Eastern Shipping Lines, Inc.

January 4, 1990 VAT RULING NO. 002-90 102 (a)-000-00-002-90 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles Attorneys At Law 4th floor, King's Court 2129 Pasong Tamo St. Makati, Metro Manila SUBJECT : Eastern Shipping Lines, Inc . Gentlemen : This refers to your letter dated October 20, 1989 requesting that local sales of services to your client be considered subject to zero-rated value-added tax (VAT) under the provisions of Sec. 102(a), National Internal Revenue Code, as implemented by Sec. 8(c) of Revenue Regulations No. 5-87. It is represented that Eastern Shipping Lines, Inc. is a domestic corporation engaged in the inter island and inter-ocean shipping business and from the latter operations, it derives foreign exchange earnings; that whenever it buys services from domestic suppliers, it is being passed-on with 10% VAT; that while foreign shipping companies can purchase domestic services free from 10% VAT because said domestic suppliers of services can enjoy zero-rated vat on sales paid for in foreign exchange inwardly remitted, domestic shipping companies do not enjoy the same benefit of tax-free purchases, hence, the law is discriminatory and may be unconstitutional. casia Please be informed that the law in point is Section 102(a)(2), NIRC, as amended by E.O. 273, otherwise known as the Value-Added Tax law, viz.: "Services . . . "the consideration for which is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines.", shall be subject to zero-rated value-added tax." In reply, please be informed that your client does not meet the requirement for zero-rating expressly provided for under RMC 47-88. The fact that your client earns foreign exchange from its inter-ocean shipping operations is not a legal basis to qualify its suppliers of service for the said zero-rated VAT. The zero-rating prescribed in Section 102(a) of the Tax Code, is in the nature of tax exemption. Accordingly, its provisions are construed strictly against your client and its suppliers of services and in favor of taxability, BIR VAT Ruling No. 282-88, as reiterated in VAT Ruling No. 375-88, etc. in relation to Section 102(a)(2) of the Tax Code pertains to VAT zero-rating of sales of services to foreign principals the consideration of which were paid for in acceptable foreign currency inwardly remitted to the Philippines in accordance with Central Bank rules and regulations. It does not apply to your client because it is a domestic corporation and its payment to suppliers of services is not in terms of foreign exchange but rather in terms of Philippine peso. In view thereof, we regret that your aforesaid request, in behalf of your said client, cannot be granted. cdt Very truly yours, JOSE U. ONG Commissioner of Internal Revenue