ITAD Ruling No. 117-03

August 1, 2003 ITAD RULING NO. 117-03 Section 108 & 109, 1997 Tax Code VAT Ruling No. 100-99; 009-99; Shindengen Philippines Corporation Lot No. 20-22 SEPZ, Carmelray Industrial Park Canlubang, Calamba, Laguna Attention: Mr. Gregorio L. Viado Finance Manager Gentlemen : This refers to your letter dated September 25, 2002, requesting to amend BIR Ruling No. DA-ITAD 142-02 dated August 20, 2002 so that the payment for services rendered in the Philippines by NTT-Facilities, Inc. (NTT-F) to Shindengen Philippines Corporation (SDP) be declared effectively zero-rated, in view of the additional representation that SDP is registered with the Export Processing Zone Authority per Certificate of Registration No. 95-41 dated April 6, 1995. It is represented that NTT-F is a corporation organized and existing under the laws of Japan with business address at No. 4-1, 3-Chome, Shibaura, Minato-Ku, Tokyo; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated June 27, 2001; that SDP is a corporation organized and existing under the laws of the Philippines with address at Lots No. 20-22, SPEZ, Carmelray Industrial Park, Canlubang, Laguna; that on December 26, 2000, SDP entered into an Agreement for Work Assignment with NTT-F to render consultation on design and supervision for the construction of a factory building; that the assigned work to NTT-F started on September 18, 2000 and was completed on April 30, 2001; and that in consideration for the said consultancy services, SDP shall pay NTT-F J17,800,000, which amount is now the subject of the instant request for zero-rating. In reply, please be informed that under Section 108 of the National Internal Revenue Code (Tax Code) of 1997, the sale or exchange of services shall be subject to VAT. Under Section 4.102(C) of Revenue Regulations No. 7-95, the sale of services to Ecozone Enterprises may be considered effectively zero-rated for VAT purposes but subject to the limitation that the sale of service is made to persons or entities who enjoy indirect tax exemption. Since the PEZA Law does not expressly grant indirect tax exemption to Ecozone Enterprises, the recognition of zero-rated sale of services is made to rest on the Cross-Border Doctrine or Destination Principle of the VAT System, viz : "the country taxes all value added, at home and abroad, for goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable . . ." ( VAT Ruling No. 009-99 dated January 21, 1999 ) The same principle is applicable to the case at hand. It should be noted that products manufactured or produced within the Ecozones are, generally, destined for export to foreign countries and that while all Ecozone enterprises are not necessarily manufacturer-exporters of products considering that there are also service enterprises registered as Ecozone enterprises, however, taken as a whole, all their integrated activities eventually translate to manufactured products which are actually exported to foreign countries ( Section 2 of Revenue Memorandum Circular No. 74-99 ). In relation to the above, it must be emphasized that only "VAT registered persons" who perform specific services is the Philippines shall be subject to the zero percent (0%) rate, pursuant to Section 108(B) of the Tax Code of 1997. Therefore, instead of zero-rating which the non-resident foreign corporation cannot avail of, the provision for exempt transactions under Section 109 of the same Code which provides VAT exemptions for transactions that are exempt under special laws, e.g., R.A. 7916 or PEZA Law, is particularly applicable to the instant case. Inasmuch as the subject fees are payable to a non-resident payee for services rendered in the Philippines, the domestic payor is constituted by law to assume the responsibility of withholding the VAT ( BIR Ruling No. 100-00 dated August 7, 2000 ). Specifically, however, since Ecozone enterprises may not be passed on with nor claim input VAT, then the payment of the said service fees by SDP to a nonresident payee, such as NTT-F should be exempt from VAT. ( VAT Ruling No. 100-99 dated September 16, 1999 ). Such being the case, this Office is of the opinion and so holds that the sale of service by NTT-F is exempt from VAT, instead of zero-rated, since NTT-F is not a VAT-registered person. HSTaEC In view of the additional representation made above that Shindengen Philippines Corporation is a PEZA registered entity, this ruling is deemed incorporated in BIR Ruling No. DA-ITAD-142-02 to the extent of the above pronouncement that NTT-F is 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 facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service