Digest of VAT Rulings for September 1989

November 23, 1989 REVENUE MEMORANDUM CIRCULAR NO. 004-90 SUBJECT : Digest of VAT Rulings for September 1989 TO : All Revenue Officials and Others Concerned Attach herewith as Annex "A" is the digest of VAT Rulings issued in the month of September, 1989. For the information and guidance of all concerned. JOSE U. ONG Commissioner of Internal Revenue ANNEX A Digest of VAT Rulings for September, 1989: 1. Only the sale of goods and services by primary contractors to U.S. Military Bases shall be subject to VAT at zero-rate pursuant to Sections 8(b)(2) and 8(c)(2) of Revenue Regulations No. 5-87, implementing Sections 100(a)(2) and 102(a)(3), respectively, of the Tax Code, as amended. Therefore, goods sold and services rendered to such primary contractors are subject to VAT which can be used as an input tax against the zero-rated output of the primary contractors. (VAT Ruling No. 216-89 dated Sept. 4, 1989 and VAT Ruling Nos. 222-89 and 234-89 dated Sept. 6, 1989). 2. The sales of used transportation equipment, machineries and scrap materials are subject to VAT pursuant to Sec. 100 of the Tax Code, as amended, and that such transactions require the issuance of "VAT invoice" in accordance with Revenue Regulations No. 5-87. (VAT Ruling No. 217-89 dated Sept. 4, 1989). cdt 3. A seller of industrial laundry services to zero-rated exporters of garments is still liable to pay the 10% VAT and cannot be granted zero-rating for lack of legal basis. However, the VAT, being an indirect tax, could be passed on to such zero-rated clients (VAT Ruling No. 218-89 dated September 4, 1989). 4. The importation of Calconpack red pepper packed in sealed drums is not exempt from the VAT because such article is no longer considered an agricultural food product in its original state since a sophisticated mode of packing has already been introduced (VAT Ruling No. 219-89 dated September 4, 1989). acd 5. Pursuant to Section 18(b) of Revenue Regulations No. 5-87 implementing Section 107 of the Tax Code, persons becoming liable to the VAT, whose gross sales reach P200,000 in any 12-month period, shall register within 30 days after the end of the 12-month period and become liable to VAT on the first day of the month following the close of the 30-day period. Thus, a taxpayer who registered only on January 9, 1989 after realizing a gross sale of P200,000 for the 12-month period ended September, 1988 was duly fined for late filing pursuant to paragraph I(4) of RMO No. 13-88 and an unnumbered memorandum by the Commissioner of Internal Revenue dated January 12, 1988. (VAT Ruling No. 220-89 dated September 5, 1989). 6. Pursuant to Section 6(g) of Revenue Regulations No. 5-87, the 4% contractor's tax is applicable to outstanding liabilities on contracts completed as of December 31, 1987, payments for which are receivable on or after January 1, 1988 subject to the following conditions: a. An information return was filed by the contractor showing the name(s) of the contractee(s) and the amount(s) of the contract price outstanding as of December 31, 1987, and containing a declaration of the obligation to pay the contractor's tax due; b. The contractor billed the unpaid amount not later than December 31, 1987, and a copy of such billing is attached to the information return required in (a) hereof; c. The contractor has recorded in his books of accounts for the year 1987 the amount receivable; and d. The contractor files not later than January 20, 1988, and on or before the 20th day after each calendar quarter, the regular contractor's tax on payments received in 1988. Failure to comply with the abovestated conditions shall automatically subject the gross receipts to the 10% VAT. A corporation who exports in its own name rather than as an agent of another corporation is an exporter itself. It cannot be considered as an agent nor a broker even if the goods are manufactured upon advances made to a supplier corporation who ships the goods for and in behalf of the former. If an exporter is a VAT-registered taxpayer, its export sales are subject to VAT at 0%. If an exporter is not VAT-registered, its export sales are VAT-exempt pursuant to Section 103(v) of the Tax Code. In both cases, the exporter is subject to income tax on its export sales. aisa dc The peso commissions derived by a corporation from another corporation are subject to the 10% VAT pursuant to Section 102 of the Tax Code even if the original transactions from which they were derived are exportations which are zero-rated. (VAT Ruling No. 221-89 dated September 6, 1989). 7. The sale of services to North Davao Mining Corp., an entity classified as a copper mining company in distress is subject to VAT pursuant to Sec. 102(a) of the Tax Code, as amended, since LOI No. 1416 which suspends all tax payments of such companies has been revoked by E.O. No. 340 effective Oct. 14, 1988. (VAT Ruling No. 223-89 dated Sept. 6, 1989). 8. Discounts granted to ice cream houses which are not granted at the time of sale of goods and are conditioned upon the meeting of a pre-set monthly quota shall not be allowed as deductions from the gross sales since pursuant to Sec. 6(c)(a) of Revenue Regulations No. 5-87, discounts conditioned upon the subsequent happening of an event or fulfillment of certain conditions shall not be allowed as deductions (VAT Ruling No. 224-89 dated September 6, 1989). 9. Section 3 of Revenue Regulations No. 2-88 provides for the exemption and not zero-rating of subcontracting services of BOI-registered entities performing services such as processing, converting or manufacturing of goods for a BOI-registered export producer who exports at least 70% of its total production. If any of the abovementioned conditions is not met, then such subcontracting service is subject to the 10% VAT. (VAT Ruling No. 225-89 dated September 6, 1989). 10. Commissions and agency fees received by shipping agents from foreign principals paid for in acceptable foreign currency inwardly remitted and duly accounted for in accordance with Central Bank regulations are considered zero-rated sales of services. However, if the payment for said services are in both foreign and local currency, only the services paid for in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at 10%. (VAT Ruling No. 226-89 dated September 6, 1989). 11. The sale of goods to Southeast Asian Fisheries Development Center (SEAFDEC) is not qualified for zero-rating because pursuant to P.D. No. 292, the exemption of the center is not extended to its suppliers of goods and services. Furthermore, since VAT is an indirect tax, BOI-registered firms (e.g., Foresight Realty and Development Corporation) are not exempt from VAT since their exemption is only limited to direct taxes. (VAT Ruling No. 227-89 dated Sept. 8, 1989). 12. The Expanded Withholding Tax Law under Presidential Decree No. 1351 as implemented by Revenue Regulations No. 13-78 and as amended by Revenue Regulations Nos. 6-85 and 1-89 does not authorize the withholding of the VAT since such law covers only the withholding of income tax by certain persons upon certain classes of income payments. Neither is the VAT subject to the withholding and remittance provisions of Republic Act No. 1051, pursuant to Revenue Regulations No. 4-88 and Revenue Memorandum Circular No. 18-88. Therefore, any government entity who buys from VAT-registered persons cannot be legally constituted as a withholding agent under said R.A. in connection with the VAT due from its suppliers since the VAT cannot be fixed or determined at the point of payment (VAT Ruling No. 228-89 dated September 8, 1989). 13. A BOI-registered export producer, who is also VAT-registered, manufactures printed circuit boards (PCBs) and sells the same to another BOI-registered export producer as components of CB radio transceivers. The export sales of the BOI-registered export producer are automatically zero-rated pursuant to Section 100(a)(1) of the Tax Code. The sale of PCBs to the other BOI-registered export producer is effectively zero-rated provided that the conditions under Section 2 of Revenue Regulations (RR) 2-88 are met. The input taxes passed on to the VAT-registered and BOI registered export producer by its suppliers of goods and services before and after the issuance of said revenue regulations can be used as input tax credits against the zero-rated export sales provided that the purchases are attributable to the export activity. However, prior to the approval of such export producer's application for zero-rate, its sale of PCBs to the other BOI-registered export producer is subject to 10% VAT since such sale is still considered a domestic sale. cdt For purposes of claiming refund or tax credit, BIR Form 2552 is to be used. (VAT Ruling No. 229-89 dated September 8, 1989). 14. Importation of books for sale or publication in the Philippines is exempt from VAT in accordance with Section 103(f) of the Tax Code. Similarly, printing services are VAT exempt. However, proprietors of such services may opt to register for VAT purposes; in which case, they will be subject to the 10% VAT and may pass on this indirect tax to their clients as additional costs. (VAT Ruling No. 230-89 dated September 8, 1989). 15. Container freight service charges, container yard charges and other fees like overtime and penalties being billed by freight forwarding companies to customers are subject to the VAT. However, if the arrastre, wharfage and trucking fees are considered as reimbursements, they are not subject to the VAT provided the receipts are in the name of the clients/customers. (VAT Ruling No. 231-89 dated Sept. 11, 1989). 16. Pursuant to Section 102(a) of the Tax Code, as amended, the basis of the VAT on security services should be the total gross receipts which, in the case of the cost distribution scheme adopted by the Philippine Association of Detective and Protective Agency Operators, Inc. (PADPAO), correspond to the total amount of wages, allowances and incentives due to the guard and total amount of SSS and Medicare contributions due to the Government plus margin or agency fee (VAT Ruling No. 232-89 dated September 13, 1989). 17. Section 103 (c) of the Tax Code provides for the VAT exemption of the sale or importation of animal feeds but not the ingredients thereof. Therefore, the importation of Niacinamide Feed Grade, a chemical used primarily as a raw material for animal feeds, is subject to the 10% VAT. (VAT Ruling No. 233-89 dated September 13, 1989). aisa dc 18. The VAT, as an indirect tax, can be passed on to VAT exempt entities (e.g., shipping companies) by their contractors and suppliers because the former's exemption is limited only to direct taxes. (VAT Ruling No. 235-89 dated September 13, 1989). 19. The sale of goods to the Philippine International Trading Corporation by a VAT-registered entity, which is classified as a foreign currency denominated sale or internal export under LOI 1355, is considered as an export sale and is automatically subject to zero-rate pursuant to Section 100(a)(1) of the Tax Code provided that the conditions under Section 8 (b)(1) of Revenue Regulations No. 5-87 are met. However, such entity will still have to file a quarterly VAT return on its zero-rated sales together with its sales subject to 10% VAT (VAT Ruling No. 236-89 dated September 14, 1989). 20. The following clarifications are made in connection with the VAT liabilities of a contractor of government contracts and projects; a) Only the 1% expanded withholding tax on gross collections net of VAT is automatically deducted in contracts awarded by any government entity; b) Gross receipts of the main contractor is subject to VAT but he shall be allowed credits for payments to the sub-contractor and the gross receipts of the sub-contractor from the main contractor shall be subject to 10% output tax; c) The main contractor is not allowed to deduct 1/11 of the total gross collection and to remit the amount to the BIR in the name of the sub-contractor; d) The sub-contractor shall issue VAT receipts/invoices for the payments made by the main contractor after which he is required to file his own VAT return covering the gross receipts derived from the main contractor; and e) The main contractor can accept the subcontractor's VAT receipts regardless of the latter's place of registration (VAT Ruling No. 237-89 dated September 14, 1989). 21. Manning and crewing services rendered to a foreign principal are subject to VAT at zero-rate provided that the services are paid for in acceptable foreign currency inwardly remitted and duly accounted for in accordance with Central Bank rules and regulations. (VAT Ruling No. 238-89 dated September 15, 1989). casia 22. The ruling on producers of gold and silver sold to Central Bank are as follows: a. Sales of gold are exempt if the company failed to register for VAT purposes (Sec. 103 (v), NIRC), the input taxes attributed to such sales cannot be refunded since only those input taxes attributable to goods exported by a VAT-registered person can be refunded. b. On or after VAT registration, the sale of gold to Central Bank is zero-rated (Sec. 100(a)(1), NIRC); input taxes of such sale can be refunded. The sale of silver to Central Bank is not considered as export sale and is, thus, subject to the 10% VAT (Sec. 100, NIRC). Both gold and silver are subject to excise tax even if exported. c. The person liable for payment of VAT is the seller rather than the purchaser, regardless of their mutual agreement on such liability. Whether or not the VAT is billed separately in the invoice, the amount billed by the seller is deemed inclusive of the 10% VAT if the sale is taxable. (Sec. 108(a)(3) NIRC). d. The 10% VAT paid on importation of mining materials and equipment can be used as input tax (Sec. 101, NIRC). e. Fluctuations in values of foreign exchange may be recognized as income, provided such income has been realized from a closed and completed transaction. Conversely, loss from fluctuation in value of foreign exchange may be deductible, for income tax purposes, subject to compliance with requisites for deductibility prescribed in Sec. 29(d) of the NIRC. (VAT Ruling No. 239-89 dated September 20, 1989). 23. The income derived from the hauling and handling of merchandise by a customs broker with the use of trucks for hire is income from the rendering of a forwarding service and not from being a common carrier. Therefore, such income is subject to VAT to be reported together with the income as a customs broker. (VAT Ruling No. 240-89 dated September 20, 1989). 24. The sale or importation of tea seed cake, which is an organic, pesticide used for eliminating pond pests and predators usually applied in prawn growout ponds, is exempt from VAT pursuant to Sec. 103(c) of the Tax Code, as amended. (VAT Ruling No. 241-89 dated September 21, 1989). 25. Export sales of an EPZA registered firm which failed to register for VAT purposes are exempt from VAT pursuant to Sec. 103(v) of the Tax Code. If said firm becomes a VAT registrant, sales will automatically be zero-rated pursuant to Sec. 100(a)(1) of the same Code (VAT Ruling No. 242-89 dated September 20, 1989). 26. The business of hauling garbage is considered as a sale of service which is subject to the VAT under Sec. 102 of the Tax Code, provided that the gross income exceeds P200,000.00 for any 12-month period. Otherwise, said business is exempt from the VAT pursuant to Sec. 103(w) but is subject to the 2% percentage tax on gross receipts pursuant to Sec. 112 of the same Code (VAT Ruling No. 243-89 dated September 22, 1989). 27. The preparation of dried parings (a by-product of desiccated coconuts) is not deemed simple within the context of Section 103 (b) of the Tax Code. Apart from the preliminary processes of dehusking, machines, are used to mill/grind the parings and to dry the milled/ground parings. Thus, dried parings are not agricultural products in the original state and the sale thereof is subject to the 10% VAT. (VAT Ruling No. 244-89 dated September 22, 1989). 28. The sale of goods and services to a government agency (e.g., Department of Budget and Management) is not exempt from VAT. Hence, the VAT on the security services rendered to a government agency may be passed on to said agency since VAT is an indirect tax. (VAT Ruling No. 245-89 dated September 22, 1989). 29. Sales of VAT-registered exporters of garments are automatically subject to VAT at zero rate pursuant to Sec. 100 (a)(1) of the Tax Code. Such exporters are, however, still required to file a quarterly VAT return which will be used as basis for a refund of the input taxes paid to suppliers of goods and services in connection with their export activity (VAT Ruling No. 246-89 dated September 28, 1989). acd