VAT Ruling No. 001-00

January 6, 2000 VAT RULING NO. 001-00 108 (B) (3) 032-98 001-00 Shimizu Philippine Contractors, Inc. 5th Floor Kings Court I Bldg. 2129 Pasong Tamo, Makati City Attention: Mr . Kenji Ikeda Director Gentlemen : This refers to your letter dated October 8, 1999 concerning your request for the application of zero percent (0%) value-added tax (VAT) in respect of your proposed sale of construction services in favor of the TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. LibLex It is represented that SHIMIZU is a VAT-registered enterprise engaged in the general construction business; that, TOSHIBA contracted the services of SHIMIZU for the construction of TOSHIBA's factory building located at the Laguna Techno Park, a special economic zone (ECOZONE) existing pursuant to R.A. 7916, as amended by R.A. 8748, otherwise known as the Special Economic Zone Act of 1995 administered by the Philippine Economic Zone Authority (PEZA); that TOSHIBA is registered with the PEZA as an " Ecozone Export Enterprise " pursuant to R.A. No. 7916 and a holder of PEZA Certificate of Registration No. 95-99, issued on September 27, 1995; that, as a PEZA-registered enterprise, TOSHIBA also enjoys the "Income Tax Holiday" (ITH) incentive: that, your application for the 0% VAT in respect of your sale of services to TOSHIBA has been duly filed with the Regulatory Operations and Monitoring Division (ROMD) of this Office on October 4, 1999; that, however, the ROMD informed SHIMIZU that it cannot grant its request since there is no existing BIR Ruling on whether or not sale of services by a VAT-registered person to a PEZA registered enterprise may qualify for the 0% VAT in case the said enterprise enjoys the ITH incentive. In reply, please be informed that Section 108 (B) (3) of the National Internal Revenue Code of 1997 provides that sales of services by a VAT-registered person may qualify for the zero percent (0%) VAT in respect of " Services rendered to persons or entities whose exemption under special laws . . . effectively subjects the supply of such services to zero percent (0%) rate ." llcd In VAT RULING NO. 032-98 dated November 5, 1995, made in response to your own letter inquiry, dated September 22, 1998, citing the book of ALLAN A. TAIT on Value Added Tax International Practice and Problems, International Fund, Washington D.C., 1988, p. 51, it was held that under the VAT System, VAT exemption and VAT zero rating are distinguished as follows: ". . . zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his price or cut payments to his factors of production (capital and labor). This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero rate." prcd " When considering a VAT, an important decision to be made by a country concerns what a regime to adopt for international trade: the origin principle (exports taxable, imports exempt), or the destination principle (export exempt, imports taxable) ." That, under the Destination Principle of the VAT System, otherwise known as the "Cross Border Doctrine", " the country taxes, all value added, at home and abroad of goods that have as their destination the consumers of that country . Exports are exempt, imports are taxable . This is comparable with the consumption type VAT ." That , the VAT Law of the Philippines adheres to the said Destination Principle or the "Cross Border Doctrine" hence, " the onus of taxation under our VAT system is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT ." (id.) The statutory doctrine of "effective zero rating" under the aforequoted provision of Section 108 (B) (3) of the Code includes the "Cross Border Doctrine'' of the VAT System. i.e., that goods, property and services destined for use or consumption outside of the territorial border of the Philippines shall be entirely free of the VAT, hence, may be the object of the zero percent VAT whereas those destined for use or consumption within the Philippines shall be subject to the 10% VAT. prcd Under R.A. 7916, as amended by R.A. 8748. otherwise known as "The Special Economic Zone Act of 1995", or the PEZA Law, in general, products manufactured by Economic Zone (ECOZONE) registered enterprises shall be exported to foreign countries. Such actual export sales must accordingly be free of the 10% VAT consistent with the "Cross Border Doctrine" of the VAT System. Conversely, Section 26 of R.A. 7916, as implemented by Sec. 2, Rule VIII, PART V of the PEZA Implementing Rules and Regulations, provides that the sale of such products in the domestic market shall be treated as a "technical importation" into the Philippines by the Buyer, in which case, such Buyer (rather than the ECOZONE registered enterprise/Seller) shall be responsible for the tax; that such Buyer shall be technically treated as the importer thereof and who shall be personally liable for the tax (including customs duties) due thereon. Considering the foregoing perspective of the VAT law in relation to the principle of the said ECOZONE law, no 10% input VAT may accordingly be indirectly passed on to a registered ECOZONE manufacturer-exporter of goods for the following reasons: 1 st , its export to foreign countries must be totally free of the 10% VAT, pursuant to the VAT law and consistent with the "Cross Border Doctrine". 2 nd , if it sells in the domestic market, it is not constituted as a taxpayer. On the contrary, it is the buyer in the domestic market, otherwise known as the "Customs Territory" (Sec. 3 (f) R.A. 7916), who is technically considered as the taxpayer-importer. If the said registered enterprise be passed on with the 10% VAT by its supplier of goods, property and services from the Customs Territory (i.e., suppliers outside the ECOZONE), there will be no legal opportunity for the said enterprise to pass on or recover the said 10% input VAT versus its sales of goods in the Customs Territory, since such ECOZONE registered enterprise is not embraced by the VAT law (see Sec. 24, R.A. 7916). Consequently, double imposition of the 10% VAT will result in respect of its sales in the domestic market, if it be passed on with 10% input VAT by its suppliers in the Customs Territory. This is precisely the basic premise, purpose and consideration behind the "effective zero rating" proviso under the aforementioned Section 108 (B) (3) of the NIRC of 1997. In view of the foregoing considerations, this Office believes and hereby rules that sale of services by a VAT-registered person in the Customs Territory to a PEZA-registered manufacturer-exporter may legally be treated effectively subject to the zero percent (0%) VAT , pursuant to Section 108 (B) (3), NIRC of 1997, in relation to the provisions of R.A. 7916 and the "Cross Border Doctrine of the VAT System, as enunciated in the aforementioned VAT Ruling No. 032-98, dated November 5, 1998. This ruling will serve as basis of the ROMD to approve your application for the zero percent (0%) VAT in respect of your sale of services to TOSHIBA, a PEZA-registered manufacturer-exporter, the fact that TOSHIBA is enjoying Income Tax Holiday incentive notwithstanding. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue