VAT Ruling No. 006-00

January 31, 2000 VAT RULING NO. 006-00 108 DA 114-96 006-00 Mr. Johnson W. Fong President Multi-Forms Corporation 13-15 G. H. del Pilar St., San Francisco del Monte Quezon City S i r : This refers to your letter dated November 4, 1999, together with copies of the exchanges of communication between you and the National Printing Office (NPO), requesting for a ruling as to the tax privileges being enjoyed by you as an inventor, relative to your business transaction with the said office. Based on the records submitted, the facts of the case are as follows: cdll Johnson W. Fong is an inventor duly certified as such by the Filipino Inventor's Society and President of Multi-Forms Corporation. His invention, "Micro Capsules for a Pressure-Sensitive Carbonless Paper and Process of Preparation Thereof" under Patent No. 189778 issued by the Bureau of Patents is now on commercial sale. Pursuant to R.A. 7459, otherwise known as the Inventors and Invention Incentives Act of the Philippines, the sale by an inventor of his invention product is exempt from taxes for which he shall have been directly liable, such as Income tax, VAT on the gross receipts and excise taxes directly payable in connection with the sale of invention products. This fact is admitted by the NPO. However, when NPO contracted the printing services/expertise of said inventor to print certain forms as requisitioned by the Cebu Port, MMDA and DBM, NPO is of the opinion that since it is the services that was the subject of the contract and not the invented products, the transaction is subject to the 6% VAT and to the 1% withholding which taxes are mandated to be withheld by every government agency. It was likewise alleged that in the conduct of its bidding for the supply of accountable forms, NPO did not specify that the carbonless paper to be used should be the carbonless paper invented by Mr. Johnson Fong. In contrast, the inventor alleged that in order to satisfy the specifications and needs of the NPO, the latter was provided with his invented product which is the "multicopy carbonless paper"; that the true nature of the purchase done by NPO was not for mere "services" in the sense that the inventor had merely acted as a service contractor for the printing and NPO provided the materials to complete the transaction, which is not the case; that in entering into the transaction, it was specified that the invention product will be used on all the products to be delivered to NPO; that the fact remains that as an integrated manufacturer, the inventor sold and delivered the end products of the invention which is the carbonless paper; that as such, the transaction is entitled to the benefit of exemption from taxes provided by law and no withholding of taxes should be made. cdlex In reply, please be informed that the source of tax exemption by an inventor is Section 5 and 6 of R.A. 7459, viz: "SEC. 5. Tax Incentives . Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is made on a commercial scale. Inventors shall be exempt from paying any fees involved in their application for registration of their inventions." LibLex "SEC. 6. Tax Exemption . To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor. The technologies , their manufacture or sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports." (Emphasis supplied) Evidently, the tax exemption of an inventor pertains to the commercialization of the technologies he has developed which would entitle him to exemption from income tax value added tax (VAT) and excise tax directly payable in connection with the sale of invention products. (BIR Ruling No. DA-114-96 dated March 18, 1999). The term 'technology' has been particularly defined in Revenue Regulations No. 19-93 (implementing R.A. 7459) in this wise: cdlex 'Technology means the application of knowledge or science which shall include all others, such as inventions , innovations and results of researches." Such being the case, this Office is of the opinion and so holds that when the inventor Johnson W. Fong of Multi-Forms Corporation entered into a contract of printing services with the NPO, the transaction resulted into the commercialization of his technology and the actual sale of his invention, "multiform carbonless paper". Thus, his gross receipts thereon will be covered by the tax exemption privileges granted under R.A. 7459. This is further supported by the fact that the term 'Gross Receipts', for purposes of 'sale or exchange of services', means the " total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services . . ." (Section 108, Tax Code of 1997). LibLex Accordingly, the National Printing Office (NPO) is hereby authorized not to subject to 6% creditable withholding VAT and to the 1% expanded creditable withholding tax the gross billing of the said inventor under the contract of service. The NPO may likewise treat this letter as an answer to its related query on the subject. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be deemed null and void. LibLex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group