VAT Ruling No. 002-06

February 15, 2006 VAT RULING NO. 002-06 R.A. 7916 Secs. 24 & 25 Yazaki-Torres Manufacturing, Inc . Bgy. Makiling Calamba, Laguna Attention: Mrs. Fe H. Biscocho Department Head General Accounting Department Gentlemen : This refers to your letter dated December 8, 2005 requesting for a ruling on several issues regarding transactions entered into by a PEZA-registered enterprise, viz: 1. Tax treatment of importation of a PEZA-registered enterprise; 2. Tax rate imposable to PEZA-registered enterprises; 3. Tax treatment of sale of goods made by a PEZA-registered enterprise to a buyer from customs territory (i.e., domestic or local sale); and 4. Type of registration of PEZA-registered enterprises. It is represented that Yazaki-Torres Manufacturing, Inc. (YTMI), located in YTMI-Realty Special Economic Zone in Calamba City, Laguna, is a PEZA-registered enterprise engaged in the manufacture and export of automotive wiring harness; that it was registered with the PEZA on June 10, 2002 and currently enjoying the tax incentives of 5% preferential tax rate, which is in lieu of all taxes; that it is likewise registered with the Bureau of Internal Revenue as a Value-Added Taxpayer since 1994 up to the present; and that it is supplying more or less 5% of its total annual production to local car manufacturers, like Toyota Motor Phils. Corporation, Isuzu Phils. Corporation, Mitsubishi Motors Phils. Corp., Nissan Motor Phils., Inc., Honda Cars Phils., Inc., and other local car manufacturers; that for every local sale of your product to your aforesaid customers, you pay 10% output tax but you also claim your 10% input tax on the imported raw materials you use in the manufacture of your product. AEDHST In reply, please be informed as follows: 1. Tax treatment of importation of PEZA-registered enterprises . Merchandise, raw materials , supplies, articles, equipment, machineries, spare parts and wares of every description brought into the ECOZONE Restricted Area by an ECOZONE Export Enterprise to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise whether directly or indirectly related in such activity, SHALL NOT BE SUBJECT TO INTERNAL REVENUE LAWS AND REGULATIONS OF THE PHILIPPINES. Importation of certain goods or merchandise under this paragraph shall be subject to the following conditions: A. Importation of capital equipment . I. Conditions for Duty and Tax Free Importation . An ECOZONE Export Enterprise may import machineries, equipment and spare parts EXEMPT from the payment of any and all INTERNAL REVENUE TAXES due thereon subject to the following conditions: (a) The machinery and equipment are directly and actually needed and will be used exclusively by the ECOZONE Export Enterprise in its registered activity; (b) The importation of spare parts shall be restricted only to component spare parts for the specific machinery and/or equipment authorized to be imported; and (c) Subject to reasonable allowances, the rated capacity of the capital equipment to be imported must be within the registered capacity of the ECOZONE Export Enterprise. II. Importation of Specialized Office Equipment and Furniture . Specialized office equipment and furniture such as computers, antistatic chairs, tables and other of similar nature may be imported by ECOZONE Export Enterprise EXEMPT from TAXES payable thereon, if the said equipment is not manufactured domestically in sufficient quantity, not of comparable quality and not sold at reasonable price. Otherwise, ordinary office equipment and furniture, whenever applicable shall be procured locally. ISHaCD III. Importation of Specialized Vehicles and Other Transportation Equipment . Specialized vehicles and other specialized transportation equipment, including necessary spare parts, directly related to the registered activity of the ECOZONE Export Enterprise may be imported EXEMPT from TAXES ONLY upon prior approval of the Board and with proper clearance from the appropriate government agency/ies. Otherwise, ordinary vehicles and other transportation equipment, including necessary spare parts, whether applicable shall be procured locally. ( Section 1, Rule XV, Rules and Regulations to Implement RA 7916 ) In view thereof, since you are a PEZA-registered enterprise, your importation of raw materials should be exempt from import taxes like VAT pursuant to Sec. 1, Rule XV of the Rules and Regulations Implementing R.A. 7916, in relation to Section 23 of R.A. 7916, otherwise known as the "Special Economic Zone Act of 1995. 2. Tax rate imposed to Existing PEZA-registered enterprises . Pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, and as implemented by Section 2, RR 1-2000 dated November 12, 1999 , PEZA-registered enterprises shall , in lieu of all national and local taxes (except for real property taxes on land owned by developers), pay a tax equivalent to five percent (5%) special tax rate based on the gross income earned, which shall be shared and distributed as follows: (a) To the National Government 3% (b) To the Treasurer's Office of the Municipality or City where the registered enterprise is located 2% Said registered enterprises, however, may generate income from sources within the customs territory of up to 30% of its total income from all sources, Provided, That should the registered enterprise's income from sources within the customs territory exceed thirty percent (30%) of its total income from all sources, then the entire income from within the customs territory and the secured area shall be subject to the internal revenue laws of the customs territory. ( Section 4(f), RR 1-95, as amended by RR 16-99 and RR 20-2002 ). TcSHaD All persons and SERVICE establishments , however, in the ECOZONE shall be SUBJECT to national and local taxes under the National Internal Revenue Code and the Local Government Code. ( Sec. 25, RA 7916 ). Incentives granted by the PEZA shall apply only to registered operations of the ECOZONE Enterprise and only during the period of its registration with PEZA. For this purpose, the ECOZONE shall be managed and operated by the PEZA as a SEPARATE CUSTOMS TERRITORY. The term " customs territory " means the national territory of the Philippines outside of the proclaimed boundaries of the ECOZONES except those areas specifically declared by other laws to have the status of special economic zones and/or freeports" 3. Tax treatment of sale of goods made by PEZA-registered enterprises to a buyer from customs territory (i.e., domestic or local sale) . Products manufactured or produced within the ECOZONE are destined for export to foreign countries. While such products, under certain conditions, may also be sold to buyers in the customs territory, (such as sales to local car manufacturers), such sales are technically considered as importation by such buyers from the customs territory. Since the ECOZONE is technically treated as another separate customs territory, the local buyer is treated as an importer and is imposed with the corresponding import taxes ( like VAT in VAT plus excise tax, as the case may be ) and customs duties on his purchase of products from within the ECOZONE . ( Section 2, RMC 74-99 ) Thus, the VAT imposed on that technical importation made by a local buyer in the ECOZONE is not a VAT on you as the seller, but a VAT imposed on the local buyer as an importer. 4. Your registration as a PEZA-registered enterprise . Since as represented, you are already paying the 5% special tax rate based on the gross income and in lieu of all taxes, your registration as a VAT-registered enterprise is erroneous, and therefore you have to change registration from VAT-registered to NON-VAT-registered taxpayer . Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue