Clarification of Issues Affecting Zero-Rated Sales and Claims for Input Tax Credit/Refund under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law"

February 20, 1996 REVENUE MEMORANDUM CIRCULAR NO. 17-96 SUBJECT : Clarification of Issues Affecting Zero-Rated Sales and Claims for Input Tax Credit/Refund under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law" TO : All Internal Revenue Officers and Others Concerned Q-1 What is zero-rated transaction? A-1 A zero-rate transaction refers to sale, lease, barter or exchange of goods, properties and/or services subject to VAT at the rate of zero percent (0%) pursuant to Sec. 100 and Sec. 102 of the National Internal Revenue Code (Tax Code). Q-2 What is VAT-exempt transaction? A-2 A VAT-exempt transaction refers to sale, lease, barter or exchange of goods, properties and/or services that are exempt from VAT under Sec. 103 of the Tax Code. Q-3 Distinguish zero-rated from VAT-exempt transaction. A-3 In a zero-rated transaction the seller is allowed to claim input tax credit-refund on his purchase of VAT taxable goods, properties or services. In an exempt transaction, the seller is not entitled to such tax credit/refund. Q-4 Who shall qualify for zero-rating? A-4 Any VAT-registered person whose sales fall under Sec. 100(a)(2) and 102(b) of the Tax Code. Q-5 What transactions are zero-rated? A-5 The following transactions are zero-rated: I With respect to Goods 1. Export sales. The term "export sales" means: (a) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods and services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (b) Sale of raw materials or packaging materials to non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods paid for in acceptable foreign currency and accounted for accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (c) Sale of raw materials or packaging materials to export-oriented enterprises whose export sales exceed seventy percent (70%) of total annual production; (d) Sale of gold to Bangko Sentral ng Pilipinas (BSP);and (e) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. 2. Foreign currency dominated sale. The phrase "foreign currency dominated sale" means sale to a non-resident of goods, except those mentioned in Section 149 and 150 of the Code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), and 3. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subject such sale to zero-rate. II. With respect to Services 1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); 2. Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. 3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subject the supply of such services to zero-rate; 4 Services rendered to vessels engaged exclusively in international shipping; and 5. Services performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise whose export sales exceed seventy (70%) of total annual production. Q-6 What are effectively zero-rated transactions? A-6 Effectively zero-rated transactions shall cover local sale of goods, properties and services to purchasers enjoying exemption from indirect taxes under special laws or international agreements such as: I. With respect to Goods: (1) Sale of raw materials or packaging materials to export-oriented enterprise whose direct export sales exceed seventy percent (70%) of total annual production. (2) Foreign currency denominated sale of goods to a non-resident, except those mentioned in Sections 149 and 150 of the Tax code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. (3) Sale to SBMA and CDA registered enterprises pursuant to RA 7927, sale to PEZA registered enterprises pursuant to RA 7916 and sale to ADB and IRRI pursuant to international agreements, etc., and (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP). II. With respect to Services: (1) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate. (2) Services rendered to vessels engaged exclusively in international shipping; and (3) Services performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise whose direct export sales exceed seventy percent (70%) of total annual production. Q-7 What are automatically zero-rated transactions? A-7 The following sales by VAT-registered taxpayers are automatically zero-rated: I. With respect to Goods: 1. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods and services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; and 2. Sale of raw materials or packaging materials to non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). II. With respect to Services: 1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);and 2. Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Q-8 Distinguish effectively zero-rated from automatically zero-rated transactions. A-8 In an effectively zero-rated transaction, the VAT registered seller of goods or services is required to file an application and secure approval for zero-rating; whereas in an automatically zero-rated transaction, the VAT registered seller need not file an application for zero-rating. Q-9 How does a VAT-registered seller taxpayer apply for effective zero-rating? A-9 A properly filled-up Application for Zero-Rating together with the required attachments must be submitted for approval to the appropriate Revenue District Office having jurisdiction over its principal place of business. Q-10 When do you apply for effective zero-rating? A-10 Applications for effective zero-rating shall be filed before the initial sale to a customer with respect to transactions enumerated in A-6. Approved applications for zero rating shall be effective for 12 months from the date of issuance of the approval. Q-11 Under Sec. 4.100-2 (a) (5) of Revenue Regulations 7-95, sale of finished products by a BOI registered export producer (indirect exporter) to another BOI-registered export producer or export trader that subsequently exports the same is considered export sale and, therefore, subject to output VAT at zero percent (0%).What are the requirements for purposes of zero-rating and entitlement to tax credits/refunds? A-11 The BOI-registered export producer (indirect exporter) after registering as a VAT-person, shall apply for VAT zero-rating with the RDO where its main office is located, submitting copies of its BOI certificate of registration, as well as those of the customers/buyers. Once approved, the indirect exporter is considered a zero-rated taxpayer for its sale of finished products to the BOI-registered export producer or export trader. The indirect exporter shall submit to the BIR, along with its quarterly VAT returns proof of actual exportation of the products consisting of bills of lading and other shipping documents certified to by the BOI-registered exports producer/trader. Failure to furnish the BIR with such proof of exportation shall subject such indirect export sale to the 10% output VAT? Q-12 Explain the distinction between the requirement for accreditation under the Export Development Act ("earns at least 50% of its normal operating revenues from the sale of its products or services abroad for foreign currency") and requirement to qualify as an export-oriented enterprise ("whose export sales exceed 70% of the total annual production of the preceding taxable year"). A-12 The 50% requirement is only for accreditation as an exporter under the Export Development Act while the 70% requirement is for entitlement to apply for effective zero-rating of transactions under Sec. 100(2)(a)(3) and Sec. 102(2)(b)(5) by export oriented enterprises. Q-13 Is the importation of equipment, materials and/or supplies that are merely consigned and which are not intended to remain in the country but in fact required to be "re exported or "shipped back" to their country of origin, or the importation through a customs bonded manufacturing warehouse of raw materials, supplies and spare parts used in the manufacture/assembly of articles for export, subject to the 10% VAT on importation? A-13 No. The importations of machinery, equipment and spare parts which are merely consigned to a BOI-registered enterprise are exempt from the VAT provided the appropriate re-export bond is posted and that the consigned equipment shall be for the exclusive use of the registered enterprise [Article 39(c) and (f), Title III, Executive Order No. 226, as amended by Republic Act No. 7918] So also importations through a customs bonded manufacturing warehouse of raw materials and spare parts used in the manufacture/assembly of products for export are likewise exempt from the VAT [Sec. 4, 100-2(a)(5) Revenue Regulations No. 7-95]. Customs bonded manufacturing warehouses are outside of the jurisdiction of the Philippine Customs Territory and, thus, the raw materials and spare parts are deemed not to have entered said territory and were never introduced into Philippine commerce. Q-14 Zero-rated taxpayers will normally have an excess of input taxes over output taxes. Can the excess be offset against the taxpayer's other internal revenue tax liabilities"? A-14 No. Direct offsetting of excess input over output taxes against other internal revenue tax liabilities of the zero-rated taxpayer is not allowed. Q-15 What are the consequences for failure of the seller to secure prior approval for effectively zero rating? A-15 Such transactions shall be considered exempt from VAT. However, if it turns out that there are other factors that would disqualify the transaction from zero-rating other than the failure to file an application thereof, then such transaction shall be subject to the VAT at 10%. Q-16 Is there a prescriptive period to claim for VAT Credit/Refund? A-16 Yes. The following are the prescribed period for filing a claim for VAT credit/refund: (1) For zero-rated taxpayer within two (2) years after the close of the taxable quarter when the zero-rated sales were made. (2) For input tax on capital goods within two (2) years after the close of the taxable quarter when the importation of purchase was made. (3) For cancelled registration/change in or cessation of status within two (2) years from the date of cancellation of VAT registration. Q-17 What is the prescribed period for the processing of tax credit or refund of unused input tax credit. A-17 The law provides that the Commissioner shall grant the VAT credit/refund within sixty (60) days from the date of submission of complete documents in support of the application by the claimant. All revenue officials and employees are enjoined to give this Circular the widest publicity possible. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue