VAT Ruling No. 005-04

March 25, 2004 VAT RULING NO. 005-04 Sec. 108 (B) (3) 032-98 Mr. Romulo D. Torres, Jr. 16 Kalinisan Street Mandaluyong City S i r : This refers to your letter dated August 22, 2003 requesting for a ruling as to whether or not the construction services rendered by your company, a VAT-registered entity, to Convergys Philippines Service Corporation (CPSC), a Philippine Economic Zone Authority (PEZA) registered enterprise, shall be treated effectively subject to the 0% value-added tax pursuant to Section 108(B)(3) of the Tax Code of 1997. It is represented that your company is a VAT-registered entity and is engaged in the general construction business under VAT Registration No. 100-106-618-V; that your company was hired by CPSC through Jones Lang LaSalle to be the general contractor in connection with the Fit-Out of the 6th and 7th floors, Enterprise Center Tower II, Ayala Avenue, Makati City; that on the other hand, CPSC is a PEZA-registered Ecozone IT (Export) enterprise under Certificate of Registration No. 03-11-IT dated August 12, 2003; that CPSC operates at the Enterprise Center which have been constituted as a Special Ecozone; that CPSC is engaged in IT-enabled services such as but not limited to business process outsourcing and call center; that Jones Lang LaSalle, as project manager, is responsible for overall progress, monitoring, coordinating between Architects & Service Consultants and certification of all invoices for the entire project; and that Jones Lang LaSalle is authorized to act on behalf of CPSC in day-to-day management of the project execution process but the contract will be with your company and CPSC. In reply thereto, please be informed that Section 108(B)(3) of the Tax Code of 1997 provides that 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 percent (0%) rate. The above quoted provision of law is implemented by Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services . Effectively zero-rated sales of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subpar. (b), Nos. (3), (4) and (5) of this section." (Sec. 4.102-2(c), Rev. Regs. No. 7-95). This was further clarified in RMC No. 74-99 that the sale of services by a VAT-registered supplier from the customs territory, to a PEZA registered enterprise, shall be treated subject to zero percent (0%) VAT under the cross border doctrine of the VAT system. ( Sec. 3(1)(b), RMC No. 74-99 ) 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." ( Value Added Tax International Practice and Problems, Allan A. Tait, International Fund, Washington D. C., 1988, p. 51 ) Our VAT law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, basically adheres to the Consumption Type VAT Regime and, in general, follows the destination principle, viz .: "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade; the origin principle (export taxable, imports exempt), or the destination principle (export exempt, imports taxable)." ( Value-Added Tax VAT by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz .: "the country taxes all value added, at home and abroad, or 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." ) 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. There are different types of PEZA-registered enterprises under R.A. No. 7916. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers. Of the foregoing classification of ECOZONE enterprises, those under the Export Processing Zone are the ones whose products are destined to, used or consumed abroad. Following our VAT Regime which adheres to the Consumption Type VAT or the Destination Principle, sales of goods, property and services to ECOZONE enterprises engaged in export processing business shall, accordingly, be considered qualified for effective zero rated VAT pursuant to the aforequoted provisions of the law and its implementing regulations considering that their export products are destined for use or consumption outside the Philippines and such export products must be free from VAT which otherwise are indirectly passed on by suppliers of goods, property or services. Since CPSC is a PEZA-registered Export Enterprise and whose products are destined to, used or consumed outside of the Philippines, your aforesaid sales of services to CPSC shall accordingly be entitled to the zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997. cIHDaE This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group