00 (" Loan 2 "), and 25,000,000.00 (" Loan 3 "), respectively. Loans 1 and 3 will be used to pay for equipment provided by NSG to NSG Philippines pursuant to sale and purchase agreements dated April 1, 2005 and March 27, 2007 and Loan 2 will cover for NSG Philippines ' deficit in cash flow. The loans bear interest at a floating rate equivalent to the prevailing long-term prime rate in Japan (as of April 28, 2005 for Loan 1; April 25, 2007 for Loan 2; and June 25, 2007 for Loan 3) plus 0.30 percentage points. The loans also bear a default interest for late payment equivalent to 14 percent per annum. Based on statements of accounts issued by Bank of Tokyo-Mitsubishi Manila Branch (" Bank of Tokyo-Mitsubishi "), 2 the loans were remitted to NSG Philippines ' account on April 28, 2005 (Loan 1: 183 million yen), April 25, 2007 (Loan 2: 18.3 million yen), and June 25, 2007 (Loan 3: 25 million yen). The interest rates for these loans are 1.85, 2.175, and 2.75 percent per annum, respectively. Based on sample debit notes issued by NSG and the statements of accounts issued by Bank of Tokyo-Mitsubishi, NSG Philippine , through the bank, remitted interest to NSG as follows: Date of Amount Principal Interest Rate Interest Period Remittance (in Yen) Subject to Per Annum Interest (in Yen) Dec. 21, 2007 349,479.00 25 million 2.750 Jun. 25, 2007 to Dec. 25, 2007 Apr. 24, 2008 202,329.00 18.3 million 2.175 Oct. 26, 2007 to Apr. 25, 2008 Apr. 30, 2008 202,329.00 18.3 million 2.175 Oct. 26, 2007 to Apr. 25, 2008 Jun. 24, 2008 349,479.00 25 million 2.750 Dec. 26, 2007 to Jun. 25, 2008 Oct. 24, 2008 404,659.00 36.6 million 2.175 Apr. 24, 2008 to Oct. 24, 2008 Dec. 16, 2008 349,479.00 25 million 2.750 Jun. 26, 2008 to Dec. 25, 2008 Apr. 23, 2009 402,448.00 36.6 million 2.175 Oct. 24, 2008 to April 24, 2009 Apr. 23, 2009 846,375.00 91.5 million 1.850 Oct. 30, 2008 to April 30, 2009 Letters of Guarantee On August 1, 2004, July 27, 2005, July 26, 2006, October 30, 2006, and July 25, 2007, NSG issued Letters of Guarantee to Bank of Tokyo-Mitsubishi where NSG guaranteed full and punctual payment of any loans granted by the bank to NSG Philippines in case of the latter's default in its loan obligations. The guarantee covers all outstanding obligations and liabilities arising out or in connection with the loans such as principal, interest, or other related expenses. The maximum amount of guarantee is 100 million yen for letters of August 1, 2004, July 27, 2005 and July 26, 2006, and 175 million yen for letters October 30, 2006 and July 25, 2007. The guarantee is valid for one year from date of issuance of the letter. The guarantee will not be affected by any country or cross border risk event, such as war, civil strife, riot, embargo, strike, moratorium, market calamity, exchange rate fluctuation, force majeure , requirements (whether having the force of law or de facto) of any applicable law, regulation, government order, directive, decree or decision, expropriation, confiscation, requisition or similar event, or by the expected termination of the letter of guarantee. Based on affidavit dated April 8, 2008 by NSG Philippines , those letters of guarantee had been required by Bank of Tokyo-Mitsubishi before it grant loans to NSG Philippines . In consideration, NSG Philippines will pay guarantee fees to NSG. Based on sample debit notes issued by NSG and the statements of accounts issued by Bank of Tokyo-Mitsubishi, NSG Philippines , through the bank, remitted guarantee fees to NSG as follows: Date of Amount Principal Rate of Guarantee Period Remittance (in Yen) Subject to Guarantee Guarantee Per Annum (in Yen) Oct. 29, 2004 151,232.00 100 million 0.30 Aug. 1, 2004 to Jan. 31, 2005 Apr. 28, 2005 147,945.00 100 million 0.30 Feb. 1, 2005 to Jul. 31, 2005 Oct. 27, 2005 151,232.00 100 million 0.30 Aug. 1, 2005 to Jan. 31, 2006 Apr. 27, 2007 56,095.00 75 million 0.30 Nov. 1, 2006 to Jan. 31, 2007 Apr. 27, 2007 258,904.00 175 million 0.30 Feb. 1, 2007 to Jul. 31, 2007 Apr. 30, 2008 260,342.00 175 million 0.30 Feb. 1, 2008 to Jul. 31, 2008 Ruling In reply, please be informed that under Section 28 (B) (1) and (5) (a) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 30 percent for income in general and 20 percent for interest on loan, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . (a) Interest on Foreign Loans . A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986." However, under Section 32 (B) (5) of the Tax Code, such income is exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose there is the amended Philippines-Japan tax treaty. With respect to service fees under the Memorandum for Technical Assistance, these are considered as business profits and subject to income tax in the Philippines if attributable to a permanent establishment which NSG has therein, pursuant to paragraph 1, Article 7 of the Philippines-Japan tax treaty, which provides: "Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." Relative thereto, a permanent establishment is defined in Article 5 of the treaty, to wit: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx 6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies , provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State." As defined, a permanent establishment means a fixed place through which the business of an enterprise is wholly or partly carried on, and includes especially, a store or other sales outlet, a branch, an office, a factory, and a workshop. It also includes the furnishing of consultancy services by an enterprise (through employees or other personnel thereof), or supervisory services in connection with a contract for a building, construction or installation project, which continue for more than an aggregate of six months within any taxable year. Accordingly, since NSG is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is relevant, and since it did not render services in the Philippines for more than an aggregate of six months within any taxable year, where NSG personnel were in the country for merely 5 days in 2005, 41 days in 2006 and 11 days in 2007, NSG does not have a permanent establishment in the Philippines under this circumstance, pursuant to paragraphs 1, 2 and 6, Article 5 of the Philippines-Japan tax treaty. This being so, service fees paid by NSG Philippines to NSG for services rendered in 2005, 2006 and 2007 are exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. On the characterization of service fees as business profits (which are exempt from income tax if not attributable to a permanent establishment) rather than payments for know-how or royalties (which are subject to tax but at a reduced rate), the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) mention that: "11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. 11.3 The need to distinguish these two types of payments, i.e. , payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services." (Pages 225-226) Based on the commentaries, in a contract for the supply of know-how, there would generally be very little more which needs to be done by the supplier other than to supply existing information or reproduce existing material. On the other hand, in a contract for the performance of services, this involves, in a majority of cases, a very much greater level of expenditure by the supplier in order to perform his contractual obligations to the other party, such as salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to subcontractors for the performance of similar services. Accordingly, since the Memorandum for Technical Assistance did not call for NSG to supply existing information or reproduce existing material to NSG Philippines , but to provide services to the latter in the manufacture of fiber optics components, where NSG Philippines is charged based on the actual or allocated cost of the services, this memorandum is clearly a contract for the performance of services rather than for the supply of know-how or other royalty-bearing property. Moreover, by reason that NSG had employed personnel for the purpose of providing services to NSG Philippines , NSG certainly incurred a greater level of expenditure (such as salaries and other remuneration of the personnel) to fulfil its contractual obligations to NSG Philippines . This being the case, the service fees in question constitute business profits rather than payments for know-how or royalties. With respect to interest under the Loan Agreements, paragraphs 1 and 2, Article 11 of the amended Philippines-Japan tax treaty provides relief as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed. a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases." The protocol, effective January 1, 2009, amended paragraph 2 as follows: "2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest." Under this article, interest paid to a resident of Japan is subject to reduced rate of income of (a) 10 percent if the interest is paid in respect of government securities, or bonds or debentures, and (b) 15 percent in all other cases. However, effective January 1, 2009, the rate is simplified to 10 percent. Accordingly, since interest paid by NSG Philippines to NSG under the Loan Agreements are not in respect of government securities, bonds, or debentures, such interest (including regular interest and default interest on late payment) is subject to income tax at the rate of 15 percent (for that paid before January 1, 2009) and 10 percent (for that paid on January 1, 2009 and onwards), pursuant to paragraph 2, Article 11 of the amended Philippines-Japan tax treaty. With respect to guarantee fees under the Letters of Guarantee, since they do not arise from the primary business activities of NSG and they are not in the nature of income described in the treaty like dividends, interest, royalties, etc., such fees are governed by the residual or catch-all article of the treaty on other income, which provides: "Article 22 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State. 2. The provisions of the preceding paragraph shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Under Article 22, items of income of a resident of Japan from wherever sources and not dealt with in any specific article of the treaty are taxable only in Japan. However, these items of income may be taxed in the Philippines if they are effectively connected with a permanent establishment (in the case of an enterprise) or a fixed base (in the case of an individual) which the enterprise has or the individual has in the Philippines. In this case, the income is taxed in accordance with the provisions of Article 7 on business profits or Article 14 on independent personal services of the treaty, as the case may be. Since tax treaties follow the method of classification and assignment where a particular income is classified and taxation of the income is assigned to one or both of the Contracting States, each income article has a distinct activity, obligation, right, or property in covering an income. Thus, in the case of income from real property (Article 6), the income arises from the use or lease of real property; for business profits (Article 7) the provision of services, sale of goods or merchandise, lease of property, or other activities carried out in the ordinary course of business of an enterprise; for shipping and air transport (Article 8) the operation of ships and air transport in international traffic; dividends (Article 10) the maintaining of shares of stock in a company; interest (Article 11) the loan of money or any debt-claim; royalties (Article 12) the grant of use or the right to use of an intangible property and equipment; and capital gains (Article 13) the alienation of real or personal property including shares of a company. In the case of guarantee fees paid to NSG, this income cannot be treated readily as business profits since they are not directly connected with NSG's ordinary business activities of manufacturing and selling glass used in architecture, automotive industry, and other technical purposes. The fees are also not in the nature of interest because NSG did not provide any loans to NSG Philippines , but guaranteed such loans granted by Bank of Tokyo-Mitsubishi to NSG Philippines . The fact that guarantee fees are received by NSG on a regular basis (semiannually) for a number of years and are computed by multiplying a certain percentage on the principal amount of the loan granted by Bank of Tokyo-Mitsubishi to NSG Philippines does not merit such fees to be assimilated as business profits or interest . Furthermore, without giving explanation to it, the guarantee fees do not come close to income from real property, profits from shipping and air transport, dividends, royalties, and capital gains. Accordingly, since NSG does not have a permanent establishment in the Philippines as earlier ruled, guarantee fees paid to it by NSG Philippines under the Letters of Guarantee are exempt from income tax pursuant to Article 22 of the amended Philippines-Japan tax treaty. Furthermore, with respect to service fees for services rendered by NSG in the Philippines, they are generally subject to value-added tax ("VAT") under Section 108 (A) of the Tax Code, to wit: "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 ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 3 raise the rate of value-added tax to twelve percent (12%) . . ." However, since NSG Philippines is a PEZA-registered enterprise and entitled to fiscal incentives under Republic Act No. 7916 , 4 the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) that: "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. 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, since NSG, the nonresident supplier of services, is not a VAT-registered taxpayer, the service fees paid to it by NSG Philippines are, for VAT purposes, treated as VAT-exempt rather than subject to zero-rated VAT; in either case, no output VAT is shifted or passed-on to NSG Philippines . 5 Finally, with respect to the Loan Agreements, under Section 179 of the Tax Code they are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the principal amount of the loans [the Philippine peso equivalent of 183 million yen (Loan 1), 18.3 million yen (Loan 2), and 25 million yen (Loan 3)], to wit: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan." 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 Footnotes 1. Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. 2. Located at 15th Floor, 6788 Ayala Avenue, Makati City, Philippines. 3. The VAT rate is increased to twelve percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 4. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes , as amended. 5. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . A zero-rated sale of goods or properties (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 these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions . (A) In general. 'VAT-exempt transactions ' refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT." n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.